Zee Entertainment Enterprises - Accelerating investments... - ICICI Securities

Zee Entertainment Enterprises' (ZEEL) Q3FY21 ad revenue rise of 7.5% YoY was better than expected, and content syndication deal worth Rs5.5bn led to much higher revenues. Ad revenues should continue to benefit from low base for next 12 months. ZEEL is planning a 5-year growth strategy and accelerate investments across TV (channels, and content), digital (originals), and movies (35-40 p.a.). This should impact near-term margins and FCF, hence the company has withdrawn its margin/FCF guidance. It would disclose more details in Q4FY21. We slightly increase our EPS estimates by 6%/3% for FY21/FY22, and our target price to Rs278 (from Rs208) on valuation rollover to FY23E; and rise in PE multiple to 14x (from 12x). Downgrade to ADD (from Buy), and await more disclosures on investments.

- Accelerated Investments. ZEEL is working to accelerate investments in: 1) digital (originals and movies); 2) TV, particularly revamping shows in a few markets probably to win market share back and launch a few more channels; and 3) movie production - likely to accelerate from 8-10 movies p.a. to 35-40. This should impact margins for next few years and drive higher working capital. Company has withdrawn its guidance of at least 50% 'PAT to FCF' for FY22 as well as its EBITDA margin guidance of 30%.

- Ad revenues bounce back; low base to help FY22 growth rate: ZEEL's domestic ad revenues have bounced back with 7.5% YoY growth to Rs12.4bn. This is despite IPL, and TV industry ad revenue decline of 2% YoY (ex-IPL). This was helped by growth in ads by auto, FMCG, e-commerce, and durables. Inventory utilisation has reached pre-Covid in primetime GECs, and pricing has also started reaching those levels. As a thumb rule, 80-85% of ad revenue growth is driven by higher realisations.

- Content syndication deals drive Rs5.5bn revenue: Subscription revenue grew 18% YoY to Rs8.4bn due to inclusion of music business (earlier under other segment), while L2L growth was 9.3%. Company sees subscription revenue growth to be muted on NTO 2.0 overhang; else it should grow at mid-teens driven by rise in HD penetration, new channel launches, higher realisations and rising ZEE5 paying users. Other sales grew >5x on content syndication deal, where ZEEL has sold some of international content where it is scaling down, e.g. in Germany, Latin speaking countries, etc. to aggregator, and has already received consideration.

- ZEE5 under-performed: ZEE5 revenues at Rs1.2mn, up 19% QoQ, is uninspiring considering the strong content line-up, and improvement in ad market for catch-up shows. Its MAU rose 20.5% QoQ (net add 11.2mn) to 65.9mn, but DAU increase was just 3.8% QoQ (net add 0.2mn). EBITDA loss slightly dipped to Rs1.8bn. Company believes launch of popular shows on TV also drives significant viewership on OTT, which could drive growth in active users and ad revenues.

- Other highlights from earnings call. 1) ZEEL is devising a 5-year growth strategy with plans to grab time share and entertainment share of users across TV, digital and movies. It plans to accelerate investments to drive higher growth in the long run; 2) it has already released >200 shows and movies on ZEE5; 3) company sees 15-18% DAU conversion, which is equal industry peers; 4) TV content cost per hour has been stable, while movies, particularly Hindi, have increased; 5) though movie production is a lower-margin business compared to TV, management remains confident of profitable scaling of the business; 6) overseas mutual investment payment of Rs2.25bn has been received; 7) SugarBox capex should start in FY22, and should be spread across three years; 8) capex is seen at Rs2bn-2.5bn in core business; and 9) Siti Network is put on cash-and-carry basis, and no new credit has been extended. Dish TV continues on payment schedule, and had receivables Rs4.6bn (from Rs5bn in Q2FY21).

Shares of ZEE ENTERTAINMENT ENTERPRISES LTD. was last trading in BSE at Rs.215.3 as compared to the previous close of Rs. 249.4. The total number of shares traded during the day was 3551302 in over 34154 trades.

The stock hit an intraday high of Rs. 252.7 and intraday low of 212. The net turnover during the day was Rs. 791190435.

Source : Equity Bulls

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