Result Update January 16, 2019 Rating matrix Rating : Hold Zee Entertainment (ZEEENT) | 461 Target : | 500 Target Period : 12 months Strong show again; stake sale key monitorable Potential Upside : 8% The key highlight for Zee Entertainment’s (Zee) Q3FY19 performance What’s changed? was the strong performance on the domestic subscription front Target Unchanged (~28.6% YoY growth vs. estimate of ~18%) and domestic EPS FY19E Changed from | 15.7 to | 16.5 advertisement growth of ~20.6% YoY (even on a high base of 30.2% EPS FY20E Unchanged growth in Q3FY18). International ad grew ~40% YoY. We note that Rating From Buy to Hold while subscription revenues were led by catch up revenues from deal closures and better monetisation of phase III markets, the domestic ad Quarterly performance performance was a reflection of the strong market share gain and ad Q3FY19 Q3FY18 YoY (%) Q2FY19 QoQ (%) monetisation at Zee5 Revenue 2,166.8 1,838.1 17.9 1,975.9 9.7 EBITDA 754.3 594.4 26.9 675.7 11.6 Given the robust topline growth, margins expanded ~250 bps YoY to EBITDA (%) 34.8 32.3 247 bps 34.2 61 bps at 34.8% (vs. estimate of 34.2%) Adj. PAT 562.4 374.4 50.2 386.7 45.4 Reported PAT at | 562.4 crore (vs. expectation of | 459.7 crore) was boosted further by MTM gain on investments of ~| 37.6 crore and Key financials higher other income (one-time miscellaneous income from sale of | Crore FY17 FY18 FY19E FY20E export license along with VAT refunds – not quantified) Net Sales 6,434 6,686 7,853 8,981 Robust ad growth; reiterates industry leading growth ahead EBITDA 1,927 2,076 2,554 2,964 Adjusted PAT 1,285 1,393 1,589 1,923 The company attributed the strong domestic growth of 20.7% YoY to Adjusted EPS 13.4 14.5 16.7 20.0 monetisation of strong viewership market share gain across genres as es well as some ad revenues from Zee5. The quarter also witnessed strong Valuation summary international revenue growth of ~40% YoY, largely boosted by a FY17 FY18 FY19E FY20E recovery in the Middle East as well as traction in the US, Europe and P/E (Adjusted) 34.4 31.8 27.6 23.0 APAC regions We note that the management reiterated its guidance of Target P/E 37.3 34.4 29.9 25.0 beating the expected industry ad growth (low teen), going ahead. We EV / EBITDA 21.0 19.9 15.9 13.3 build in 17.5% CAGR in ad revenues over FY18-20E to | 5810 crore. P/BV 5.2 4.9 4.2 3.7 RoNW 15.0 15.3 15.4 15.9 Subscription growth led by Phase III/IV monetisation & catch up revenues RoCE 21.2 25.6 25.2 25.5 The strong domestic subscription growth, for the quarter, at 28.6% YoY was boosted by monetisation of phase III/IV markets as well as some Stock data catch up revenues. On the Trai new tariff implementation, the company Particular Amount indicated that it continues to work with DPOs but expects some hiccups Market Capitalization (| crore) 44,263.1 over three to six months. They also indicated that new tariff will largely be Total Debt (FY18) (| crore) 1.0 driven by bouquet implementation. The management maintained Cash & Investments (FY18) (| crore) 2,981.2 guidance of low to mid teen subscription growth ahead. We build in EV (| crore) 41,282.8 52 week H/L (| ) 619/ 410 overall subscription revenue CAGR of 14.8% in FY18-20E to | 2672 crore. Equity capital (| crore) 96.0 Lays out content strategy for Zee5 Face value (|) 1.0 Zee5 has a monthly active user base of 56.3 million (vs. ~41 million in Price performance Q2FY19) and an average daily time spent of 31 minutes. Furthermore, the company also indicated that earlier target of 90 originals by FY19 end is a 1M 3M 6M 12M TV Today -2.9 -9.6 -12.5 -20.6 tough ask, with only 31 originals launched so far. The company is Sun TV 0.6 -11.5 -26.3 -46.2 targeting annual launch of 72 originals/web series (six/month spread ZEEL -8.4 -4.0 -11.9 -24.2 across languages), ahead. The company is also looking to launch Zee5 in the Asia Pacific region by Q4FY19 and globally (excluding US) by Research Analyst Q1FY20. Notwithstanding Zee5 spending, the company has reiterated margin guidance of 30%+ for FY20. Bhupendra Tiwary [email protected] Await clarity on stake sale & preferred partner; assign HOLD We highlight that while Zee’s market share gain across genres and Sameer Pardikar superior growth in linear television is positive, the long term outlook will [email protected] largely be led by digital strategy success ahead. Therefore, consummation of stake sale and preferred partner holds key. Moreover, we expect Trai’s Tariff order implementation to drive some volatility in the near term, especially on the subscription front. Therefore, we downgrade the stock to HOLD, with a target price at | 500/share (25x FY20E P/E). ICICI Securities Ltd | Retail Equity Research Variance analysis Q3FY19 Q2FY19E Q3FY18 Q2FY19 YoY (%) QoQ (%) Comments Revenue 2,166.8 2,137.8 1,838.1 1,975.9 17.9 9.7 Domestic ad revenue growth was aided by market share gain while subscription growth was aided by better monetisation of Phase III as well catch up in revenues Other Income 123.6 50.0 6.1 36.9 1,919.9 234.7 Raw Material Expenses 0.0 0.0 0.0 0.0 NA NA Employee Expenses 183.4 181.7 153.5 168.7 19.4 8.7 Admin & Other Expenses 230.2 252.3 237.5 240.0 -3.1 -4.1 Marketing Expenses 201.1 181.7 179.6 165.1 11.9 21.8 Operational Cost 797.8 791.0 673.0 726.3 18.5 9.8 Other Expenses 0.0 0.0 0.0 0.0 NA NA EBITDA 754.3 731.1 594.4 675.7 26.9 11.6 The beat at the EBITDA level was largely driven by superior revenues EBITDA Margin (%) 34.8 34.2 32.3 34.2 247 bps 61 bps Depreciation 61.5 58.8 50.5 58.8 21.8 4.5 Interest 5.5 5.5 2.4 5.5 133.9 Total Tax 248.4 258.1 173.9 262.4 42.8 -5.3 Adj. PAT 562.4 459.7 374.4 386.7 50.2 45.4 Reported PAT was boosted further by MTM gain on investments of ~| 37.6 crore and higher other income (one-time miscellaneous income from sale of export license and VAT refunds – not quantified) Key Metrics Ad Revenue Growth 21.7% 19.0% 25.8% 22.7% Domestic Subscription % 28.6% 17.4% -16.2% 26.0% International Subscription % 1.2% 5.0% -12.2% 1.9% es Source: Company, ICICI Direct Research Change in estimates es FY19E FY20E (| Crore) Old New % Change Old New % Change Comments Revenue 7,754.1 7,853.4 1.3 8,806.1 8,981.3 2.0 Re-align our estimates to incorporate Q3FY19 performance EBITDA 2,483.3 2,554.0 2.8 2,906.0 2,963.8 2.0 EBITDA Margin (%) 32.0 32.5 50 bps 33.0 33.0 0 bps PAT 1,505.7 1,588.7 5.5 1,920.1 1,923.0 0.2 EPS (|) 15.7 16.5 5.5 20.0 20.0 0.2 Source: Company, ICICI Direct Research Assumptions es Current Earlier FY16 FY17 FY18 FY19E FY20E FY19E FY20E Ad Revenue Growth 29.4% 7.1% 14.5% 18.3% 16.0% 17.0% 16.0% Slightly raise our estimates to incorporate strong domestic ad growth Domestic Subscription % 13.2% 13.0% -10.1% 16.7% 15.0% 17.0% 14.7% Align our estimates in line with management guidance International Subscription % 6.9% 3.0% -11.5% 2.7% 3.8% 0.1% 1.4% Source: Company, ICICI Direct Research ICICI Securities Ltd | Retail Equity Research Page 2 Company Analysis Exhibit 1: Ad growth trend 7,000.0 35 28.9 5,809.6 6,000.0 30 5,009.0 5,000.0 4,204.8 25 3,673.5 4,000.0 3,429.6 19.1 20 21.2 (%) 3,000.0 2,380.0 2,660.311.8 16.0 15 | crore | 14.5 2,000.0 10 7.1 1,000.0 5 - - FY14 FY15 FY16 FY17 FY18 FY19E FY20E Ad revenue Growth es Source: BARC, ICICI Direct Research Exhibit 2: Subscription revenue trends 3,000 20.0 16.5 15.0 2,500 12.8 13.0 10.0 2,000 10.0 5.0 1,500 - (%) | crore | 1,000 2,364 (5.0) 500 (10.0) 2,058 2,263 2,029 (10.3) 2,672 - (15.0) FY16 FY17 FY18 FY19E FY20E Subscription revenue Growth (RHS) Source: BARC, ICICI Direct Research EBITDA margin expansion trend to continue We expect Zee to post an EBITDA margin of 32.5% and 33% in FY19E and FY20E, respectively, vs. 31.1% in FY18 as the management has guided that it would maintain 30%+ trajectory despite digital spends. Exhibit 3: EBITDA and PAT margins trend 35.0 32.5 33.0 30.0 29.9 31.1 25.0 25.7 25.8 21.4 20.0 20.0 20.0 20.8 20.4 17.9 % 15.0 10.0 5.0 - FY15 FY16 FY17 FY18 FY19E FY20E EBITDA margin PAT margin es Source: BARC, ICICI Direct Research ICICI Securities Ltd | Retail Equity Research Page 3 BARC Rating Maintains undisputed leadership in Marathi market with Exhibit 4: Marathi market over 60% viewership market share (Zee Marathi+ Zee Talkies together) 62.8 60 59.9 60.1 60.6 57.4 50 40 (%) 30 20 17.5 17.3 14.6 16.8 16.8 14.9 16.9 16.5 10 15.5 15.8 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Zee Marathi + Zee Talkies Colors Marathi STAR Pravah Source: BARC, ICICI Direct Research Viewership share for Zee Group improved by more than Exhibit 5: Bengali market 1000 bps YoY, only 150 bps difference with the market leader now 65 58.8 55 49.7 49.9 45 43.2 43.5 42.2 42.0 35 36.1 35.8 (%) 31.5 25 15 5 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 STAR Jalsha +Jalsha Movies Zee Bangla + Bangla cinema Colors Bangla Source: BARC, ICICI Direct Research Exhibit 6: Telugu market Viewership market share for Zee Telugu was steady for the 30 quarter while STAR Maa share improved 170 bps QoQ 29.0 28 27.3 26 23.4 24.9 24 24.2 24.0 (%) 23.6 22.5 22.8 22.6 22 22.6 21.8 ` 20.7 20.7 20 19.9 18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 STAR Maa ETV Telugu Gemini TV Zee Telugu Source: BARC, ICICI Direct Research ICICI Securities Ltd | Retail Equity Research Page 4 Exhibit 7: Kannada market 33.4 34 32.9 31.3 32.6 32.5 31.2 31.3 32 32.5 30 29.0 28.6 28 31.0 (%) 27.2 26 24 23.1 23.0 22 21.5 20 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Colors Kannada Zee Kannada Udaya Movies + Udaya TV Source: BARC, ICICI Direct Research Zee’s Tamil Viewership share further improved to 21.6%, Exhibit 8: Tamil market while share of Sun