India Equity Research Media June 14, 2021 ZEE ENTERTAINMENT COMPANY UPDATE KEY DATA Stronger signals on growth, compliance Rating BUY Sector relative Overweight Price (INR) 221 12 month price target (INR) 357 Zee is recouping its network market share – up 70bps QoQ in Q4FY21 Market cap (INR bn/USD bn) 212/2.9 – on the back of FTAs and Bengali, Telugu and Kannada channels. And Free float/Foreign ownership (%) 96.0/66.2 What’s Changed it gives ZEE has a chance to close the vast gap with leader STAR, which Target Price Rating/Risk Rating ⚊ has a market share of ~24%—500bps higher than ZEE’s. Although Street views higher investments to shore up content as negative, we INVESTMENT METRICS regard it as critical to capturing market shares in both TV and OTT. 75 50 Zee has scaled back future investments in SugarBox amid rising 25 0 investor concerns, not to mention the new operating dynamics in the -25 wake of uncertainty caused by the pandemic. Meanwhile, the Sales Growth EPS Growth RoE PE (%) (%) (%) (x) reconstituted board instils confidence. All in all, we retain ‘BUY’ with a Media Z IN Equity TP of INR357. FINANCIALS (INR mn) Strong focus on content creation; ad revenues to bounce back Year to March FY20A FY21E FY22E FY23E ZEEL will aggressively invest in content to enable it to monetize across various Revenue 81,299 77,299 88,918 95,803 channels and reduce the pressure of bidding wars for movie rights. Hindi mega- EBITDA 16,346 17,901 24,976 26,829 Adjusted profit (1,682) 4,641 17,164 19,191 starrer ’Radhe’’ helped Zee5 garner a huge amount of new subscribers while Diluted EPS (INR) 3.2 7.7 17.6 20.0 “FRIENDS: The Reunion’’ recorded 1mn + views on ZEE5 in less than seven hours. Ad EPS growth (%) (79.0) 143.6 128.3 13.8 spends by FMCG companies (~60% of ad revenues of TV broadcasters) are likely to RoAE (%) (1.8) 4.8 16.0 15.9 remain resilient while discretionary categories are likely to pick up as the second P/E (x) 69.9 28.7 12.6 11.0 wave of covid ebbs down. Zee5 is set for a launch in the US at an annual fee of USD84. EV/EBITDA (x) 12.9 11.2 7.7 6.9 Dividend yield (%) 0.1 0.3 1.6 2.3 The US has 5.4mn Indian diaspora with a deep cultural connect to Zee5 content. Listening to investors; balance sheet continues to improve PRICE PERFORMANCE ZEE’s disclosure levels have improved with regular updates on related-party 250 53,000 transactions, inventory and cash levels. It has scaled back further investments in 225 49,000 Sugarbox amid investor concerns and emerging dynamics in the wake of the 200 45,000 pandemic. Notably, despite the pandemic, ZEE’s cash balance improved consistently 175 41,000 150 37,000 in FY21 (INR18.6bn in Mar-21 vs INR10.1bn in Mar-20) and there was a sequential 125 33,000 reduction in receivables (including part of Dish TV’s overdue). About INR2bn of Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 arrears of Dish TV have been paid. Transactions with Siticable are on a cash-and- Z IN Equity Sensex carry basis. Outlook and valuation: Improving; maintain ‘BUY’ Explore: We expect the strong ad revival to play out in favour of ZEE given its improving viewership across markets and new channels. Although Street takes higher investments in content as a negative, in our view it is very important to get more market share in both TV and OTT. Investment in content will be critical to improve shares in laggards such as its Hindi, Tamil and Marathi channels. ZEE has scaled Financial model Podcast back further investments in Sugarbox due to investor concerns and emerging dynamics given pandemic. Hence, we are retaining the target of 20x FY22E EPS and TP of INR 357. Maintain ‘BUY/SN’. Corporate access Video Abneesh Roy +91 (22) 6620 3141 [email protected] m Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited ZEE ENTERTAINMENT Financial Statements Income Statement (INR mn) Balance Sheet (INR mn) Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Total operating income 81,299 77,299 88,918 95,803 Share capital 961 961 961 961 Gross profit 43,014 39,795 48,969 52,658 Reserves 92,479 1,00,114 1,12,769 1,26,169 Employee costs 7,805 8,183 8,361 8,946 Shareholders funds 93,439 1,01,074 1,13,730 1,27,130 Other expenses 18,863 13,710 15,632 16,883 Minority interest 110 110 110 110 EBITDA 16,346 17,901 24,976 26,829 Borrowings 9,284 7,526 5,026 4,626 Depreciation 4,195 2,687 2,959 3,443 Trade payables 16,803 13,982 14,228 13,003 Less: Interest expense 1,449 571 515 320 Other liabs & prov (46) 908 1,258 1,108 Add: Other income 2,836 1,104 1,478 2,622 Total liabilities 1,20,885 1,25,036 1,35,789 1,47,413 Profit before tax 8,099 12,519 22,979 25,688 Net block 7,594 6,329 7,011 7,681 Prov for tax 4,317 4,625 5,791 6,473 Intangible assets 5,553 6,208 6,290 7,178 Less: Other adj (24) (24) (24) (24) Capital WIP 832 129 1,500 1,500 Reported profit 3,758 7,870 17,164 19,191 Total fixed assets 13,979 12,667 14,802 16,359 Less: Excp.item (net) (5,440) (3,229) 0 0 Non current inv 478 890 3,390 5,590 Adjusted profit (1,682) 4,641 17,164 19,191 Cash/cash equivalent 10,115 18,152 23,267 30,726 Diluted shares o/s 961 961 961 961 Sundry debtors 20,847 19,452 21,925 22,310 Adjusted diluted EPS 3.2 7.7 17.6 20.0 Loans & advances 3,732 3,418 3,732 4,232 DPS (INR) 0.3 0.6 3.6 5.0 Other assets 67,224 66,118 63,941 63,464 Tax rate (%) 53.3 36.9 25.2 25.2 Total assets 1,20,885 1,25,036 1,35,789 1,47,413 Important Ratios (%) Free Cash Flow (INR mn) Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Ad revenue growth (%) (7.1) (20.4) 32.3 12.0 Reported profit 3,758 7,870 17,164 19,191 Subscription growth (%) 25.5 11.1 4.9 2.9 Add: Depreciation 2,071 1,882 2,000 2,330 Dom. sub growth (%) 29.0 11.3 7.6 3.0 Interest (net of tax) 1,449 571 515 320 EBITDA margin (%) 20.1 23.2 28.1 28.0 Others (21,537) 11,858 3,345 (8,193) Net profit margin (%) (2.1) 6.0 19.3 20.0 Less: Changes in WC 16,758 (6,703) (4,346) 1,284 Revenue growth (% YoY) 2.6 (4.9) 15.0 7.7 Operating cash flow 2,499 15,477 18,678 14,931 EBITDA growth (% YoY) (36.0) 9.5 39.5 7.4 Less: Capex 1,401 1,468 5,000 5,000 Adj. profit growth (%) nm nm 269.8 11.8 Free cash flow 1,098 14,009 13,678 9,931 Assumptions (%) Key Ratios Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E GDP (YoY %) 4.8 (4.0) 7.0 6.0 RoE (%) (1.8) 4.8 16.0 15.9 Repo rate (%) 4.3 3.0 3.5 4.0 RoCE (%) 14.2 15.4 20.6 20.7 USD/INR (average) 70.7 75.0 73.0 72.0 Inventory days 438 523 490 444 Direct cost (% of sales) 47.1 48.6 44.9 45.0 Receivable days 88 95 85 84 Employee cost (%) 9.6 10.4 9.4 9.3 Payable days 151 150 129 115 SG&A expense (%) 23.2 18.1 17.6 17.6 Working cap (% sales) 101.4 115.3 106.0 108.0 Debtors days 87.8 110.0 90.0 85.0 Gross debt/equity (x) 0.1 0.1 0 0 Inventory days 438.5 330.0 360.0 350.0 Net debt/equity (x) 0 (0.1) (0.2) (0.2) Payable days 151.1 140.0 130.0 110.0 Interest coverage (x) 8.4 26.7 42.7 73.1 Valuation Metrics Valuation Drivers Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Diluted P/E (x) 69.9 28.7 12.6 11.0 EPS growth (%) (79.0) 143.6 128.3 13.8 Price/BV (x) 2.3 2.1 1.9 1.7 RoE (%) (1.8) 4.8 16.0 15.9 EV/EBITDA (x) 12.9 11.2 7.7 6.9 EBITDA growth (%) (36.0) 9.5 39.5 7.4 Dividend yield (%) 0.1 0.3 1.6 2.3 Payout ratio (%) 7.7 7.1 20.0 25.0 Source: Company and Edelweiss estimates 2 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited ZEE ENTERTAINMENT Growth so far and gearing for future Market share starting to rebound; CY20 an aberration Zee has over the years improved its market share consistently—though it faced rough weather in 2020 and is now recouping market share.