ZEE clocked domestic ad growth of about 1.4% y-o-y, on a base of ~23% y-o-y, due to softer ad spends by advertisers, withdrawal from the FTA platform and broad-based economic slowdown.
Zee Entertainment Enterprises’ (ZEE) Q2FY20 revenue and Ebitda came in line, while PAT undershot our estimate owing to an Rs 1.7-bn ICD write-off. Key highlights: (i) domestic subscription revenue jumped ~27% y-o-y on account of the NTO tailwind & rising viewership in regional markets; (ii) domestic advertising remained muted—up mere ~1% y-o-y—in the wake of advertising slowdown and withdrawal from the FTA platform; and (iii) Ebitda margin contracted 155bps
y-o-y to 32.7% owing to weak revenue growth. We expect ZEEL to be a key beneficiary of NTO given its strong viewership countrywide. Progress on pledged shares with VTB Capital is key monitorable. Maintain Buy with a target price of Rs 399.
Ad growth slackens; subscription revenue jumps
ZEE clocked domestic ad growth of about 1.4% y-o-y, on a base of ~23% y-o-y, due to softer ad spends by advertisers, withdrawal from the FTA platform and broad-based economic slowdown. The business continued to clock strong domestic subscription revenue—up ~27% y-o-y (19% overall) on a base of 23%—due to bouquet re-pricing in NTO and strong offtake of ZEE’s channels. Ebitda grew ~2.5% y-o-y with margin contracting 155bps y-o-y. ZEE5 clocked 8.9 mn DAU count in Q2FY20.
Q2FY20 conference call: Key takeaways
(i) Bouquet pricing has not been changed, the cut in a-la-carte is only a festive offer; less than 10% revenue comes from a-la-carte, also the offer will only be for three months; (ii) No change to subscription revenue growth guidance; (iii) ICD issue: Had issued to a company ‘Oscar’; trying to recover the money from them for the past three years; (iv) Receivables have gone up due to MSO and DTH: Dish and Siti—expect it to come down by Q4FY20. Have received definitive and binding payment plans from both the players.
Outlook: Positive; maintain ‘BUY’
While we expect ZEE to gain in the new tariff regime, near-term ad growth is likely to be subdued. Though festive season could offer some respite, material growth is likely to resume once demand from FMCG, auto, among others, revives. In our view, though the valuation is attractive now, resolution of promoter’s pledged shares remains key trigger for the stock. We maintain our target PE of 18x and retain target price at Rs 399. The stock is trading at ~13x/12x FY20e/21e EPS. We maintain ‘BUY/SP’.