India Equity Research | Media & Entertainment © August 31, 2016 Event Update Emkay Your success is our success Zee Entertainment
CMP Target Price Rs540 Rs546 () Adieu to Sports at impressive valuations Rating Upside
ACCUMULATE () 1.2 %
. Zee has entered into definitive agreement with Sony Pictures India to sells its sports Change in Estimates business for Rs25.8bn ($385mn) in all cash deal. Till FY16, Zee had invested Rs11.1bn in EPS Chg FY17E/FY18E (%) NA the sports business including Rs6.1bn of cumulative EBITDA loss (FY08-16) Target Price change (%) 8.1 . Post this transaction, management’s focus will be on expanding five business verticals; Previous Reco BUY broadcast, digital, films, live events and international operations . Transaction is positive for Zee given that; 1) sports business would have continued to burn Emkay vs Consensus cash and required investments for acquiring rights and 2) savings can push investments EPS Estimates on digital and other platforms to offer differentiated content FY17E FY18E . As there is lack of clarity on cash utilization (it can be either used for pre-payment of RPS Emkay 12.5 15.8 or business investment), we have ascribed cash/share of Rs24 and raised pro-forma EPS Consensus 13.1 16.4 by 4% for FY18E after adjusting sale of sports, resulting to PT of Rs546. Recent run-up in Mean Consensus TP Rs 502 the stock price to restrict up-side in near term, cut rating to ACCUMULATE Stock Details Key contours of the deal Bloomberg Code Z IN . Transaction includes Sale of all sports channels both in India and overseas. Consideration Face Value (Rs) 1 amount will be a bullet payment at the time of deal closure, which is expected to conclude Shares outstanding (mn) 960 in 4-5 months 52 Week H/L 544 / 350 . Non-compete agreement is for 4 years M Cap (Rs bn/USD bn) 518 / 7.73 . Tax and transaction cost is estimated at 5-10% of transaction value Daily Avg Volume (nos.) 1,690,607 Daily Avg Turnover (US$ mn) 11.9 Outlook and valuations We view sale of sports as positive event given that; 1) sports business would have continue Shareholding Pattern Jun '16 to burn cash in medium term, 2) it would have had to invest heavily towards acquiring rights Promoters 43.1% and 3) cash inflow can push investments in digital platform to offer differentiated content. In FIIs 48.1% our view, there are limited sports properties which Zee could have acquired while keeping DIIs 3.8% IRR in mind. Increasing competition and low IRRs would have led to continued drag on Public and Others 5.0% consolidate performance.
As there is lack of clarity on cash utilization (it can be either used for pre-payment of RPS or Price Performance business investment), we have ascribed cash/share of Rs24 and raised pro-forma EPS by (%) 1M 3M 6M 12M 4% for FY18E after adjusting sale of sports business, resulting to PT of Rs546. We continue Absolute 8 22 45 40 to like the company’s aggressive focus on regional markets, proven track record with market share gains in most of the markets and prudent capital allocation with clear focus on investing Rel. to Nifty 7 14 17 30 in businesses (Music, Movie production, acquisition of Sarthak TV and in-house content Relative price chart production) that can provide long term synergies. Recent run-up (14% since Q1FY17 results) 550 Rs % 40 in the stock price would restrict up-side in near term, cut our rating to ACCUMULATE. We have not factored impact of sports business sale in our estimates while mentioned pro-forma 510 32 financials 470 24
430 16 Financial Snapshot (Consolidated) 390 8 (Rs mn) FY14 FY15 FY16 FY17E FY18E 350 0 Net Sales 44,217 48,837 58,515 67,551 77,069 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jun-16 Aug-16 EBITDA 12,043 12,538 15,095 19,056 23,565 Zee Entertainment (LHS) Rel to Nifty (RHS) Source: Bloomberg EBITDA Margin (%) 27.2 25.7 25.8 28.2 30.6
APAT 8,921 9,775 10,580 13,444 16,254 Naval Seth EPS (Rs) 9.2 8.9 9.8 12.5 15.8 [email protected] EPS (% chg) 22.8 (3.1) 9.4 28.3 25.9 +91 22 66242414 ROE (%) 20.4 16.6 15.9 21.9 28.2
P/E (x) 58.6 60.5 55.3 43.1 34.2 Ashish Agrawal EV/EBITDA (x) 41.9 40.0 33.0 27.1 21.4 [email protected] P/BV (x) 10.9 9.3 8.3 10.9 8.6 +91 22 66121241 Source: Company, Emkay Research
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Zee Entertainment (Z IN) India Equity Research | Event Update
Conference call takeaways
. Sale of sports is marginally contrast to management views in the past about bouquet strength and long term synergies. However, favorable deal value and expectations of generating better IRRs with investment in entertainment genre from sale proceeds led to exit . All the Sports contracts will be transferred to Sony Pictures while there are couple of contracts which require non-objection certificates from respective boards. Given the Sony’s global credibility there would not be any hassle in transferring of rights. . Expansion in new verticals will bring back the lost viewership market share in medium term . No impact on negotiating power of Zee for subscription revenue contracts with MSOs post exit of sports business. Sports subscription contribute in mid-teens of total subscription revenues. . EBITDA margin would be ~30% on consolidated basis post exit of sports business . Working capital requirements would also reduce going forward . Cash utilization: the company might utilize funds for future investment that would be done in live events, films, digital (significant investment). Focus in digital will be on both A-VoD and S-VoD. Possibility of early redemption of RPS could also be evaluated by the board. . Deal value does not include proceeds from two ongoing litigations with BCCI which are worth Rs2.75bn. Zee will be entitled for the amount, if court cases are ruled in favor of the company (over and above the deal value) . The Board of Control for Cricket in India (BCCI) pending case excerpts from AR: The Company has preferred a legal case against BCCI for premature termination of Media Rights contract for telecast of cricket matches between India and other countries in neutral territories outside India. The Hon’ble Arbitration Tribunal in November 2012 has passed an Arbitral award of Rs1236mn (plus interest) in favour of the company. BCCI has filed a petition before the Hon’ble High Court of Judicature at Madras challenging the Tribunal Award. Accordingly, pending final outcome and receipt of the award amount, effect has not been given in these financial statements.
Details of proposed transaction As part of the proposed sale of Sports Broadcasting Business (a) the entire equity stake held by the company in Taj Television (India) Pvt Ltd shall be sold to Sony Pictures Networks India Pvt Ltd; and (b) Taj TV Ltd, Mauritius shall sell on a slump sale basis its Sports broadcasting business including TEN brand of television channels along with other assets to and in favor of Aqua Holding Investments Pvt Ltd, Mauritius and MSM Asia Limited, UK - affiliates of Sony Pictures Networks.
Exhibit 1: Deal value per share Particulars Rsmn Total Deal Value (Rs mn) 25795 Transaction cost & Tax 10% Net Proceeds (Rsmn) 23216 No of shares (mn) 960.4 Value/share (Rs) 24.2 Source: Company, Emkay Research
Zee’s investment in sports Zee had acquired 50% in sports business in 2006 from Dubai-based Abdul Rahman Bukhatir's Taj Group for Rs2.6bn ($57mn currency conversion of 2006), additional 45% stake was purchased in 2010 for Rs2.1bn ($44.14mn currency conversion of 2010). Cumulative EBITDA losses from FY08-16 stands at Rs6.1bn. Total investment stands at ~Rs11.1bn while sale value is pegged at Rs25.8bn, implying premium of 2.3x.
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Zee Entertainment (Z IN) India Equity Research | Event Update
Exhibit 2: Stake acquired in Taj Television Particulars Year Value (Rs bn) 50% 2006 2.6 45% 2010 2.1 5% 2011 0.2 Cumulative EBITDA loss (FY08-16) 6.1 Total investment 11.1 Source: Company, Emkay Research
Sports business has been contributing in the range of 13-15% to the total revenues (higher during India cricket series) while the losses has been continued since acquisition. Over the last 9 years, it has registered cash burn of Rs6.1bn, dragging consolidated performance.
Exhibit 3: Zee Sports business performance Rs mn FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E Revenue 2147 3876 3187 5111 3934 4960 6591 6313 6312 7,431 8,092 8946 Opex 2075 3563 3764 6489 5414 5830 7567 6579 6661 8331 8892 9546 EBITDA 73 313 -577 -1378 -1480 -870 -976 -266 -349 -900 -800 -600 Source: Company, Emkay Research
Sports to be a duopoly market in India while business economics still unfavorable . Sports has been loss making for Zee Ent. and other broadcasters as well, due to structural issues pertaining to high content cost (especially cricket), relatively low advertisement and subscription monetization. . There are three major sports broadcasters in India with Star India leading the pack with maximum hours of India cricket and focus on regional (sports) expansion. Sony is generating huge cash with marquee property IPL (which will come for renewal next year) and increased focus on other sports properties like football (see Exhibit 7 for detailed sports rights for major broadcasters). . Ten Sports has never been very aggressive in biding India cricket series, given the group’s focus on RoI and secondly, tussle with BCCI in the past has also restricted it from bidding for India cricket series. But, Ten Sports has rights for WWE, which has strong viewership. . To sum-up all the three broadcasters have created their niche to sustain in sports segment, Zee’s philosophy of not to bid aggressively has kept it at third position while due to the same reason losses have been also curtailed. . In our view, Zee has taken step in the right direction as continued investment in sports without having any marquee India cricket property (in Cricket Lover’s country) would have restricted business scale. Furthermore, aggressive bidding as well as higher operating losses would have dented consolidated performance and disliked by the investors. . Cost to build sports content has been rising globally as well: Disney’s ESPN, and TNT, owned by Time Warner, are paying a combined $24 billion for the rights to broadcast NBA basketball games for the next nine years, almost triple the amount they were paying under their former deal.
Exhibit 4: Sports channels of large broadcasters Star Sony TV Zee TV Star Sports 1 Sony SIX Ten 1 Star Sports 2 ESPN Ten 2 Star Sports 3 Sony SIX HD Ten 3 Star Sports 4 ESPN HD Ten Golf HD Star Sports 1 HD Ten cricket Star Sports 2 HD Ten 1 HD Star Sports 3 HD Star Sports 4 HD Source: Company, Emkay Research
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Zee Entertainment (Z IN) India Equity Research | Event Update
Sports business has been burning cash from years due to structural issues of high content cost and weak monetization of the same. Partially monetization is getting addressed with digitization, while it continues to remain below expectations. On the other hand, content cost is also increasing meaningfully over the years, for instance, Star India in 2012 had bought media rights (Test, one-day international and Twenty20) for the matches to be played in India for Rs38.5bn for 96 matches, implying cost per match of Rs401mn. As per our back of the envelop calculations, Star India would generating minimal RoI’s given the high cost of acquisition (Exhibit below).
Exhibit 5: Back of the envelop calculation on per match basis (One-Day cricket match) Particulars Rs mn Comments One day cricket match duration 7 In Hour Maximum advertisement duration 98 In min, assuming maximum duration of 14 min/hr similar to Hindi GEC Number of 10 sec slots available 686 Cost recovery through advertisement during match 80% Remaining through subscription and syndication right sales post-match Cost per match paid by Star 410 Bid amount paid by Star India Advertisement rate per 10 sec slot 0.5 For broadcasters to recover >80% cost Advertisement revenue per Match 343 Subscription Revenue 58 Equals to the cost of acquisition, while there are other cost pertaining telecast, Total Revenues 401 marketing, other admin cost. Therefore, marginal RoI, assuming sales of syndication rights and other digital revenues Source: Emkay Research
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Zee Entertainment (Z IN) India Equity Research | Event Update
Exhibit 6: Key sports rights of major broadcasters Genre Star India Sony Entertainment/Sony ESPN Ten Sports Neo sports Cricket Asia Cup Asia Cup (2016-2023) ICC Cricket World Cup ICC Champions Trophy ICC Tournaments ICC T20 World Cup
ICC Under-19 Cricket World
Cup International cricket in International cricket of India International cricket of New Zealand Pakistan International cricket of International cricket in South
Australia Africa Full Members International cricket of International cricket in Sri
Bangladesh Lanka International cricket of International cricket in West
England Indies International cricket in
Zimbabwe Big Bash League Indian Premier League Bangladesh Premier Natwest T20 Blast Caribbean Premier League League Domestic Ranji Trophy Ram Slam T20 Challenge
Digital rights for IPL Masters Champions League Pro Kabaddi League Karnataka Premier League Professional Total Nonstop Action Wrestling World Wrestling Entertainment wrestling Premier League FIFA World Cup UEFA Champions League Eredivisie Bundesliga FIFA Women's World Cup UEFA Europa League Coupe de France AFC Champions League Other FIFA tournaments UEFA Super Cup Coppa Italia UEFA European Championship & AFC Cup Ligue 1 FIFA Club World Cup Qualifying CONMEBOL FIFA World Cup Indian Super League English League Cup qualification
Football J1 League Copa America & Copa do Brasil Sky Bet Championship Copa America Centenario & La Liga DFB-Pokal Copa del Rey Except Final & Serie A Brazilian League Supercopa de España Campeonato Paulista FA Cup, Community Shield Campeonato Carioca Argentine Primera División I-League International Champions Cup FFA Cup Australian Open and Premier Futsal A-League Wimbledon ATP World Tour Masters 1000 U.S. Open French Open ATP World Tour Finals WTA Tour ATP World Tour 500 Tennis ATP World Tour 250 Hopman Cup Champions Tennis League World Tennis Championship Formula One and Formula E NASCAR MotoGP Motor racing FIA WTCC
FIA WEC U.S. Open/Open PGA Tour (except the Golf The Masters/PGA Championship Championship Majors) Field Hockey Hockey India League Hockey World League Source: Company, Emkay Research
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Zee Entertainment (Z IN) India Equity Research | Event Update
We have not incorporated sale of sports in our financials while our pro-forma estimates are mentioned below. As stated above we are valuing sale proceeds on per share basis in our target price while other financials assumption remain unchanged.
Exhibit 7: Pro-forma financials Consolidated (Rsmn) FY 14 FY 15 FY 16 FY 17E FY 18E FY19E Advertising revenue 23801 26603 34297 40134 46275 51878 Subscription 17155 17935 20579 23102 26993 29923 Other 3261 4299 3639 4315 3800 3800 Total Revenue 44217 48837 58515 67551 77069 85602 Expenditure 32174 36299 43420 48495 53503 58521 EBITDA 12043 12538 15095 19056 23565 27081 EBITDA margin 27% 26% 26% 28% 31% 32% Other income 1807 2278 2016 2500 2600 2880 Depreciation 501 673 839 1063 1241 1279 Interest 158 103 123 300 300 300 PBT 13,191 14,040 15,818 19,061 24,625 28,382 Tax 4291 4285 5532 6734 8372 9650 Tax rate 33% 31% 35% 35% 34% 34% PAT 8,921 9,775 10,250 12,312 16,254 18,705 EPS (Rs) 9.3 10.2 10.7 12.8 16.9 19.5 EPS -Adj for RPS (Rs) 9.2 8.9 9.4 11.3 15.8 18.6
Sports (Rs mn) FY 14 FY 15 FY 16 FY 17E FY 18E FY19E Total Revenue 6,591 6,313 6,312 7,431 8,478 8,988 Expenditure 7,567 6,579 6,661 8,331 9,278 9,588 EBITDA -976 -266 -349 -900 -800 -600 EBITDA margin -15% -4% -6% -12% -9% -7%
Ex sports (Rsmn) FY 14 FY 15 FY 16 FY 17E FY 18E FY19E Advertising revenue 19319 22310 30005 35081 40511 45766 Broadcasting 16166 16988 19632 21988 25722 28575 Other 2141 3226 2566 3052 2359 2272 Total Revenue 37626 42524 52203 60120 68591 76614 Expenditure 24607 29720 36759 40164 44226 48933 EBITDA 13019 12804 15444 19956 24365 27681 EBITDA margin 35% 30% 30% 33% 36% 36% Other income 1,807 2,278 2,016 2,500 2,600 2,880 Depreciation 501 673 839 1,063 1,241 1,279 Interest 158 103 123 300 300 300 PBT 14,167 14,306 16,167 19,961 25,425 28,982 Tax 4,291 4,285 5,532 6,787 8,644 9,854 Tax rate 30% 30% 34% 34.0% 34.0% 34.0% PAT 9,897 10,041 10,599 13,160 16,782 19,101 EPS (Rs) 10.31 10.46 11.04 13.70 17.47 19.89 EPS -Adj for RPS (Rs) 10.22 9.19 9.77 12.22 16.32 19.04 Source: Company, Emkay Research
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Zee Entertainment (Z IN) India Equity Research | Event Update
Key Financials (Consolidated) Income Statement Y/E Mar (Rs mn) FY14 FY15 FY16 FY17E FY18E Net Sales 44,217 48,837 58,515 67,551 77,069 Expenditure 32,174 36,299 43,420 48,495 53,503 EBITDA 12,043 12,538 15,095 19,056 23,565 Depreciation 501 673 839 1,063 1,241 EBIT 11,542 11,865 14,256 17,993 22,325 Other Income 1,807 2,278 2,016 2,500 2,600 Interest expenses 158 103 123 300 300 PBT 13,191 14,040 16,149 20,193 24,625 Tax 4,291 4,285 5,532 6,734 8,372 Extraordinary Items 0 0 (331) (1,099) 0 Minority Int./Income from Assoc. 2 (37) (4) (44) (48) Reported Net Income 8,835 8,564 9,039 10,924 15,143 Adjusted PAT 8,921 9,775 10,580 13,444 16,254
Balance Sheet Y/E Mar (Rs mn) FY14 FY15 FY16 FY17E FY18E Equity share capital 21,130 21,152 21,130 960 960 Reserves & surplus 26,247 34,346 41,168 46,367 58,982 Net worth 47,378 55,499 62,298 47,328 59,942 Minority Interest 61 4 85 33 33 Loan Funds 17 12 9 20,179 15,979 Net deferred tax liability (298) (531) (531) (531) (531) Total Liabilities 47,158 54,984 61,861 67,009 75,423 Net block 10,733 11,376 13,856 14,169 13,929 Investment 8,290 9,755 10,439 10,939 15,939 Current Assets 40,000 47,519 52,667 58,390 65,899 Cash & bank balance 5,645 7,365 9,414 10,827 14,164 Other Current Assets 1,243 1,707 2,126 2,449 2,794 Current liabilities & Provision 12,862 14,544 15,979 17,367 21,221 Net current assets 27,138 32,975 36,688 41,023 44,678 Misc. exp 0 0 0 0 0 Total Assets 47,158 54,984 61,861 67,009 75,423
Cash Flow Y/E Mar (Rs mn) FY14 FY15 FY16 FY17E FY18E PBT (Ex-Other income) (NI+Dep) 11,384 11,762 14,133 17,693 22,025 Other Non-Cash items 0 0 0 0 0 Chg in working cap (5,833) (4,350) (1,664) (2,922) (317) Operating Cashflow 3,627 6,274 9,506 10,401 17,177 Capital expenditure (2,256) (1,197) (3,319) (1,376) (1,000) Free Cash Flow 1,371 5,077 6,186 9,025 16,177 Investments (374) (1,465) (684) (500) (5,000) Other Investing Cash Flow 0 0 0 0 0 Investing Cashflow (823) (384) (1,987) 624 (3,400) Equity Capital Raised 20,176 22 (22) (20,170) 0 Loans Taken / (Repaid) 0 (5) (3) 20,170 (4,200) Dividend paid (incl tax) (2,333) (3,812) (3,805) (3,949) (3,639) Other Financing Cash Flow (14,845) 5,373 5,849 4,051 8,527 Financing Cashflow 2,841 1,475 1,896 (198) 387 Net chg in cash 5,645 7,365 9,414 10,827 14,164 Opening cash position 5,317 5,645 7,365 9,414 10,827 Closing cash position 5,645 7,365 9,414 10,827 14,164
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Zee Entertainment (Z IN) India Equity Research | Event Update
Key Ratios Profitability (%) FY14 FY15 FY16 FY17E FY18E EBITDA Margin 27.2 25.7 25.8 28.2 30.6 EBIT Margin 26.1 24.3 24.4 26.6 29.0 Effective Tax Rate 32.5 30.5 34.3 33.4 34.0 Net Margin 20.1 20.0 18.1 19.9 21.1 ROCE 31.0 27.7 27.9 31.8 35.0 ROE 20.4 16.6 15.9 21.9 28.2 RoIC 39.9 34.3 36.5 42.1 50.3
Per Share Data (Rs) FY14 FY15 FY16 FY17E FY18E EPS 9.2 8.9 9.8 12.5 15.8 CEPS 9.7 9.6 10.6 13.6 17.1 BVPS 49.3 57.8 64.9 49.3 62.4 DPS 2.1 3.5 3.5 3.7 3.4
Valuations (x) FY14 FY15 FY16 FY17E FY18E PER 58.6 60.5 55.3 43.1 34.2 P/CEPS 55.5 56.1 50.8 39.6 31.6 P/BV 10.9 9.3 8.3 10.9 8.6 EV / Sales 11.4 10.3 8.5 7.6 6.5 EV / EBITDA 41.9 40.0 33.0 27.1 21.4 Dividend Yield (%) 0.4 0.7 0.7 0.7 0.6
Gearing Ratio (x) FY14 FY15 FY16 FY17E FY18E Net Debt/ Equity (0.3) (0.3) (0.3) 0.0 (0.2) Net Debt/EBIDTA (1.2) (1.4) (1.3) (0.1) (0.6) Working Cap Cycle (days) 177.4 191.4 170.1 163.2 144.5
Growth (%) FY14 FY15 FY16 FY17E FY18E Revenue 19.5 10.4 19.8 15.4 14.1 EBITDA 26.2 4.1 20.4 26.2 23.7 EBIT 26.2 2.8 20.1 26.2 24.1 PAT 22.8 (3.1) 5.5 20.9 38.6
Quarterly (Rs mn) Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Revenue 13,267 13,849 15,951 15,316 15,716 EBITDA 3,146 3,546 4,302 4,136 4,532 EBITDA Margin (%) 23.7 25.6 27.0 27.0 28.8 PAT 1,937 2,474 2,750 2,606 2,203 EPS (Rs) 2.0 2.6 2.9 2.7 2.3
Shareholding Pattern (%) Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Promoters 43.1 43.1 43.1 43.1 43.1 FIIs 47.7 48.4 47.6 47.1 48.1 DIIs 3.7 3.5 4.2 4.1 3.8 Public and Others 5.6 5.1 5.1 5.7 5.0
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Zee Entertainment (Z IN) India Equity Research | Event Update
Emkay Rating Distribution BUY Expected total return (%) (Stock price appreciation and dividend yield) of over 25% within the next 12-18 months. ACCUMULATE Expected total return (%) (Stock price appreciation and dividend yield) of over 10% within the next 12-18 months. HOLD Expected total return (%) (Stock price appreciation and dividend yield) of upto 10% within the next 12-18 months. REDUCE Expected total return (%) (Stock price depreciation) of upto (-) 10% within the next 12-18 months. SELL The stock is believed to underperform the broad market indices or its related universe within the next 12-18 months.
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