India Equity Research | Media & Entertainment August 18, 2020 Result Update Zee Entertainment Refer to important disclosures at the end of this report Consistency and delivery will win back trust CMP: Rs 174 TP: Rs 190 (▲) Rating: HOLD (▲) Upside: 9.5 % as of (August 18, 2020) 12 months Change in Estimates We appreciate your support in the Asiamoney Brokers Poll 2020 EPS Chg FY21E/FY22E (%) (12.8)/- Target Price change (%) 39.0 . Z IN posted poor operating performance, with EBITDA declining 67% yoy, accentuated by Target Period (Months) 12 higher-than-expected opex. Advertising revenues fell 65% yoy, while domestic Previous Reco SELL subscription revenues surprised once again by rising 6% yoy, driven by ZEE5. Emkay vs Consensus . Management expects ad revenues to bounce back from H2FY21. Conversely, subscription EPS Estimates revenue is anticipated to moderate, due to an inability to effect price hikes. While the FY21E FY22E viewership share has eroded meaningfully during the lockdown, it is starting to reverse. Emkay 11.3 16.8 . The company has improved disclosures with quarterly balance sheet, standardized ZEE5 Consensus 12.5 16.8 metrics and strengthened corporate governance policies. Consistent FCF generation is Mean Consensus TP (12M) Rs 169 key for sustained re-rating given the underperformance in the recent past. Stock Details . We remain watchful of timely subscription receivables from Dish and Siti, and investments Bloomberg Code Z IN in Sugarbox. The improvement in disclosures and policies, along with corrective steps, is Face Value (Rs) 1 leading us to upgrade Z IN to Hold with a revised TP of Rs190 (11x Sep’22E EPS). Shares outstanding (mn) 961 Weak operating performance: Consolidated revenues declined 35% yoy to Rs13.1bn, 52 Week H/L 376 / 114 though partially supported by higher-than-expected subscription revenues, which rose 5% yoy M Cap (Rs bn/USD bn) 167 / 2.23 on the back of a healthy yoy increase in domestic subscription revenues despite a high base. Daily Avg Volume (nos.) 2,80,90,620 Ad revenues declined 65% yoy, negatively impacted by the Covid-19-led slowdown. Daily Avg Turnover (US$ mn) 63.1 Programming cost, although down 16% yoy, was higher than expected due to the amortization Shareholding Pattern Jun '20 of movies and the purchase of content for linear and digital businesses. The bottom-line was dented to the extent of 94% yoy due to a change in the price of redeemable preference shares. Promoters 4.8% FIIs 67.3% Outlook: We believe that Z IN is taking the correct steps, by trying to improve its corporate DIIs 9.7% governance policies. Improved disclosures, potential strengthening of the company’s board Public and Others 18.2% and the reporting of ZEE5 financials paint a positive picture. However, given the underperformance in the recent past, we await consistent delivery and transparency. The Price Performance company is banking on ZEE5 to drive subscription growth, going forward. Management has (%) 1M 3M 6M 12M guided for lower movie purchases and reduced working capital requirement in FY21. Given Absolute 11 16 (29) (50) the hyper-competitive nature of the OTT space, we believe that it would continue to see Rel. to Nifty 6 (10) (25) (51) investments for sustainable growth, especially with the presence of numerous global players. In our view, the first leg of multiple re-rating will happen along with the changes in Q1 and Relative price chart consistency in balance sheet improvement, with FCF generation providing further re-rating in 375 Rs % 10 the ensuing quarters. Underperformance in the past and balance sheet deterioration should 320 -6 fade away over time with consistent delivery. Key upside risks: 1) significant improvement in cash generation and balance sheet; 2) quicker-than-estimated ad revenue recovery; 3) 265 -22 sustained double-digit subscription revenue growth; and 4) monetization of ZEE5. 210 -38 Please see our sector model portfolio (Emkay Alpha Portfolio): Media & Entertainment (page 12) 155 -54 100 -70 Financial Snapshot (Consolidated) Aug-19 Oct-19 Dec-19Feb-20 Apr-20 Jun-20 Aug-20 Zee Entertainment (LHS) Rel to Nifty (RHS) (Rs mn) FY19 FY20 FY21E FY22E FY23E Source: Bloomberg Revenue 79,339 81,299 75,036 87,807 96,142 This report is solely produced by Emkay Global. The EBITDA 25,675 16,346 17,024 23,732 26,270 following person(s) are responsible for the production of the recommendation: EBITDA Margin (%) 32.4 20.1 22.7 27.0 27.3 APAT 15,889 10,705 11,480 16,452 18,378 Naval Seth EPS (Rs) 16.5 10.2 11.3 16.8 19.1 [email protected] +91 22 6624 2414 EPS (% chg) 17.6 (38.2) 10.9 48.4 13.8 ROE (%) 19.3 10.7 11.2 15.2 15.3 Sonali Shah P/E (x) 10.5 17.0 15.3 10.3 9.1 [email protected] EV/EBITDA (x) 6.1 10.1 9.4 6.5 5.5 +91 22 6624 2482 P/BV (x) 1.9 1.8 1.7 1.5 1.3 Source: Company, Emkay Research Emkay Research is also available on www.emkayglobal.com and Bloomberg EMKAY<GO>. Please refer to the last page of the report on Restrictions on Distribution. In Singapore, this research report or research analyses may only be distributed to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore. Zee Entertainment (Z IN) India Equity Research | Result Update Other highlights . Consolidated revenue of Rs13.1bn was down 34.7% yoy. Reported ad revenue was down 64.5% vs. est. of 55% decline. Other operating income stood at Rs1.5bn vs. Rs1.1bn in Q1FY20. Domestic advertisement revenue decreased 66.1% yoy to Rs3.8bn, while International ad revenue stood at Rs371mn (down 31.9% yoy). Total subscription revenue was up 5% yoy to Rs7.4bn (12% above estimates). Domestic subscription revenue stood at Rs6.6bn, up 6.2% yoy, despite a high base. This increase was primarily driven by growth in ZEE5’s subscriptions. International subscription revenue stood at Rs818mn (-3.5% yoy). Other operating income rose 30.2% yoy to Rs1.5bn, boosted by the sale of movie rights to the OTT platform. Exhibit 1: Segmental revenues: Domestic subscription witnessed healthy growth of 6% yoy Rs mn Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 YoY % QoQ % Ad Revenue 11,867 12,247 12,308 10,389 4,211 (64.5) (59.5) Subscription revenue 7,088 7,235 7,137 7,414 7,443 5.0 0.4 Domestic 6,240 6,459 6,317 6,607 6,625 6.2 0.3 International 848 776 820 807 818 (3.5) 1.4 Others 1,126 1,739 1,042 1,708 1,466 30.2 (14.1) Total Sales 20,081 21,220 20,487 19,511 13,120 (34.7) (32.8) Source: Company, Emkay Research . The company reported EBITDA of Rs2.2bn, down 67% yoy, with EBITDA margins contracting 1,609bps yoy. Programming and content cost declined a mere 16% yoy as the halt in shooting for fresh episodes was partially offset by the purchase of licensed content for the linear and digital businesses, as well as shooting of content at home. In addition, the amortization cost of movies and digital shows continued as usual. Other operating expenses declined only 36% yoy as advertisements for the digital business continued. Net profit stood at Rs304mn vs. Rs5.3bn in Q1FY20. Other income stood at Rs264mn vs. Rs1bn in Q1FY20. MTM loss stood at Rs1.1bn vs. profit of Rs679mn in Q1FY20. This was primarily due to a change in the market price of redeemable preference shares. The company reported headline numbers for ZEE5 for the first time, with revenue at Rs949mn and an EBITDA loss of Rs1.5bn in the quarter. ZEE5 had 39.7mn and 4mn global Monthly Active Users and Daily Active Users, respectively. ZEE5 launched 18 original movies and shows in the quarter. International operations - continues to disappoint . Total international revenue stood at Rs1.3bn, down 16.5% yoy. Ad revenue declined 31.9% yoy, while international subscription revenue fell 3.5% yoy. Ad revenue shrank to Rs371mn, while subscription revenue decreased to Rs818mn. Other operating income stood at Rs150mn. Exhibit 2: Breakdown of international revenues Rs mn Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 YoY % QoQ % Ad revenue 545 557 738 560 371 (31.9) (33.8) Subscription revenue 848 776 820 807 818 (3.5) 1.4 Other sales and services 210 749 107 633 150 (28.6) (76.3) Total Revenue 1603 2082 1665 2000 1339 (16.5) (33.1) Source: Company, Emkay Research Emkay Research is also available on www.emkayglobal.com and Bloomberg EMKAY<GO>. Please refer to the last page of the report on Restrictions on Distribution. In Singapore, this research report or research analyses may only be distributed to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore. August 18, 2020 | 2 Zee Entertainment (Z IN) India Equity Research | Result Update Balance Sheet . Cash and cash equivalents rose to Rs13.2bn from Rs10.1bn in FY20. Trade receivables declined 16.8% to Rs17.4bn from Rs20.8bn in FY20. Inventories declined slightly to Rs52.2bn from Rs53.5bn in the previous year, which can be attributable to amortization and absence of fresh content purchase in the lockdown period. Exhibit 3: Net cash position improved, aided by reduction in trade receivables 35 30 25 20 15 Rs bn Rs 10 5 0 -5 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Cash and cash equivalents EBITDA less Tax Source: Company, Emkay Research Exhibit 4: Breakdown of content, inventory advances and deposits Exhibit 5: Breakdown of content, inventory advances and deposits 80% 70 60 60% 50 Rs bn Rs 40 40% 30 20 20% 10 0 0% Movies Shows Movie Content Total Movies Shows Movie Content production, Advances production, Advances & Music & & Deposits Music & Others Deposits Others FY18 FY19 FY20 Q1FY21 FY18 FY19 FY20 Q1FY21 Source: Company, Emkay Research Source: Company, Emkay Research Emkay Research is also available on www.emkayglobal.com and Bloomberg EMKAY<GO>.