Zee Entertainment (ADD): Green shoots begin to show in ad revenues, ICICI Securities

NCLT order in the matter of the Zee-Sony merger which had been reserved, will be pronounced on 10th Aug’23. We think this could be a trigger for stock re-rating if the judgement is favourable to the merger. ZEEL surprised positively on both revenue and margin front. Revenue was higher due to 7.1% QoQ/ 17.6% YoY growth in subscription revenues as NTO 3.0 was implemented and Zee5 revenues (up 21% YoY) were higher than expectations. ZEEL had a net profit of INR 38.7 mn in Q1FY24 vs loss of INR 729 mn in Q4FY23. Also, management mentioned that green shoots are now visible with respect to advertising revenues from FMCG spenders. We think improving regulatory clarity is a positive for the stock. Maintain ADD with price revision to INR 255 (from INR 225).

Q1FY24 performance
ZEEL’s overall ad revenue was down 3.6% YoY to INR 9.4bn. Domestic ad revenues were down 6.4% QoQ /2.6% YoY, due to IPL taking away large share of revenue. Subscription revenue grew 7.1% QoQ/ 17.6% YoY in Q1FY24. However, 21% YoY growth in ZEE5 helped offset some of the impact of the decline in linear revenue. EBITDA declined 34.3% YoY to INR 1.5bn but grew sequentially by 2.1%. EBITDA margin was up 60bps QoQ/(500bps) YoY, due to sequential reduction of 13.5% in programming cost to INR 11.4bn. Zee reported a consolidated profit of INR 38.7 mn. This was broadly due to higher than expected subscription revenues and revenues from other sales.

Digital business, music business and content update
ZEE5 grew revenues 21% YoY to INR 1.9bn. 32 shows (down from 42 shows) and movies (including 5 originals) were released during Q1FY24.

Management commentary
Management sounded positive on ad spend recovery. There were green shoots with regards to FMCG ad spends making a comeback. According to management, content improvement in Q1FY24 has led to market share improvement in Jun’23 from 16.2% to 16.9%. This has been led by market share expansion in South and East India (Bangla, Odiya, Telugu and Kannada). However, Zee TV and Zee Marathi are yet to recover. Linear TV reach and impressions have continued to improve sequentially in Q1FY24.

Valuation
We maintain ADD on the stock and increase our target price to INR 255 (from INR 225), valuing it at ~19x 1 year forward P/E multiple, as we believe ZEEL could rerate given the increasing clarity on the matters relating to the merger. Key risks: Further slowing of ad/subscription revenue recovery and higher inflation in expenses particularly programming cost. ICICI Securities