India Equity Research | Media & Entertainment © February 20, 2017 Company Update Emkay Your success is our success Zee Entertainment CMP Target Price Rs529 Rs580 () Confident of outperforming industry Rating Upside growth; upgrade to ACCUMULATE ACCUMULATE () 9.7 % . We met the management of Z IN to get insights on advertisement outlook, content strategy Change in Estimates and long term subscription revenue trend. Revamping programing hours on flagship Hindi EPS Chg FY17E/FY18E (%) 1.7/2.9 GEC i.e. Zee TV in next 2 quarters is the key focus of the management. Target Price change (%) 14.6 . As per our data, the company has acquired higher number of Bollywood movie titles in FY17 Previous Reco HOLD as compared to last 4-5 years. This, would assist in delivering advertisement growth in FY18 till Zee TV’s viewership share recovers. Emkay vs Consensus . Viewership of regional channels remain strong with leadership position in Marathi, ranked EPS Estimates no.2 in Telugu, Bengali and Kannada GEC’s. Proven track record of gaining market share in FY17E FY18E regional channels and healthy viewership share in &TV (although need for further ramp-up Emkay 11.8 14.4 for timely break-even) keeps the hope high on imminent revival of Zee TV’s market share. Consensus 12.5 16.3 . Continued monetization of strong viewership share in regional channels to aid better than Mean Consensus TP Rs 538 industry’s advertisement growth. For Zee, we are projecting a growth of 14%/15% for FY18/19 (healthy outperformance vs. industry estimates) in entertainment business. Stock Details . The management in the past has indicated possibility of RPS redemption with cash flow from Bloomberg Code Z IN sale of sports business, announcement on the same will be a positive move as it will be Face Value (Rs) 1 RoCE accretive. Upgrade to ACCUMULATE with revised TP of Rs580 (30x FY19E EPS). Shares outstanding (mn) 960 Sustained weakness in Zee TV’s viewership is a key risk to our call. 52 Week H/L 590 / 364 M Cap (Rs bn/USD bn) 508 / 7.58 Increased investment in movie rights to aid advertisement growth in FY18E Daily Avg Volume (nos.) 22,24,681 As stated in Q3FY17 earnings call, Zee has increased investment towards acquiring movie satellite rights. Zee has acquired higher number of Bollywood movie titles in FY17 as Daily Avg Turnover (US$ mn) 15.5 compared to last 4-5 years, which include big ticket titles like Dangal, Raees and others. This, would aid advertisement growth in FY18 till Zee TV recovers viewership share. In the initial Shareholding Pattern Dec '16 years, monetizing satellite rights is margin accretive due to aggressive accounting policy. Promoters 43.1% Zee TV content revamp in-place- hours to inch-up over the next 2 quarters FIIs 46.6% Zee TV has seen reduction in programing hours from 34/week in Q3FY16 to 22-24/week DIIs 4.3% during the last 3 quarters. For FY17, the management had initially guided for 34hours/week Public and Others 6.0% content, which was revised to 30 in Sep’16 which has now been deferred to Q2FY18. Changes in senior management in Zee TV (new channel head has been appointed) is now Price Performance behind us. New shows and story line-up for the upcoming content has been finalized. New (%) 1M 3M 6M 12M launches and increase in programming hours will be closely watched in the ensuing quarters. Absolute 13 18 5 38 Regional channel viewership share remain on strong footing Rel. to Nifty 7 8 3 14 Zee’s regional bouquet has been delivering strong results with sustenance of viewership share in most of the GEC channels despite rise in competition. It has maintained leading Relative price chart Rs % position in Marathi, ranked no. 2 in Telugu, Bengali and Kannada GEC’s. The company has 600 30 recently launched movie channel in Telugu to further strengthen the share. Robust viewership 550 22 share rise in Tamil GEC has been commendable, sustenance of the same would be the key 500 14 for monetization. 450 6 Financial Snapshot (Consolidated) 400 -2 (Rs mn) FY15 FY16 FY17E FY18E FY19E 350 -10 Revenue 48,837 58,515 65,254 73,337 83,039 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 EBITDA 12,538 15,095 18,950 21,763 25,962 Zee Entertainment (LHS) Rel to Nifty (RHS) EBITDA Margin (%) 25.7 25.8 29.0 29.7 31.3 Source: Bloomberg APAT 9,775 10,551 12,749 14,980 17,965 Naval Seth EPS (Rs) 8.9 9.7 11.8 14.4 17.9 [email protected] EPS (% chg) (3.1) 9.1 21.3 22.4 23.6 +91 22 66242414 ROE (%) 16.6 15.9 21.1 27.3 26.9 P/E (x) 59.3 54.4 44.8 36.6 29.6 Ashish Agrawal EV/EBITDA (x) 39.1 32.3 26.8 23.0 18.8 [email protected] P/BV (x) 9.1 8.2 11.3 9.0 7.1 +91 22 66121241 Source: Company, Emkay Research Emkay Research is also available on www.emkayglobal.com, Bloomberg EMKAY<GO>, Reuters and DOWJONES. Emkay Global Financial Services Ltd. Zee Entertainment (Z IN) India Equity Research | Company Update Increased investment in movie satellite rights to aid advertisement growth in FY18 As stated in Q3FY17 earnings call, Zee has increased investment towards acquiring movie satellite rights. Zee has acquired higher number of Bollywood movie titles in FY17 as compared to last 4-5 years, which include big ticket titles like Dangal, Raees and others. This, would aid advertisement growth in FY18 till Zee TV recovers viewership share. At the initial stage, monetization of movies rights is margin accretive due to accounting policy for amortization. Zee amortizes movie rights over the period of 5 years, the same has been in place from last 20years. In our view, a new movie rakes in +50% of its expected lifetime revenue (with 4-5 re-runs) while annual amortization is 20% and some additional marketing spends, this leads to revenue-cost mismatch and push margin upwards in the 1-2 years of movie monetization. Therefore, this also result in rise in inventory. Exhibit 1: Movie satellite rights- Highlighted portion in case of Zee indicates those movies which are yet to be telecasted Zee Entertainment Sony Entertainment Colors Star Entertainment Baaghi Sultan Ki and Ka Housefull-3 A Flying Jatt Fan Rangoon Mohenjo Daro Rustom Azhar Camaando 2 Dishoom Happy Bhaag Jayegi Te3n Shivaay Rock On 2 Dear zindagi Aligarh Banjo Rocky handsome Pink Bar Bar Dekho Befikre Akira Neel Batte Sanatta Saala Khadoos Kabali (Hindi) FY17 Kahani 2 Jungle Book Raaz Reboot M.S. Dhoni – The Untold Story Happy bhag jayegi Ae Dil Hai Mushkil Udta punjab Tum bin 2 Raees Mirzya Dangal Sanam Teri Kasam Jagga Jasoos* Singh Is Bliing Baahubali Airlift Baby I (Hindi Version) ABCD 2 Bajirao Mastani Bajrangi Bhaijaan Tanu weds Manu return Detective Byomkesh Bakshy Pyaar Ka Punchnama 2 Drishyam Dil Dhadakne do Dum Laga Ke Haisha Shaandaar Bhaag Johnny FY16 Welcome Back Piku Brothers Talvar Aligarh Dilwale Force2 Prem Ratan Dhan Payo Fitoor Kapoor and Sons Roy Tamasha Ghayal Once Again Neerja Holiday PK Hasee Toh Phasee KICK Entertainment Dedh Ishqiya Humpty Sharma Ki Dulhania Singham Returns Happy New year Gunday Mary Kom Jai Ho Mai Tera Hero Queen Bombay Velvet Raja Natwarlal Bhoothnath Returns Bang Bang Gulaab Gang Action Jackson FY15 Entertainment Hamshakals Haider Bobby Jasoos Yaariyan Shaadi Ke Side Effects 2 States Ek Villain Chennai Express Lootera Raanjhanna Mental Besharam Once upon a time in Mumbai Dobara Go Goa Gone Nautanki Saala Ghanchakkar Aashiqui 2 Ishkq in Paris Chashme Buddor Zanjeer Ek thi daayan Kochadaiyaan Satyagraha Deal with Subhash Ghai's Mukta FY14 Aurangzeb Boss Arts-Rs 250mn Shootout at Wadala Yeh Jawani Hai Diwani Krish 3 Dhoom 3 Source: Emkay Research, Company. * Expected to release in April 2017. Bold highlights successful performance at box office Emkay Research | February 20, 2017 2 Zee Entertainment (Z IN) India Equity Research | Company Update Zee TV content revamp in-place- programming hours to inch-up over the next 2 quarters Zee TV has seen reduction in programing hours from 34/week in Q3FY16 to 22-24/week during the last 3 quarters. For FY17, the management had initially guided for 34/hours/week content, which was revised to 30 hours in Sep’16 which has now been deferred to Q2FY18. Changes in senior management in Zee TV (new channel head has been appointed) is now behind us. New shows and story line-up for the upcoming content has been finalized. New launches and increase in programming hours will be closely watched in the ensuing quarters. After reduction in programming hours from Q3FY16, the company has been focusing on replacing other non-performing shows. As the below exhibits indicates that 69% of the current content of Zee TV has been launched in FY17. Zee TV is at lowest in terms of fresh programing hours on weekly basis (24.5hrs) as compared to the competitors (Star Plus- 40hrs, Colors- 29.5hrs and Sony at 22.5hrs). Zee TV is launching its flagship non-fiction show Sa-R-Ga-Ma-Pa-lil-champs from 25th Feb’17, which is replacement of Brahmarakshas. Increase in number of hours is the key in near future and success of the same would be driver of advertisement revenue growth. Increase in programming hours are also crucial to push absolute viewership, which in-turn result into higher implied market share.