Zee Entertainment

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 Big Magic EPS FY18E Changed from | 17.5 to | 16.9 (comedy genre GEC) and Big Ganga (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 ICICI Securities Ltd | Retail Equity Research Page 2 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. ICICI Securities Ltd | Retail Equity Research Page 3 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 ICICI Securities Ltd | Retail Equity Research Page 4 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 Marathi, Zee Bangla, Zee Talkies, Zee Telugu, Zee Cinemaalu and Zee Kannada television channels) of Zee News (ZNL) Apr-10 The education business undertaking of the company was demerged from the company and transferred to Zee Learn 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.

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