Zee Entertainment Enterprises : Muted result; investors focus on merger

Zee Entertainment Enterprises’ (ZEE) Q3FY23 revenue was muted on account of subdued demand environment as FMCG companies kept ad-spends under control to counter raw material inflation. As the company continued to invest in content creation, EBITDA declined 29.5% YoY. Multiple one-offs and exceptional items impacted net profit (down 92% YoY). We have cut our earnings estimates by ~14% for FY24E and our TP by ~15%. We maintain our HOLD rating on the stock.

We note NCLT’s final hearing is due on 14th February. Therefore, we believe the merger with Sony is likely to be the most important focus area for investors in the near term.

• Q3FY23 performance. ZEEL’s overall ad revenue was down 15.6% YoY to Rs10.6bn with domestic ad revenue declining 15.8% YoY to Rs10.2bn. Subscription revenue rose 13.2% YoY to Rs8.9bn. Domestic subscription revenue grew 11.2% YoY while international revenue grew 30.7% YoY. Subscription revenue was aided by organic growth in ZEE5 and Rs490mn from SITI network. EBITDA dipped 29.5% YoY to Rs3.4bn and EBITDA margin was only 16%, impacted by 11.5% rise in programming cost to Rs11.3bn. Reported PAT for the quarter was Rs243mn after exceptional items like: 1) Provisions for SITI revenue (Rs590mn), 2) merger-related costs (Rs689mn) and 3) Zee Learn NCDs write-off (Rs250mn). ZEE5’s MAU rose 7.1mn to 119.5mn while DAU increased by 0.1mn to 11.5mn. ZEE5 revenue grew 33.2% YoY to Rs1.9bn; however, cost rose sharper at 45% YoY. Therefore, EBITDA loss rose to Rs2.8bn from Rs1.8bn in Q3FY22. Management indicated to be in investment mode in ZEE5 for the next few years. Inventory rose 14.1% YoY in Q3FY23

• Commentary. Management stated ad-spending by FMCG brands has been soft post a minor revival in Oct’22. Growth in ad-revenue is the key objective for the company ahead. The viewership share in Q3FY23 was 16.2% with the company gaining share in Zee Tamil though Zee Marathi continued to be weak. Within ZEE5, company should implement continuous price hikes ahead. Management expects single digit growth in subscription revenue post the implementation of NTO3.0. On the merger with Sony, management awaits the NCLT order, the hearing of which is scheduled on 14th Feb’23.

• Valuation. We cut our EPS estimates by ~14% for FY24E on gradual margin recovery, and reduce target price to Rs225 (from Rs265) valuing the stock at an unchanged P/E multiple of 20x FY24E. Maintain HOLD on gradual FCF recovery. Key risks: Faster ad / subscription revenue recovery and lower inflation in expenses particularly programming cost.

ICICI Securities