Zee Entertainment Q1FY23 results, ICICI Securities

Zee Entertainment Enterprises’ (ZEEL) Q1FY23 print was disappointing on the ad revenue front due to discontinuation of FTA channels, margin pressure for advertisers due to high commodity costs, and subdued viewership rating. Subscription revenuesdeclined due to embargo on pricing, delay in closure of B2B deals and fall in revenuesfrom linear TV.

However, content costswere elevated as ZEEL continued to invest in programming to improve viewership rating in key genres including HindiGEC, and invest in ZEE5. With marked improvement in ZEE5 performance, company has taken price increase of 40% from Rs499 p.a. to Rs699 p.a., which should help drive growth in ZEE5 revenues for the next few quarters. Though we maintain our BUY rating on the back of inexpensive valuation, and proposed merger with SONY Network, near-term performance depends on recovery in viewership rating (which has stabilised now). We cut our EPS estimates by 3-7% over FY23E-FY24E due to lower revenue and margin assumptions, and reduce the target price to Rs300 (from Rs310) valuingthe stockat an unchanged P/E multiple of 20x FY24E.

• ZEE5 has taken large price hike.ZEEL’s efforts on pricing, content and technology is benefiting ZEE5 where good performance has sustained for past few quarters. ZEE5 has taken price increase from Rs499 p.a. to Rs699 p.a., which should help drive revenue growth for the next few quarters. ZEE5 lost 1.5mn MAUs to bring the total MAUs to 103mn while it added 0.8mn in DAUsto 11.3mn. ZEE5 revenues rose 43% YoY to Rs1.6bn. EBITDA losses increased QoQ to Rs2.4bn in Q1FY23 from Rs2bnin Q4FY22.
• Ad revenues facing headwinds. ZEEL’s domestic ad revenues (up 5.8% YoY to Rs9.3bn) werehit due to: 1) stress on margins for advertisers due to higher commodity inflation, particularly for FMCG companies; 2) discontinuation of FTA channels; and 3) subdued viewership ratings. ZEEL was impacted more than its peers, because of itsrelativelyhigher dependence on FMCG ads as it lacks presence in the sport genre(sport now has 20-25% of industry ad revenue pie). ZEEL is focusing on improving its ratings in key genresincluding Hindi GEC. It now expects ad revenuesto improve in H2FY23 on correcting commodity prices, and festive season.
• Underlying subscription revenues subdued. Domesticsubscription revenues dipped 7.4% YoY (down 10.2% QoQ) to Rs6.6bn, negatively affected due to impasse in NTO 2.0. Underlying subscription revenuesfrom linear TV contracted,which was disappointing. TRAI has intimated timeline of Nov’22 forimplementing NTO 2.0,which will be key to watch. Further, discontinuation of FTA channels was expected to help,but that has not happened as yet. Revenues were also impacted from delay in completion of negotiationswith B2B subscribers to ZEE5 with whom the ithaslong-term contracts.
• Content cost remainedelevatedandhurt EBITDA.EBITDA dipped 32% YoY to Rs2.4bn and EBITDA margin was only 12.8%, impacted by 15.7% rise in programming cost to Rs10bn. ZEEL has been aggressivelyinvesting in programming to drive improvement in viewership rating, and for ZEE5. Inventory for show and movies has increased by 33% and 80% YoY to Rs11bn and Rs10bn respectively.

ICICI Securities