Zee TV launched its most awaited digital entertainment platform ‘ZEE5’ which marks its full-fledged entry into the emerging over-the-top content consumption segment. While it earlier had “DittoTV” for the live TV segment and “Ozee” for its existing movie and TV show library, Zee5 consolidates these offerings and provides a significantly better viewing experience with various original/international content.

o It offers 6 original shows, 2 in Hindi and 1 in Marathi (with weekly addition of a new episode) and 3 short-format movies. The content library will be expanded with 1 new show every month, in any language.

o It has 2,000+ movies, which will be expanded to 3,500+ in a few months.

o It also offers several international shows and movies, some of them dubbed in various regional languages. These have been licensed for a certain period by Zee.

o Zindagi’s content library, with 17 shows, is also available.

o Zee’s entire TV channel bouquet is also available for live viewing. Existing popular TV shows are available for free viewing with advertisement, which opens up the advertiser’s site when clicked.

o Content is available across 12 languages—English, Hindi, Bengali, Malayalam, Tamil, Telugu, Kannada, Marathi, Oriya, Bhojpuri, Gujarati and Punjabi. There is also an option to select menu language.

o It is available across most platforms such as Android, iOS, Android TV, Amazon Fire TV, browser and Chromecast.

o Various features such as streaming from different servers, progressive web app and local download are available for a superior viewing experience. Also, the voice search feature offers hands-free experience.

o It is priced at Rs 99 per month for 1 month, Rs 300/600 for 3/6 months and Rs 1,000 for a year. More options, such as pay per view, will be incorporated over the next few days.

We believe the initial content library of Zee5 looks promising as it caters to the entire gamut of subscribers in both regional and English entertainment segment. Initial pricing is also competitive, at par with Amazon Prime (Rs 999 per year), lower than Netflix (Rs 500 per month) or Hotstar (Rs 199 per month) and higher than AltBalaji (Rs 33 per month). Going ahead, continuous addition of new content would be important to keep subscribers hooked on to the platform and is a key thing to watch out for. Additionally, the company can also look to monetise content by deals with telecom operators which would provide incremental revenues.

Currently, we don’t factor in any revenues from this platform. However, we do factor in the costs leading to Ebitda margins at 32.4/33.3% in FY19/20F, as compared to adjusted underlying margins of 35% in Q3FY18. Thus, stronger performance can lead to upside to our estimates. The stock is currently trading at 36x/29x FY19/20F EPS. We value it at 35x FY20F EPS and maintain our Buy rating on the stock.

Risks that may impede the achievement of the target price

Extended period of subdued ad spend by FMCG players: The FMCG segment contributes the bulk (~50-55%) of TV advertising spend. This segment had reduced its monthly ad budget sharply following demonetisation and GST. We expect advertising spends to improve in H2FY18F, but if the FMCG growth slowdown continues, there could be downside risk to our estimates. Delay in the improvement of viewership ratings for &TV &TV is in its second year of operation and its viewership share has stagnated at around ~6%. Increased content and viewership remain critical for Ebitda returning to the break-even level within management’s guidance of three-four years. Higher investment in content to wade off competitive pressures can affect margins. Competitive pressures remain high in the broadcasting landscape from established players like Star, Viacom18 and Sony. Also, it is not present in many movie verticals in regional genres. The higher investment in content to improve market share could affect Ebitda margins in the medium term, in our view.