Result Update: Zee Entertainment Enterprises Ltd - ACCUMULATE - TP Rs.623 - Kotak

Zee Entertainment reported EBITDA ahead of estimates, while PAT missed estimates on higher than expected effective tax rate. While earnings of the company are in line, reported balance sheet shows greater capital intensity required than we had earlier expected. Viewership assets of the company are strong, and growing, and we expect the stock shall continue to draw premium valuations. We value Zee Entertainment at 31x PER FY20E, or Rs 623 (Rs.610 earlier). ACCUMULATE (REDUCE earlier) as Zee TV's ratings performance reduces concerns relating with impending tariff order implementation.

Key Highlights

Zee Entertainment reported strong advertising revenues on expected lines, as advertising environment improved. The company reported weaker than expected subscription revenues, in an environment of uncertainty over tariff order and its rollout.

EBITDA margin was impacted by launch of Zee5 and additional programming hours. Reported EBITDA was ahead of our estimates, while PAT missed estimates on high effective tax rate.

The company reported a significant rise in working capital as ZEEL is investing aggressively in content. Working capital requirements are likely to remain elevated in the near future.

Valuation & outlook

The company's broadcasting operations are performing extremely well. While Regional GECs have been very consistent, Zee TV, the company's flagship Hindi GEC has also staged a consistent comeback, and has been the leader in recent weeks. This reduces our concern on subscription revenues of the company and their sustenance following the implementation of the tariff order.

We expect elevated valuations of ZEEL to sustain; however, we believe the likelihood of a significant re-rating or positive earnings surprise is low while ZEEL continues to be in investment mode and earnings growth remains subdued. We see ZEEL as a buy into decline opportunity, as we upgrade the stock to ACCUMULATE (REDUCE earlier). We set a price target of Rs 623 (31X FY20E PER).

Key risks to our investment view/ estimates include competitive risks, regulatory risks (notably the risks from tariff order rollout)

Shares of ZEE ENTERTAINMENT ENTERPRISES LTD. was last trading in BSE at Rs.593 as compared to the previous close of Rs. 589. The total number of shares traded during the day was 57722 in over 1145 trades.

The stock hit an intraday high of Rs. 598.5 and intraday low of 584. The net turnover during the day was Rs. 34118294.

Source : Equity Bulls

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