Event Update November 24, 2016

Rating matrix Rating : Buy Zee Entertainment (ZEEENT) | 440 Target : | 530 Target Period : 12 months Potential Upside : 20% Adds comedy, Bhojpuri genre to bouquet!!! What’s changed? Zee Entertainment (Zee) has announced the acquisition of the TV Target Changed from | 583 to | 530 EPS FY17E Changed from | 12.3 to | 11.7 business of Reliance Broadcast Network (RBNL), which houses EPS FY18E Changed from | 17.5 to | 16.9 (comedy genre GEC) and (Bhojpuri GEC) for an enterprise Rating Unchanged valuation (EV) of | 298.4 crore. The acquired entity also has four other TV licences that shall get transferred to Zee through the demerger scheme.

The acquired channels had revenues of | 49 crore and | 37 crore in FY16 Key financials and H1FY17, respectively, implying deal valuations of 6x FY16 and 4x | Crore FY15 FY16E FY17E FY18E Net Sales 4,884 5,851 6,617 6,905 annualised FY17E EV/sales. Prima facie, the deal is expensive considering EBITDA 1,254 1,510 1,853 2,279 the EBIT losses of | 265.8 crore in FY16 (as reported in RBNL’s FY16 Net Profit 978 1,027 1,120 1,619 annual report as TV segment EBIT). However, the acquired business has EPS (|) 10.2 10.7 11.7 16.9 accumulated loss of | 650 crore and Cenvat credit of | 60 crore, which, as per the company, would give them a tax benefit of | 270 crore. Valuation summary Furthermore, the acquisition of these two channels provides Zee an FY15 FY16E FY17E FY18E opportunity to enter the comedy genre (that was missing so far in its P/E 43.2 41.2 37.7 26.1 bouquet) and expand its regional foray in the Bhojpuri language markets Target P/E 52.1 49.6 45.5 31.4 of UP, Bihar and Jharkhand. Meanwhile, the company remains confident EV / EBITDA 32.5 26.9 21.6 17.0 of a turnaround of the acquired channels as it believes it is better P/BV 7.6 6.8 5.8 4.9 RoNW 17.6 16.8 15.5 18.8 equipped to monetise the ad growth opportunity of the above acquired RoCE 25.3 25.9 25.0 28.7 given its wide reach and strong bouquet pricing. On the demonetisation front, we expect a pullback in advertisement Stock data spends by consumer companies. Therefore, we have lowered our Particular Amount estimates for FY17E ad growth to 10.3% YoY (implying 5.5% H2FY17 ad Market Capitalization (| crore) 42,257.6 growth). While the company has acknowledged a near term impact of Total Debt (FY16) (| crore) 0.9 demonetisation, it would wait to see how it pans out, going ahead, to Cash (FY16) (| crore) 973.2 fathom the extent of the impact. We maintain our BUY recommendation EV (| crore) 40,693.3 52 week H/L (| ) 590/ 350 on the stock with a revised target price of | 530. Equity capital (| crore) 96.0 Lowering our ad estimates to account for “demonetisation” impact Face value (|) 1.0 Demonetisation is likely to impact the ad spend by consumer companies in H2FY17. As per media reports and the consumer companies’ Price performance 1M 3M 6M 12M management commentary, there has been a pullback in ad spends in TV Today -4.9 6.5 -1.7 18.0 November. There would be a likely slowdown in ad spends in H2FY17. Sun TV -15.8 -3.7 22.3 16.5 According to the company, while there is a near term impact, it would wait to see how it pans out, going ahead, to fathom the extent of the ZEEL -12.6 -11.2 4.9 12.2 impact. We now lower our estimates for FY17E ad growth to 10.3% YoY Research Analyst (implying 5.5% H2FY17 ad growth) to | 3782.3 crore, while keeping ad Bhupendra Tiwary growth estimates for FY18E unchanged at 6.5% (optically lower owing to [email protected] exclusion of sports business). Sneha Agarwal Continues to be favoured pick in broadcasting space [email protected] We do note that demonetisation and the subsequent cut by consumer ad

spend will impact H2FY17 ad growth. However, we highlight that Zee

remains a favoured pick in the broadcasting space given its consistent industry leading ad revenue aided by traction in regional & new channels. In addition, the current acquisition adds to its strength across genres, while further investment in fresh content is likely to aid overall revenues. Furthermore, the sport business exit is also likely to boost margins, earnings and would enable the company to focus on the core business. We value the company at 30x FY18 P/E and separately value the sports deal cash inflow of | 2300 crore (ex-tax with tax assumed at 10.0% of the deal value) at par to arrive at a target price of | 530. We have a BUY recommendation on the stock. We have not incorporated the current deal financials into our estimates, currently.

ICICI Securities Ltd | Retail Equity Research

Change in estimates owing to monetisation FY17E FY18E (| Cr or e) O ld New % C hange Old New % Cha nge Comments Revenue 6,774.3 6,617.2 -2.3 7,071.3 6,904.9 -2.4 We now lower our H2FY17 ad revenues growth estimates owing to the impact of de mone tis a tion EBITDA 1,943.0 1,853.0 -4.6 2,334.7 2,279.4 -2.4 EBITDA Margin (%) 28.7 28.0 -70 bps 33.0 33.0 1 bps FY17E margin estimate lowered to account for lower ad growth PAT 1,181.8 1,119.6 -5.3 1,678.9 1,619.5 -3.5 EPS (|) 12.3 11.7 -5.3 17.5 16.9 -3.5 Earnings estimates have been impacted accordingly

Source: Company, ICICIdirect.com Research

Assumptions Current Earlier FY15 FY16 FY17E FY18E FY17E FY18E Ad Revenue Growth 11.3% 29.4% 10.3% 6.5% 14.9% 6.5% We now lower our H2FY17 ad revenues growth estimates owing to the impact of de mon e ti sa ti on Domestic Subscription % 8.0% 13.2% 14.7% 1.0% 14.7% 1.0% International Subscription % -17.3% 6.9% 10.9% 11.3% 10.9% 11.3%

Source: Company, ICICIdirect.com Research

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Deal payment structure As per the deal, a consideration of | 298.4 crore will paid by Zee by issuing 0.39 crore cumulative preference shares (carrying 6% dividend) worth | 3.9 crore, redeemable within three years and assuming the debt of demerging companies accumulating to | 294.5 crore. The transaction is expected to be completed by H2CY17.

Exhibit 1: Purchase consideration | crore Pref. Share Debt Total RBBL 0.9 48.5 49.4 Azalia 1.3 5.0 6.3 Big Magic 1.7 241.0 242.7 Total 3.9 294.5 298.4 Source: Company, ICICIdirect.com Research

Big Magic, Ganga – decent addition to Zee’s bouquet Big Magic is a comedy genre Hindi GEC, which offers content such as sitcoms, historical comedies, weekend specials, stand-up acts, comedy blockbuster movies, etc The key shows of the channel include Akbar Birbal, Family Fortunes, Fakebook with Kavita, Comedy ka Rocket, etc. It is available in all 0.1 million to 1 million and LC1 HSM markets and has a reach of 85 million homes across the country. The channel, over the last year, has increased its market share in its segment, as witnessed in its BARC rating improvements.

Big Ganga is a Bhojpuri GEC channel with a market share of more than 50% in Bihar and Jharkhand. It has extensive distribution in the deepest pockets of Bihar, Jharkhand and Purvanchal.

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Valuation We do note that demonetisation and the subsequent cut in consumer ad spend will impact H2FY17 ad growth. However, we highlight that Zee remains a favoured pick in the broadcasting space given its consistent industry leading ad revenue aided by traction in regional & new channels. In addition, the current acquisition adds to its strength across genres, while further investment in fresh content is likely to aid overall revenues. Furthermore, the sport business exit is also likely to boost the margins, earnings and would enable the company to focus on the core business. We value the company at 30x FY18 P/E and separately value the sports deal cash inflow of | 2300 crore (ex-tax with tax assumed at 10.0% of the deal value) at par to arrive at a target price of | 530. We have a BUY recommendation on the stock. We have not incorporated the current deal financials into our estimates, currently.

Exhibit 2: Valuations FY18E EPS 16.9 Multiple 30.0 Ex-deal value business valuation/share 505.9 Deal Inflow (| crore) 2,600.0 Tax Rate as a % of deal value (Assumed) 10% Ex-tax cash inflow (| crore) 2,300.0 Number of Shares Outstanding (crore) 96.0 Per share cash valued at par for the shareholders (|) 23.9 Target Price (|) 530

Source: Company, ICICIdirect.com Research

Exhibit 3: Valuations Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE (| cr) (%) (|) (%) (x) (x) (%) (%) FY15 4883.7 10.4 10.2 9.6 43.2 32.5 17.6 25.3 FY16 5851.5 19.8 10.7 5.0 41.2 26.9 16.8 25.9 FY17E 6617.2 13.1 11.7 9.0 37.7 21.6 15.5 25.0 FY18E 6904.9 4.3 16.9 44.7 26.1 17.0 18.8 28.7

Source: Company, ICICIdirect.com Research

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Recommendation history versus consensus

600 100.0 90.0 80.0 500 70.0 60.0

(|) 400 50.0 (%) 40.0 30.0 300 20.0 10.0 200 0.0 Nov-14 Jan-15 Apr-15 Jun-15 Sep-15 Nov-15 Feb-16 Apr-16 Jun-16 Sep-16 Nov-16

Price Idirect target Consensus Target Mean % Consensus with BUY

Source: Bloomberg, Company, ICICIdirect.com Research

Key events Date Event Jan-09 Asia Today Ltd, Mauritius, a wholly-owned overseas subsidiary of the company, acquired the balance 40% equity stake in Asia Business Broadcasting (Mauritius) Ltd, a company registered in Mauritius and divested their entire 100% holding in Pan Asia Infrastructure Ltd, Mauritius Jan-10 Company demerges the regional general entertainment channel business undertaking (comprising , , , , Zee Cinemaalu and channels) of (ZNL) Apr-10 The education business undertaking of the company was demerged from the company and transferred to Ltd on the appointed date Mar-11 Zee Entertainment Studios Ltd, BVI and ZES Mauritius Ltd, Mauritius amalgamated with their holding company ZES Holdings Ltd, Mauritius Jan-12 Company introduces new Bangla movie channel Dec-13 Court approves bonus issue of redemable preference shares in the ratio of 1:21 Jun-14 Launches new channel Zee Zindagi, which serves as a platform for global content Jan-15 Launches new channel & TV

Source: Company, ICICIdirect.com Research

Top 10 Shareholders Shareholding Pattern Rank Name Latest Filing Date % O/S Position (m)n Change (m) (in %) Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 1 Cyquator Media Services Pvt. Ltd. 30-Sep-16 25.1 241.4 0.0 Promoter 43.07 43.07 43.07 43.07 43.07 2 30-Sep-16 17.9 172.3 0.0 FII 48.39 47.63 47.13 48.12 48.02 3 The Vanguard Group, Inc. 30-Sep-16 1.6 15.6 -0.1 DII 3.52 4.15 4.07 3.78 3.54 4 Schroder Investment Management Ltd. (SIM) 30-Jun-16 1.6 15. 2 -0. 2 Others 5.02 5.15 5.73 5.03 5.37 5 BlackRock Institutional Trust Company, N.A. 30-Sep-16 1.6 15.2 0.2 6 GIC Private Limited 30-Sep-16 1.6 14.9 -0.5 7 Schroder Investment Management (Hong Kong) Ltd. 30-Jun-16 1.5 14.6 0.0 8 Capital World Investors 30-Jun-15 1.5 14.5 -32.9 9 Colum bia Wanger Asset Management, LLC 31-Dec-15 1.4 13. 5 0.0 10 Birla Sun Life Asset Management Company Ltd. 30-Sep-16 0.9 8.4 0.0

Source: Reuters, ICICIdirect.com Research

Recent Activity Investor name Investor name Buys Sells Grantham Mayo Van Otterloo & Co LLC +10.54M +1.60M Capital Research Global Investors -26.47M -4.53M Morgan Stanley Investment Management Inc. (US) +5.28M +0.65M Mackenzie Financial Corporation -9.02M -1.33M Northern Trust Investments, Inc. +5.00M +0.62M Emerging Global Advisors, LLC -4.54M -0.55M Schroder Investment Management (Singapore) Ltd. +4.18M +0.62M GIC Private Limited -4.15M -0.50M British Columbia Investment Management Corp. +3.39M +0.58M Baroda Pioneer Asset Management Company Limited -1.71M -0.26M

Source: Reuters, ICICIdirect.com Research

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Financial summary

Profit and loss statement | Crore Cash flow statement | Crore (Year-end March) FY15 FY16E FY17E FY18E (Year-end March) FY15 FY16E FY17E FY18E Total operating Income 4,883.7 5,851.5 6,617.2 6,904.9 Profit after Tax 977.5 1,026.8 1,119.6 1,619.5 Growth (%) 10.4 19.8 13.1 4.3 Add: Depreciation 67.3 84.0 112.5 96.7 Operational Cost 2,139.3 2,604.9 2,939.1 2,733.5 Add: Interest paid 10.3 12.3 31.7 32.0 Employee Expenses 449.8 523.2 612.9 573.1 (Inc)/dec in Current Assets -579.9 -310.1 -533.7 139.1 Admin & Other Expenses 1,040.8 746.5 731.3 766.4 Inc/(dec) in CL and Provisions 171.9 197.3 142.2 27.4 Marketing Expenses 467.3 481.0 552.4 Others 0.0 0.0 0.0 0.0

Total Operating Expenditure 3,630.0 4,341.9 4,764.2 4,625.4 CF from operating activities 647.1 1,010.3 872.2 1,914.6

EBITDA 1,253.7 1,509.6 1,853.0 2,279.4 (Inc)/dec in Investments -146.5 -68.3 -400.0 -850.0 Growth (%) 4.1 20.4 22.8 23.0 (Inc)/dec in Fixed Assets -93.5 -228.3 -250.0 -250.0

Depreciation 67.3 84.0 112.5 96.7 Others -58.8 -119.1 1.9 -0.2

Interest 10.3 12.3 31.7 32.0 CF from investing activities -298.9 -415.7 -648.1 -1,100.2 Other Income 227.8 201.6 80.5 300.0 Issue/(Buy back) of Equity 0.0 0.0 0.0 0.0 Exceptional Items - 33.1 - - Issue of Preference Shares 2.2 -2.2 0.0 0.0 PBT 1,403.9 1,581.8 1,789.4 2,450.8 Inc/(Dec) in loan funds (0.5) (0. 3) - - Minority Interest (5.7) 1.8 (0.6) (0.8) Interest paid 10.3 12.3 31.7 32.0 PAT from Associates (3.7) (0.4) (10.7) (16.0) Others -188.1 -367.6 -168.6 -319.0 Total Tax 428.4 552.8 659.7 816.1 CF from financing activities -176.1 -357.8 -136.9 -287.0 PAT 977.5 1,026.8 1,119.6 1,619.5 Net Cash flow 172.1 236.8 87.1 527.4 Growth (%) 9.6 5.0 9.0 44.7 Opening Cash 564.4 736.5 973.2 1,060.3 EPS (|) 10.2 10.7 11.7 16.9 Closing Cash 736.5 973.2 1,060.3 1,587.8

Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research

Balance sheet | Crore Key ratios (Year-end March) FY15 FY16E FY17E FY18E (Year-end March) FY15 FY16E FY17E FY18E Liabilities Per share data (|)

Equity Capital 96.0 96.0 96.0 96.0 EPS 10.2 10.7 11.7 16.9 Preference Share Capital 2,019.2 2,017.0 2,017.0 2,017.0 Cash EPS 10.9 11.6 12.8 17.9 Reserve and Surplus 3,434.6 4,118.4 5,132.7 6,497.2 BV 57.8 64.9 75.4 89.7 Total Shareholders funds 5,549.8 6,231.4 7,245.7 8,610.2 DPS 2.7 2.3 2.4 2.7 Total Debt 1.2 0.9 0.9 0.9 Cash Per Share 3.0 3.8 5.0 6.0 Others 29.2 38.8 38.3 38.1 Operating Ratios (%) Total Liabilities 5,580.2 6,271.2 7,284.9 8,649.2 EBITDA Margin 25.7 25.8 28.0 33.0 EBIT Margin 24.3 24.4 26.3 31.6 Assets PAT Margin 20.0 17.9 16.9 23.5 Gross Block 641.4 836.7 1,086.7 1,336.7 Inventory days 88.8 82.1 85.0 78.0 Less: Acc Depreciation 292.5 366.1 478.6 575.3 Debtor days 79.9 82.6 90.0 85.0 Net Block 348.9 470.6 608.1 761.4 Creditor days 31.4 32.4 34.0 34.5 Capital WIP 87.8 110.4 110.4 110.4 Return Ratios (%) Total Fixed Assets 436.7 581.0 718.5 871.8 RoE 17.6 16.8 15.5 18.8 RoCE 25.3 25.9 25.0 28.7 Investments 1,764.2 1,958.8 2,358.8 3,208.8 Inventory 1,187.8 1,316.0 1,541.0 1,475.6 RoIC 33.1 34.7 38.2 47.5 Debtors 1,069.2 1,324.5 1,631.6 1,608.0 Valuation Ratios (x) Loans and Advances 1,587.7 1,472.2 1,488.9 1,450.0 P/E 43.2 41.2 37.7 26.1 Other Current Assets 170.6 212.7 197.6 186.4 EV / EBITDA 32.5 26.9 21.6 17.0 Cash 736.5 973.2 1,060.3 1,587.8 EV / Net Sales 8.3 6.9 6.1 5.6 Total Current Assets 4,751.8 5,298.6 5,919.4 6,307.8 Market Cap / Sales 8.7 7.2 6.4 6.1 Creditors 420.4 519.4 616.4 652.7 Price to Book Value 7.6 6.8 5.8 4.9 Provisions 507.2 467.9 602.2 587.4 Solvency Ratios Other current liabilities 498.0 635.5 546.4 552.4 Debt/EBITDA 0.0 0.0 0.0 0.0 Total Current Liabilities 1,425.6 1,622.9 1,765.1 1,792.4 Debt / Equi ty 0.0 0.0 0.0 0.0 Current Ratio 4.3 4.4 4.0 3.8 Net Current Assets 3,326.2 3,675.7 4,154.4 4,515.3 Other non current assets 53.1 55.6 53.1 53.1 Quick Ratio 3.0 3.0 2.7 2.6

Application of Funds 5,580.2 6,271.1 7,284.8 8,649.1 Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research

The historical numbers have been shown according to the previous reporting. standards and have not been reclassified on the basis of the quarterly restated numbers given by the company. We will restate the numbers once the same is available for all the four quarters of FY16.

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ICICIdirect.com coverage universe (Media)

CMP M Cap EPS (|) P/E (x) EV/EBITDA (x) RoCE (%) RoE (%) Sector / Company (|) TP(|) Rating (| Cr) FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E DB Corp (DBCORP) 362 455 Buy 6,657 16.1 21.3 25.2 22.4 17.0 14.4 12.5 9.2 7.8 29.9 31.8 32.5 22.0 23.7 23.9 DISH TV (DISHTV) 82 90 Hold 8,708 6.5 2.1 3.2 12.6 39.8 25.2 9.2 8.5 6.9 31.1 30.5 40.2 181.9 36.6 36.6 ENIL (ENTNET) 698 790 Hold 3,326 21.0 15.5 22.5 33.3 45.1 30.9 21.4 21.5 15.2 14.5 12.6 16.2 13.0 8.8 11.5 Eros (EROINT) 156 190 Buy 1,463 22.9 21.0 23.7 6.8 7.4 6.6 4.9 7.1 5.5 13.5 10.6 12.9 12.1 10.5 10.6 HT Media (HTMED) 71 80 Hold 1,644 7.2 6.6 7.3 9.8 10.8 9.7 6.3 4.3 3.4 10.7 12.3 12.3 8.2 6.9 7.2 Inox Leisure (INOX) 224 270 Hold 2,058 8.4 6.5 9.7 26.6 34.7 23.1 11.8 12.2 9.3 11.1 9.9 12.8 10.9 7.3 9.9 Jagran Prakashan 170 220 Buy 5,541 13.6 12.5 14.7 12.5 13.5 11.5 9.7 7.9 6.3 23.9 26.7 28.3 22.5 22.1 21.8 PVR (PVRLIM) 1,133 1,375 Buy 5,294 25.4 24.6 32.6 44.5 46.0 34.7 16.7 14.7 11.7 15.6 14.9 17.6 14.3 11.9 13.6 Sun TV (SUNTV) 441 560 Buy 17,393 23.2 27.0 31.1 19.0 16.3 14.2 9.0 8.1 7.1 36.1 39.5 42.3 24.9 27.5 29.3 TV Today (TVTNET) 304 363 Buy 1,813 15.8 18.8 24.1 19.2 16.2 12.6 11.3 8.9 6.8 27.6 27.3 29.5 17.7 18.0 19.5

ZEE Ent. (ZEEENT) 440 530 Buy 42,258 10.7 11.7 16.9 41.2 37.7 26.1 26.9 21.6 17.0 25.9 25.0 28.7 16.8 15.5 18.8 Source: Company, ICICIdirect.com Research

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RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock.

Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) – 400 093 [email protected]

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ANALYST CERTIFICATION We /I, Bhupendra Tiwary, MBA, Sneha Agarwal, MBA Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a Sebi registered Research Analyst having registration no. INH000000990. ICICI Securities is full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. ICICI Securities is a wholly-owned subsidiary of ICICI Bank which is India’s largest private sector bank and has its various subsidiaries engaged in businesses of housing finance, asset management, life insurance, general insurance, venture capital fund management, etc. (“associates”), the details in respect of which are available on www.icicibank.com.

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