As ad/subscription revenue outlook looks weak due to Trai’s latest order on capping of channel prices, we have lowered our FY20/FY21 revenue estimate by 4%/8% and EPS estimate by 14%/18%.
The revenue momentum for the third quarter was hit by weak consumer advertisement spends in a slowing economy and higher expenses, which dragged margins; the same trend is expected to continue for another quarter. As ad/subscription revenue outlook looks weak due to Trai’s latest order on capping of channel prices, we have lowered our FY20/FY21 revenue estimate by 4%/8% and EPS estimate by 14%/18%.
Zee Entertainment’s (ZEEL) overall revenue declined 6% Y-o-Y to Rs 2,050 crore (5% miss) on account of lower-than-expected ad revenues. Ad revenue declined 16% Y-o-Y to Rs 1,230 crore (6% miss), led by decline in ad spending by advertisers. Domestic ad revenue was down 16% Y-o-Y as volume growth for consumer companies declined. Subscription revenue grew 15% Y-o-Y to Rs 710 crore (in-line), with domestic segment witnessing a 22% Y-o-Y growth, which was offset by a 17% decline in international subscription revenues.
EBITDA at Rs 570 crore (6% miss), declined 25% Y-o-Y; the EBITDA margin plummeted by 720 bps Y-o-Y and stood at 27.6%. ZEEL reported long-pending trade receivables worth Rs 750 crore from Dish TV and Siti Cable, which has now been given a revised recovery plan spanning 12-24 months. This forms ~31% of total receivables worth Rs 2,420 crore (2QFY20). Credit loss of Rs 37.6 crore (for time value of money) has been provided in other expenses. Adjusting for the same, EBITDA margins would stand at 29.5% (down 530 bps Y-o-Y).
FY21 ad revenue growth to be in high single-digit. On a status quo basis, subscription revenue is expected to grow in low double-digits, and in case new tariff orders are implemented, management is confident of witnessing rise in subscription revenues. Programming cost is expected to grow 10-12%.
Near-term headwinds persist for ZEEL on the back of weak ad outlook, risk of margin pressure from increased inventory seen in the recent past, losses in OTT segment, coupled with uncertainty around Trai’s latest tariff order, and recent board member resignations. We value ZEEL at 14x FY22E EPS of Rs 22 to arrive at a target price of Rs 300. Maintain ‘Neutral’.