Zee’s Q3 results were operationally ahead of our estimates with Ebitda at Rs 5.9 billion as margins improved 130 bp q-o-q. The PAT miss was largely on account of the fair value loss and higher tax. Zee’s domestic advertising revenues grew 25.7 percent y-o-y — a strong pick-up vs previous few quarters (6 percent in Q2), as GST and demonetization headwinds are behind. Mgmt expects growth to remain strong aided by GST rate cuts across several categories and a strong traction on ratings as viewership share is up 200 bp y-o-y. Domestic subscription growth remained muted at 7.5 percent. But, management remains confident of achieving its full year guidance of low-teens growth implying a strong Q4. Ebitda margins improved in line with expectations and are set to remain above 30 percent. We have raised EPS estimates by 2 percent on the back of strong advertising revenue growth.

Zee plans to launch its new digital platform (Zee5) next month with strong digital-only content in multiple languages being a key differentiator. Stay constructive on Zee and expect advertising strength to sustain ahead. Maintain

Outperform with a new TP of Rs 650 (vs Rs 610) as we roll forward to Dec-2019.

Ad revenue picks up sharply

Advertising revenue growth picked up sharply this quarter (+26 percent y-o-y, +22 percent q-o-q), although off a low base. On a comparable basis, adjusting for the sports sale and acquisitions, growth was similar (+26 percent y-o-y). With demonetization and GST related headwinds behind it, management believes the uptick in advertising revenue should sustain, aided by the recent cut in GST rates across categories. Growth has been strong across sectors with strong growth outlook and mgmt is confident of growing faster than the industry as it has done in the last few years. The Zee Cine awards were in Q3 this year vs Q4 last year which would also have helped advertising growth to some extent.

Subscription growth remains weak

Subscription growth on the other hand remained muted (-15 percent y-o-y), similar to the decline seen in Q2, with both domestic as well as international subscription witnessing a decline. However, adjusted for the sports business, domestic subscription revenues grew 7.5 percent y-o-y. Management has attributed this to slower closing of the content deals which happened in Q2 & Q3 last year, but is confident of achieving the full year target of low-teens growth.

Ratings remain strong; regional seeing some improvement

Zee has launched two additional HD channels, taking the count to 13 and Zee Entertainment maintains its #1 position in non-sports entertainment, with 18.3 percent viewership share vs 16.3 percent last year. Ratings have also seen an improvement in the regional channels, with a No #1 position in Marathi, Telugu (Urban) and Orissa.

Ebitda margins improve in line with expectations

As per our expectations, Ebitda margins have continued to improve post the sale of the sports business. Margins have improved 130 bp q-o-q to 32.3 percent and are likely to remain strong on the back of strong topline growth. Program cost increase on account of the release of movies this quarter should normalize in the next quarter. Other expenses were also higher this quarter on account of `400 mn of one-off expenses on the brand refresh and 25th year celebrations.

Digital platform (Zee5) to be launched next month

Zee’s new digital platform Zee5 is slated to be launched in February, replacing the current Ditto TV and OZee platforms, which have seen improved traction recently. The Zee5 platform will host digital-only exclusive content from Day 1, focus on digital and the breadth of content will be a key differentiator. The company has cash and equivalents of Rs 32.6 bn. The company will also redeem 20 percent of their preference shares in Q4; part of the original terms. – Financial Express