RESULT UPDATE ZEE ENTERTAINMENT ENTERPRISES Strong Q1 reinforces our top pick stance India Equity Research| Media COMPANYNAME Zee Entertainment Enterprises’ (ZEE) Q1FY19 revenue and EBITDA came EDELWEISS 4D RATINGS in line, while PAT surpassed estimate. Key positives: (i) 22.3% YoY growth Absolute Rating BUY in domestic advertising. With innovations likely to be at a record high in Rating Relative to Sector Outperform FY19 (HUL’s ad spends jumped 27% YoY in Q1FY19), we expect ad Risk Rating Relative to Sector Medium expenses of FMCG players to continue to be high; and (ii) 12.3% YoY spurt Sector Relative to Market Overweight in domestic subscription revenue. The 21.2% YoY rise in selling & admin cost incurred for promotion of newly launched ZEE5 was key negative. Broad-based ad growth across categories, higher ratings for Zee TV and MARKET DATA (R: ZEE.BO, B: Z IN) CMP : INR 515 sustained focus on regional markets (likely GEC launch in Kerala) brighten Target Price : INR 700 prospects. Response to ZEE5 (launched in February) and implementation of TRAI’s tariff order are key monitorables. Maintain ‘BUY’. 52-week range (INR) : 619 / 477 Share in issue (mn) : 960.5 M cap (INR bn/USD mn) : 496 / 7,252 Domestic ads extend robust run; digital initiatives yielding results Avg. Daily Vol.BSE/NSE(‘000) : 2,247.3 ZEE sustained robust domestic LTL ad growth (up 22.3% YoY; our estimate 18.0%) driven by higher ad spends across categories and increase in the network viewership SHARE HOLDING PATTERN (%) share. The company had an all-India viewership share of 19.2%. ZEE5 has started on a Current Q4FY18 Q3FY18 strong note on viewership metrics of MAUs and video views and is already among Promoters * 41.6 41.6 43.1 the top 5 OTTs in India. We believe that with a strong line up of original content, ZEE5 MF's, FI's & BK’s 10.8 10.8 8.4 will continue to garner growth across viewership metrics. FII's 41.4 41.4 42.2 Others 6.2 6.2 6.3 Q1FY19 conference call: Key takeaways * Promoters pledged shares : 10.3 (% of share in issue) i) Company is expecting higher ad growth for the industry than the initial estimates and expects to outperform the industry. It expects to report 30% plus EBITDA margin PRICE PERFORMANCE (%) in FY19 despite further investment in ZEE5 and launch of new channel in Kerala; ii) The EW Media company is repatriating excess funds invested abroad; iii) The company is expecting Stock Nifty Index similar revenue from Jio as it receives from D2h and cable players and iv) ZEE has not 1 month (8.5) 1.1 (12.1) yet signed any telecom deals for its content. 3 months (12.1) 3.9 (16.9) 12 months (1.2) 10.6 (8.9) Outlook and valuations: Positive; maintain ‘BUY’ We maintain ‘BUY/SO’ due to revival in ad spends by FMCG companies, likely scale up of ZEE5, market share gains and likely dilution of tariff order. ZEE is available at 23.7x FY20E P/E versus most consumer players’ 40-50x FY20E P/E. This is one of the highest gaps we have seen between ZEE and consumer companies. We retain 32x FY20 target PE to arrive at target price of INR700. At CMP, the stock trades at 30.3x FY19E and 23.7x FY20E EPS. Financials (INR mn) Year to March Q1FY19 Q1FY18 % change Q4FY18 % change FY18 FY19E FY20E Abneesh Roy Revenues 17,720 15,403 15.0 17,253 2.7 66,857 75,497 88,339 +91 22 6620 3141 EBITDA 5,657 4,844 16.8 5,062 11.7 20,761 24,443 30,670 [email protected] Adjusted Profit 3,472 2,815 23.3 1,275 172.3 13,499 16,315 20,807 Monit Vyas +91 (22) 6623 3463 Adj. diluted EPS 3.6 2.9 23.3 1.3 172.3 14.1 17.0 21.7 [email protected] Diluted P/E (x) 36.6 30.3 23.7 EV/EBITDA (x) 23.2 19.2 14.7 ROAE (%) 18.9 19.8 21.3 July 17, 2018 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited Media Table 1: Trends at a glance Revenue break up (INR mn) Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Ad revenue 9,120 9,592 9,554 8,469 9,665 9,867 12,020 10,496 11,460 International ad revenue 705 792 817 525 578 506 647 662 590 Domestic ad revenue 8,415 8,800 8,738 7,944 9,087 9,361 11,373 9,834 10,870 Domestic subscription 4,179 4,675 4,818 4,554 3,791 4,043 4,036 4,521 4,252 International subscription revenue 1,103 1,158 1,117 1,026 1,000 971 981 944 934 Total subscription 5,282 5,833 5,935 5,580 4,791 5,014 5,017 5,465 5,186 Sport business Sales 1,700 2,125 1,411 1,066 200 16 NA NA NA Costs 1,529 2,293 1,334 1,049 200 16 NA NA NA EBITDA 171 (168) 77 17 - - NA NA NA EBITDA margin (%) 10.1 (7.9) 5.5 1.6 0.0 0.0 NA NA NA Non-sports business Sales (non-sports) 14,016 14,829 14,980 14,214 15,203 15,805 18,381 17,253 17,720 Costs (non-sports) 9,656 9,769 9,899 9,544 10,359 10,893 12,437 12,191 12,064 EBITDA (non-sports) 4,361 5,060 5,081 4,670 4,844 4,912 5,944 5,062 5,657 EBITDA margin (non-sports) (%) 31.1 34.1 33.9 32.9 31.9 31.1 32.3 29.3 31.9 Growth rate International ad revenue NA 7.8 0.6 (53.1) (18.0) (36.1) (20.8) 26.1 2.1 Domestic ad revenue NA 16.5 3.7 8.1 8.0 6.4 30.2 23.8 19.6 Total ad revenues 19.2 15.7 3.4 (0.0) 6.0 2.9 25.8 23.9 18.6 Domestic subscription 13.6 24.6 15.0 (2.7) (9.3) (13.5) (16.2) (0.7) 12.2 International subscription revenue 16.7 11.5 8.4 (18.7) (9.3) (16.1) (12.2) (8.0) (6.6) Total subscription revenues 14.2 21.7 13.7 (6.1) (9.3) (14.0) (15.5) (2.1) 8.2 % of revenue Transmission & programming 41.8 45.3 42.9 42.7 38.1 36.6 36.6 40.0 37.7 Employee cost 9.5 9.0 8.7 10.4 10.8 11.5 8.4 9.5 9.7 EBITDA 28.8 28.9 31.5 30.7 31.4 31.0 32.3 29.3 31.9 PAT 18.6 17.3 18.0 16.0 18.3 31.9 18.9 7.4 19.6 Source: Edelweiss research Fig. 1: Zee5 in Top 5 App on Google Playstore in Entertainment Genre Source: Edelweiss research 2 Edelweiss Securities Limited Zee Entertainment Enterprises Q1FY19 concall highlights Subscription revenue Q1FY19 domestic subscription revenue jumped 12.3% YoY, whereas international subscription revenue fell 6.6% YoY. ZEE has already initiated discussions with distribution partners for seamless transition to the new regime as per TRAI’s tariff order. Management believes the regulation could be beneficial for all the stakeholders in the value chain and improve the overall customer experience. Its medium-term outlook of domestic subscription growth remains unchanged. ZEE is banking on ARPU growth to drive spurt in subscription revenue. The company is guiding for low teens subscription growth in FY19. International business International advertising revenue growth was muted due to geopolitical issues in the Middle East. Content cost ZEE will further increase investment in digital content going forward. EBITDA margin Management is guiding for 30% EBITDA margin despite all future investments. TRAI tariff order Implementation risk of the tariff order is there only if there is some intervention from the court. The company does not see any risk to subscription revenue due to TRAI’s tariff order. ZEE5 ZEE has come out with a one-time offer till August 15—50% cut in subscription amount. The company will incur significant marketing cost for the Kareenjet Kaur series and other 14 originals in coming months. ZEE has not yet signed any telecom deals for its content. ZEE5 will be launched in a phased manner internationally and will be available by FY19 end globally. ZEE5 is still in investment mode and management believes it will breakeven in fifth year of operation. Other takeaways ZEEL was the No. 1 non-sports entertainment television network during the year with an all-India viewership share of 19.2%. 3 Edelweiss Securities Limited Media The increase in viewership was driven by improved performance in several regional language markets, while the network maintained its leadership in the pay and FTA Hindi GEC segment. The company is expecting similar revenue from Jio as it receives from D2h and cable players. ZEE sees consolidation of D2h players and MSOs as positive. The company is repatriating excess funds invested abroad. Movie inventory will fall going forward. The company is going to launch in the Malyalam market in September 2019 and is evaluating other markets as well. Tax rate: 35% in FY19.