We hosted Zee Entertainment (Z IN) management at our India Corporate Day in Hong Kong. Management highlighted that advertisement spending continues to be healthy and maintained mid-teens growth for Z ad spending in H2FY18. New launches in FMCG and a cut in GST rates from 28% to18% for a number of FMCG products have boosted customer sentiment, thus benefitting growth. While TV will remain the preferred medium of media consumption, given mass appeal, low penetration and low ARPUs, the company’s soon-to-be-unveiled digital initiative Z5 will target niche segments such as youth and kids, to which Z currently doesn’t cater. On subscription, the company indicated that digitisation progress is on track, and benefits from Phase 3-4 monetisation will be visible in the next 1.0-1.5 years. It maintained its outlook of low-teens growth in domestic subscription revenues in the near term. While most of the investments in the near term will be in the digital segment, management maintains that it would comfortably achieve 30%+ EBITDA margins.
We maintasin that Z can deliver ~18% CAGR growth in ad revenues over H2FY18-FY20 led by rising ratings (especially in Hindi GEC), increasing programming hours (~28 hours currently to ~30-32 by 4Q) and a low base. Domestic subscription growth should also remain strong at ~18% led by monetisation of Phase 3/4 subscribers. With our forecast of ~22% EPS CAGR FY18-20F, we expect premium valuations to persist. We have a BUY rating with TP of Rs 636, based on 32x FY20F EPS discounted to Nov-18.
The shares currently trade at 33x/28x FY19/20F EPS. Digital opportunity is important in India as it caters to a new set of customers who consume limited content via TV. However, consumer engagement levels are much lower at ~36 minutes per day per user for digital compared to ~300 minutes per day per household for TV. TV advertisement will remain relevant as a means for reaching mass audience and brand building. Also, given low ARPUs it will see limited threat from digital in the medium term.