Zee Entertainment Enterprises Rating: Robust run on ad growth continued

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Updated: May 19, 2018 1:31:01 AM

A host of factors brighten prospects for the company; response to ZEE5 is key monitorable; retain ‘Buy’.

zee tv, GEC space, hindi GEC category, colorsWe believe while investments in movies and GECs will benefit ZEE, those made in ZEE5, launched in February, will be key monitorable.

Zee Entertainment Enterprises’ (ZEE) Q4FY18 revenue came in line, while Ebitda surpassed our estimate.

Key positives:

(i) robust 21.5% y-o-y jump in LTL ad revenue due to negative base; and

(ii) 18.1% y-o-y rise in LTL domestic subscription revenue (after adjusting for sale of sports business) aided by deals closed during the quarter & catch-up revenue associated with the same.

Key negative was 48% y-o-y jump in selling & admin cost due to launch of ZEE5. Broad-based ad growth across categories, higher ratings for Zee TV, sustained focus on regional markets (likely GEC launch in Kerala) and likely launch of movie channels in regional markets brighten prospects. Response to ZEE5 (launched in February) is key monitorable. Maintain Buy.

Domestic ads extend robust run

ZEE sustained robust domestic LTL ad growth (up 21.5% y-o-y ; our estimate 18%) on a negative base. International ad revenue grew 26.1% y-o-y aided by creating local content for international markets on non-Indian channels.

Conference call: Key takeaways

(i) Guidance: ZEE has guided for low-teen subscription growth for FY19. It expects to report 30% plus Ebitda margin in FY19 despite further investment in ZEE5 and launch of new channel in Kerala;

(ii) international launch of ZEE5 is expected in the ensuing two quarters;

(iii) large part of advances and increase in inventory during FY18 was on account of investments in acquisition of current, future & advance rights of under production movies; and

(iv) ZEE is considering launch of movie channels in regional markets.

Outlook and valuations: Positive

We believe, while investments in movies and GECs will benefit ZEE, those made in ZEE5 will be key monitorable. We retain 32x FY20 target PE multiple to arrive at target price of Rs 687. We maintain ‘BUY/SO’. At CMP, the stock trades at 34.9x FY19e and 27.7x FY20e EPS.

We expect ZEE’s ad outlook to improve led by:

(i) best play on digitisation;

(ii) innovations; and

(iii) net cash in favour of ZEE.

We believe, irrespective of higher subscriber additions by DTH or cable operators, broadcasters like ZEE will be one of the safest and most attractive plays on the digitisation theme. Amongst listed players, we believe ZEE is best placed to benefit due to its huge brand & bouquet of domestic & international channels. We believe it is a secular growth story that derives additional benefits from sturdy free cash flow and a stable dividend policy.

zee tv, GEC space, hindi GEC category, colors

Key concerns:

(i) loss of ad share to internet; and

(ii) flattish viewership of new channels like &TV.

Implementation of the TV tariff order in true spirit will be positive for all stakeholders. However, concerns about on-ground execution persist. Response to ZEE5 and market share gain by Colors Tamil in Tamil market will be key monitorables. We believe investments in movies (released 10 films in FY18) and GECs will benefit ZEE. We retain 32x FY20 target PE multiple to arrive at target price of Rs 687. We maintain ‘BUY/Sector Outperformer’.

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