Recovery in the ad market coupled with Zee TV’s improved BARC rating in Hindi GEC and focus on regional channel bouquet should help the company to garner higher than industry ad revenue growth. We expect subscription revenue to grow in mid-teens in FY19/20 – on the back of gains from digitisation and monetisation of DAS III/IV markets. Trai order should consolidate the market towards top broadcasters. We expect overall investments of Rs 7 bn towards movie/music rights acquisition and movie production in FY18. RoCE should recover from FY19, driving healthy FCF. We believe a secular 16% EPS CAGR over FY17-20 should support the premium valuations. We maintain ‘buy’ with a revised target price of Rs 690. With the impact of demonetisation and GST implementation waning, the overall ad market should see healthy growth from Q3FY18.
ZEE’s flagship channel, Zee TV’s BARC ratings across Hindi GEC have remained healthy and it has consistently featured among the top-2 in the last few months. This should support higher-than-industry ad revenue growth for ZEE. We estimate 15% CAGR in ZEE’s ex-Sports ad revenue over FY17-20, ahead of KPMG’s estimate of 14% CAGR for the industry.
ZEE’s subscription revenue has strong growth potential on the back of (a) digitisation, (b) new tariff order, (c) ARPU increase, and (d) improving TV penetration. Recent results of cable operators indicate healthy ARPU growth, led by digitisation across DAS markets, particularly DAS III and IV. This should translate into healthy growth for broadcasters like ZEE.
If implemented, the recent Trai order should further consolidate the market towards top broadcasters, as key channels, constituting 40-50% of the portfolio, contribute 80-85% of the bouquet pricing, creating a pull for the rest of the channels in the portfolio. Also, the Trai order should increase subscription revenue from cable operators. Further India’s low ARPU and 71% TV penetration leave healthy growth potential. We expect ZEE’s ex-Sports subscription revenue to grow at a CAGR of 13% over FY17-20.
ZEE’s upcoming digital platform launch, Z5, which is expected to offer original as well as catch-up content, should fill the key gap in its content offerings, attracting the ‘millennials’ who are moving away from TV viewing.