Result Update October 26, 2016 Rating matrix Rating : Buy Zee Entertainment (ZEEENT) | 514 Target : | 583 Target Period : 12 months Potential Upside : 14% Another good show... • Revenues came in at | 1695.4 crore (vs. our estimate: | 1633.8 What’s changed? crore), growth of 22.4% YoY, led by robust subscription revenues, Target Unchanged EPS FY17E Changed from | 13.1 to | 12.3 which grew 21.7% YoY to | 583.3 crore (vs. estimate of | 546.4 EPS FY18E Unchanged crore) driven by strong traction in domestic subscription (up 24.6% Rating Changed from Hold to Buy YoY) during the quarter. Advertising revenues at | 959.2 crore, up 13.7% YoY (15.7% YoY on restated Q2FY16 advertisement revenues Quarterly performance as per IND AS), were in line with our estimate of | 957.4 crore. The Q2FY17 Q2FY16 YoY (%) Q1FY17 QoQ (%) revenue beat can also be partially attributed to other sales and Revenue 1,695.4 1,384.9 22.4 1,571.6 7.9 syndication revenues, which came in at | 152.9 crore (our estimates EBITDA 489.2 354.6 38.0 453.2 8.0 | 130 crore), owing to outperformance of the movie Rustom EBITDA (%) 28.9 25.6 325 bps 28.8 2 bps • EBITDA came in at | 489.2 crore vs. our expectation of | 441.1 crore PAT 238.4 247.4 (3.6) 217.0 9.9 benefiting from high operating leverage. Consequently, EBITDA Key financials margins came in at 28.9%, up 325 bps YoY, higher than our | Crore FY15 FY16E FY17E FY18E expectations of | 27% Net Sales 4,884 5,851 6,774 7,071 • PAT came in at | 238.4 crore (vs. expectation of | 315.4 crore). PAT EBITDA 1,254 1,510 1,943 2,335 came in lower owing to Ind-AS implementation wherein it has Net Profit 978 1,027 1,182 1,679 incorporated MTM impact of | 82.9 crore for change in fair value EPS (|) 10.2 10.7 12.3 17.5 Continues industry leading ad growth trajectory… Valuation summary Zee Entertainment posted ad growth (15.7% YoY) ahead of the industry FY15 FY16E FY17E FY18E average in Q2FY17 and continues to remain a favoured pick in the P/E 50.5 48.1 41.8 29.4 broadcasting space with its bouquet of ~36 domestic channels across Target P/E 57.3 54.6 47.4 33.4 genres. The company expects to continue its industry leading growth, EV / EBITDA 38.1 31.6 24.3 19.6 going ahead. The company also sounded a cautionary note on P/BV 8.9 7.9 6.8 5.7 moderation in FMCG and e-commerce spends, which may have some RoNW 17.6 16.8 16.2 19.2 impact on industry growth in coming quarters. However, the company RoCE 25.3 25.9 26.0 29.0 remained upbeat on telcos ad spends owing to 4G launches coupled with Stock data GST rollouts wherein potential savings in tax outgo by companies may be Particular Amount reinvested for ad spend. We expect Zee to post 10.7% CAGR in FY16-18E Market Capitalization (| crore) 49,355.0 to | 4195.7 crore in its advertisement revenues. The FY18E ad revenues Total Debt (FY16) (| crore) 0.9 exclude sports business. Therefore, the growth appears optically lower. Cash (FY16) (| crore) 973.2 Sports business sale to help Zee focus on core business EV (| crore) 47,790.6 52 week H/L (| ) 590/ 350 Zee, in Q2FY17, entered into a definitive agreement to sell its sports Equity capital (| crore) 96.0 business held under the wholly-owned subsidiaries viz. Taj TV and Taj Face value (|) 1.0 Television India Pvt Ltd to Sony Networks India Pvt Ltd for an all-cash consideration of ~$385 million (~| 2600 crore). The exit is expected to Price performance free up investments outlined for the sports business, which would boost 1M 3M 6M 12M the performance of the core business. In addition, the sports business TV Today 8.5 14.4 6.6 33.7 also entailed higher working capital requirement. Hence, the exit is also Sun TV 7.6 25.5 49.5 41.5 likely to improve the working capital cycle. The sale will lead to a 9.6% ZEEL -2.4 10.2 27.7 18.5 dilution in revenues but will be PAT accretive by 2.7% as the sports segment was a negative EBITDA business. Research Analyst Continues to clock industry leading growth, recommend BUY Bhupendra Tiwary Zee continues to clock industry leading ad revenue aided by traction in [email protected] regional & new channels. In addition, the strength across genres and Sneha Agarwal investments in fresh content is likely to aid overall revenues. The sport [email protected] business exit is likely to boost margins and earnings and would enable the company to focus on the core business. We continue to value the company at 32.0x P/E at an FY18E EPS of | 17.5 and separately value the cash inflow of | 2300 crore (ex-tax with tax assumed at 10.0% of the deal value) at par arriving at a revised target price of | 583. We have a BUY recommendation on the stock. ICICI Securities Ltd | Retail Equity Research Variance analysis Q2FY17 Q2FY17E Q2FY16 Q1FY17 YoY (%) QoQ (%) Comments Revenue 1,695.4 1,633.8 1,384.9 1,571.6 22.4 7.9 Revenue beat was led by robust subscription revenues, which grew 21.7% YoY and higher other sales and syndication revenues, owing to outperf or mance of the movie R us tom and syndication r ev enues from several cricket series played during the quarter Other Income -39.7 70.0 58.9 -39.8 -167.4 -0.4 The number is negative due to Ind-AS implementation wherein it has incorporat ed MTM hit of | 82.9 crore for a change in fair value Raw Material Expenses 0.0 0.0 0.0 0.0 NA NA Employee Expenses 153.3 155.2 126.7 149.9 21.0 2.2 Admin & Other Expenses 168.8 223.2 179.1 191.3 -5.7 -11.7 The admin and other costs were lower led by reduction in carriage fee Marketing Expenses 115.3 115.0 120.9 119.7 -4.6 -3.7 Operational Cost 768.8 699.2 603.6 657.5 27.4 16.9 The operating costs were higher due to telecast of several cricketing events and release of Rustom movie Ot her Expenses 0.0 0.0 0.0 0.0 NA NA EBITDA 489.2 441.1 354.6 453.2 38.0 8.0 EBITDA Margin (%) 28.9 27.0 25.6 28.8 325 bps 2 bps The EBITDA margins was higher owing to operating leverage Depreciation 33.6 25.3 19.8 25.1 69.8 33.8 The depreciation was higher due to upgrade in fixed assets Interest 8.6 7.8 2.1 7.5 311.1 14.0 Total Tax 163.4 162.5 112.3 162.6 45.6 0.5 PAT 238.4 315.4 247.4 217.0 -3.6 9.9 The PAT came in lower owing to Ind-AS implementation wherein it has incorporated MTM impact of | 82.9 crore for a change in fair value 82.9 Key Metrics Ad Revenue Growth 15.7% 17.8% 34.7% 19.0% -54.8 -17.4 The ad growth was led by superior performance of regional channels Domestic Subscription % 24.6% 15.1% 11.2% 13.6% 119.0 81.4 Superior domestic revenues were driven by early completion of content deals and catch up deals of earlier quarters International Subscription % 11.5% 4.0% 19.2% 16.7% -40.2 -31.5 Source: Company, ICICIdirect.com Research Change in estimates FY17E FY18E (| Cr or e) Old New % C hange Old New % Cha nge Comments Revenue 6,742.0 6,774.3 0.5 7,124.0 7,071.3 -0.7 We have fine-tuned our earnings estimates by incorporating H1FY17 pe rfo rma nc e EBITDA 1,887.0 1,943.0 3.0 2,351.8 2,334.7 -0.7 EBITDA Margin (%) 28.0 28.7 69 bps 33.0 33.0 0 bps Incorporate higher margins for FY17E given in Q2FY17 beat PAT 1,255.1 1,181.8 -5.8 1,673.8 1,678.9 0.3 EPS (|) 13.1 12.3 -5.8 17.4 17.5 0.3 The earning downgrade is largely owing to MTM impact in H1FY17 Source: Company, ICICIdirect.com Research Assumptions Current Earlier FY15 FY16 FY17E FY18E FY17E FY18E Ad Revenue Growth 11.3% 29.4% 14.9% 6.5% 16.1% 6.9% The growth rate for FY18E is lower as ad revenue from sports will be eliminated from FY18E onwards Domestic Subscription % 8.0% 13.2% 14.7% 1.0% 12.4% 2.9% The FY18E numbers excludes sports business contribution International Subscription % -17.3% 6.9% 10.9% 11.3% 10.1% 11.0% Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 2 Company Analysis Zee continues its industry leading ad growth journey Zee reported ad revenue growth of 13.7% YoY (15.7% YoY on restated Q2FY16 advertisement revenues as per IND AS), in the quarter aided by strong growth in regional channels. This was higher than industry ad growth of 13-15% during the quarter. Zee has a leadership position in Marathi and Bengal and is in the top 3 positions in Telugu and Kannada space.