Despite estimates of 12/11% ad/subscription growth in FY20F, near-term growth is expected to be weak due to FMCG slowdown and new tariff order; ‘Buy’ retained
Our analysis of Zee’s annual report for FY19 indicates that while the company sustained healthy revenue/Ebitda growth, cash flow from operations was nominal (Rs 1.3 bn vs Rs 5.5 bn in FY18), led by a sharp jump in working capital requirements. We highlight in detail each of these:
Domestic advertising growth
20% y-o-y growth was driven by 170bps market share gain in movies and regional content. Zee became the leader in Bangla, Kannada and further strengthened its share in Tamil Nadu. Ad revenues from ZEE5 also contributed to the growth. The company has seen some impact on ad growth in Q4FY19 due to the implementation of the tariff order and pulling out of two Free-To-Air channels from DD Freedish; hence, we believe this will have an impact on growth in FY20F. The company plans to compensate for this with growth in other channels and keep growing ahead of the advertising industry.
Subscription revenue growth
It was 17.4% in FY19. Q4FY19 growth was impacted by the TRAI tariff order implementation. The company has maintained its medium-term guidance (growth in teens) as it has seen satisfactory take-up of its channels and bouquets.
Increased by 22% y-o-y in FY19. The three buckets of cost inflation were: (i) TV content: There was normal inflation in content cost per hour for TV shows; (ii) ZEE5’s original launch and higher content cost per hour; and (iii) investment in movies for satellite and digital. The digital rights saw a sharp inflation.
The sharp jump of Rs 17 bn in the working capital is led by: (i) a build-up of movie inventory and scaling up of original content in ZEE5, (ii) advances and interest free deposits given for content rights that will generate revenues in the future, and
(iii) loans given to related parties. Part of the impact is offset by Rs 5 bn of interest free deposits received from customers. The auditors have highlighted a few points on these transactions:
(i) There has been a change in the movie acquisition process relating to advances paid to certain content aggregators for movies. Auditors indicated a material weakness in company’s internal financial controls and possibility of advances being paid without adequate approvals; (ii) Goodwill of Rs 2.4 bn (impairment of Rs 218 mn) pertaining to the online media business is based on the company’s assessment.
Currently stands at 36.7% compared to 38.2% as of Mar-19. Overall, while we factor in 12%/11% ad/subscription growth in FY20F, we expect near-term growth to remain weak due to the slowdown in the FMCG segment and as the impact of new tariff order normalises. Also, the improvement in the balance sheet parameters after the promoter stake sale will be important to alleviate the concerns, in our view. The stock is currently trading at 16.2x FY21F EPS. We maintain our Buy rating for the stock. We value Zee based on 25x P/E on FY21F EPS, to arrive at our target price of `522.