17 January 2018 3QFY18 Results Update | Sector: Media Zee Entertainment BSE SENSEX S&P CNX 35,082 10,789 CMP: INR593 TP: INR705 (+19%) Buy Bloomberg Z IN Better growth to drive valuation Equity Shares (m) 960.4 Ex-sports revenue rebounds with 23% growth, EBITDA up 17%: Ex-sports M.Cap.(INRb)/(USDb) 569.5/8.8 52-Week Range (INR) 619/465 revenue rebounded (+23% YoY) to INR18.4b on a low base (3QFY17 was 1, 6, 12 Rel. Per (%) -1/0/-5 impacted by demonetization). Consolidated revenue grew 12% YoY (7.6% beat). Avg Val, INRm 1087 EBITDA expanded 15% YoY to INR5.9b (8% beat). Ex-sports EBITDA increased Free float (%) 56.9 17% YoY – lower than revenue growth due to higher SG&A related to a) an Financials & Valuations (INR b) increase in original number of hours of content, b) three movie releases and c) Y/E MARCH 2018E 2019E 2020E INR400m of one-off expense related to Zee’s 25-year branding. EBITDA margin Sales 66.1 76.5 87.7 improved 90bp YoY to 32.3% (in-line). PAT rose 29% YoY to INR3.2b. Investment EBITDA 21.0 25.3 29.7 in secured NCD of INR1.67b is overdue, while Zee is pursuing recovery options. NP 13.1 16.9 20.2 Ad revenue propels growth; subscription revenue delayed: Domestic ad EPS (Rs) 13.7 17.6 21.0 EPS Growth (%) 2.1 28.7 19.3 revenue jumped 26% YoY (adj. for sale of sports business and acquisition of BV/Share (Rs) 80.9 94.9 112.2 RBL), with healthy ad spends across categories. Ex-sports domestic subscription P/E (x) 43.4 33.7 28.3 revenue grew at a muted 7.5% due to longer time taken for contract renewal P/BV (x) 7.3 6.3 5.3 negotiations on account of the TRAI’s tariff order. EV/EBITDA (x) 26.5 21.8 18.1 Upbeat ad/subscription outlook: Improving ad market outlook with broad- EV/Sales (x) 8.4 7.2 6.1 RoE (%) 18.2 20.0 20.3 based ad spends across sectors and healthy viewership should lead to steady RoCE (%) 16.4 18.7 20.3 15% ad revenue growth in 4QFY18 and 16% CAGR over FY18-19E. Domestic subscription revenue (ex-sports) led by closure of content contracts is expected Estimate change to grow 16% in 4QFY18 and at 14% CAGR over FY18-19E. TP change Maintain Buy with a revised TP of INR705: We have revised up FY19-20E PAT Rating change by 2% on better-than-expected results. Subsequently, our TP is revised up to INR705 (v/s INR680 earlier) on 35x P/E on Dec’19 EPS. Premium valuation is justified by steady 24% EPS CAGR over FY18-20E and improving RoIC above 30%. Our high EPS growth estimate is driven by 200bp EBITDA margin expansion over FY18-20E to 33.9%, above the company’s guidance of 30%+. We believe steady revenue growth (ex-sports) should offer buffer for higher operating cost toward the upcoming re-launch of Zee’s digital platform – Z5. Consolidated - Quarterly Earning Model (INR m) Y/E March FY17 FY18 v/s est FY17 FY18E 3QFY18E 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4QE (%) Total Revenue from Operations 15,717 16,954 16,391 15,280 15,402 15,821 18,381 16,462 64,342 66,065 17,085 7.6 YoY Change (%) 18.5 23.0 3.4 0.4 -2.0 -6.7 12.1 7.7 10.7 2.7 0.8 Total Expenditure 11,185 12,062 11,233 10,593 10,559 10,909 12,437 11,118 45,073 45,023 11,593 7.3 EBITDA 4,532 4,892 5,158 4,688 4,844 4,912 5,944 5,343 19,269 21,042 5,492 8.2 Margins (%) 28.8 28.9 31.5 30.7 31.4 31.0 32.3 32.5 29.9 31.9 32.1 19bp Depreciation 251 336 249 316 311 411 505 453 1,152 1,679 376 34.1 Interest 75 86 90 1,122 147 3 24 1,089 1,372 1,262 556 -95.8 Other Income 734 432 525 549 1,011 2,031 480 123 2,240 3,646 302 59.2 Fair Value through P&L -1,132 -829 -714 470 -532 -148 -419 0 -2,205 -1,099 0 gain/(loss) PBT before EO expense 3,808 4,074 4,630 4,269 4,864 6,381 5,477 3,925 16,780 20,647 4,862 12.7 Extra-Ord expense 0 0 0 -12,234 0 -1,346 0 0 -12,234 -1,346 0 PBT 3,808 4,074 4,630 16,504 4,864 7,727 5,477 3,925 29,014 21,993 4,862 12.7 Tax 1,626 1,634 2,081 1,464 2,344 1,832 2,260 1,592 6,805 8,028 1,653 36.7 Rate (%) 42.7 40.1 44.9 8.9 48.2 23.7 41.3 40.6 23.5 36.5 34.0 MI & P/L of Asso. Cos. 13 56 41 -116 4 -16 -4 0 -7 -16 0 Reported PAT 2,169 2,383 2,508 15,156 2,516 5,912 3,222 2,333 22,216 13,982 3,209 0.4 Adj PAT 2,169 2,383 2,508 4,006 2,516 4,885 3,222 2,333 12,851 13,127 3,209 0.4 YoY Change (%) -9.0 -9.9 -6.1 180.1 16.0 104.9 28.5 -41.8 52.3 2.1 34.6 Aliasgar Shakir – Research analyst ([email protected]); +91 22 6129 1565 Hafeez Patel – Research analyst ([email protected]); +91 22 6129 1568 Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital. Zee Entertainment Valuation and view Ad revenue growth: Our FY18-21E ad revenue growth for Zee remains at 16.5%. This is marginally above FICCI-KPMG’s TV ad industry growth estimates of 15% over the similar period. Zee’s wide channel bouquet and focus to increase target market through entry in new genres should support higher growth. Subscription revenue growth: Subscription revenue growth in the next three years should remain healthy, as digitization is expected to help garner better subscription revenue driven by ARPUs. EBITDA margin: We have built in steady EBITDA margin improvement of 270bp over FY18-21E on the back of sale of loss-making sports business and operating leverage. Management has guided north of 30% EBITDA margin; however, we believe the company has enough margin headroom to support fresh investments (even at 200-300bp higher margin from the current 31-32% EBITDA margin). Subsequently, the company has the potential to drive secular 22% EPS growth over FY18-21E. Exhibit 1: ZEEL – Business Construct Particulars FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E FY21E Advertisement revenue growth (%) 24.0 21.2 11.8 26.5 9.2 12.3 17.3 15.5 15.5 Subscription revenue growth -Domestic revenue growth (%) 26.3 13.2 8.0 14.5 11.8 -10.0 16.5 16.5 16.5 -International revenue growth (%) 14.0 5.5 -23.5 15.4 3.0 -12.5 4.0 2.0 2.0 Total Subscription revenue growth (%) 22.6 11.0 -0.4 14.7 10.0 -10.5 14.1 14.0 14.3 Total Revenue growth (%) 21.7 19.5 10.4 19.0 10.7 2.7 15.8 14.7 14.8 EBITDA margin (%) 25.8 27.2 25.7 26.0 29.9 31.9 33.0 33.9 34.6 EPS growth (%) 22.8 21.9 -3.1 -1.6 52.5 2.1 28.7 19.3 19.3 Source: MOSL, Company What it means for the target price 3-year view: Given the steady 22% EPS growth estimate over FY18-21, healthy RoIC of 30% and strong FCF generation, we maintain 35x P/E (3-year average). This values the company at INR 876, offering 50% upside. 1-year view: We have revised up FY19-20 PAT by 2% on better-than-expected results. Subsequently, our TP is revised up to INR705 (v/s INR680 earlier) on 35x (3-year average) P/E on Dec’19 EPS. Premium valuation is justified on Zee’s steady 24% EPS CAGR over FY18-20E and improving RoIC above 30%. Our high EPS growth estimate is driven by 200bp EBITDA margin expansion over FY18-20E reaching 33.9%, above the company’s guidance of 30%+. 17 January 2018 2 Zee Entertainment Exhibit 2: ZEEL: 1-year forward P/E band P/E (x) Avg (x) Max (x) Min (x) 53.0 43.3 41.0 35.0 29.0 25.9 17.0 5.0 10.0 Jul-10 Jul-15 Jan-08 Jan-13 Jan-18 Oct-11 Oct-16 Apr-09 Apr-14 Source: MOSL, Bloomberg Key Triggers Sustainable ad revenue growth led by steady industry growth and healthy viewership market share. Digitization led healthy subscription revenues growth over the next 2-3 years. Key risk factors Intense competition across genres leading to lower viewership and subsequently impacting yields. Heavy investment in the digital – OTT application, movie production and aggressive ramp-up in movie library.