Q4FY23 Review: Zee Entertainment: Dismal Q4; potential delay in merger timeline

26 May 2023 , 11:30 AM

Zee’s Q4 Ebitda declined 70% YoY to Rs1.52bn, worse than analysts of IIFL Capital Services estimate of Rs1.86bn. Consequently, it posted PAT loss in Q4. FY23 was a perfect storm for Zee with 1% revenue decline and with ZEE5 losses widening YoY from Rs7.5bn to Rs11bn. Though Q4 saw QoQ WC improvement, Zee saw Rs1.2bn FCF drain in FY23. The NCLT has ordered the exchanges to reconsider the NOC given to the Zee-Sony merger; however, Zee appeared confident of consummating the deal. Analysts of IIFL Capital Services cut pro-forma EPS estimates by 5-11% and prune the probability of merger from 80% to 70%.

The perfect storm: 

Multiple factors such as weak ad environment, FTA pullout from DD Free Dish, disruption around NTO 3.0 implementation, rising content costs and expenses around broadcasting ILT20 League had made us build in 62% YoY Ebitda decline for Zee in Q4. With the ILT20 League related content costs surprising negatively, Ebitda decline was sharper. Zee also booked Rs900mn exceptional item pertaining to merger costs and a dispute settlement. PAT loss from continuing operations was Rs729mn. FY23 FCF was –Rs1.2bn vs. +Rs1.5bn in FY22.

Cautiously optimistic commentary: 

Key takeaways from the earnings call: 1) Viewership share has improved in all genres except Marathi. 2) Ad revenue should see some gradual recovery. 3) There were some challenges at the ground level with LCOs on NTO 3.0 implementation, which have been largely resolved. 4) ZEE5 losses should gradually come off going forward. 5) Necessary steps are being taken to overcome legal hurdles for the merger with Sony.

Cut EPS by 5-11%; new TP Rs217: 

ZEE5 contributes ~10% to Zee’s overall revenue. However, ZEE5 Ebitda losses stood at Rs11bn in FY23, almost identical to Zee’s consol Ebitda suggesting that Ebitda could have been double in the absence of OTT investments. With management commentary suggesting that the peak investment phase is behind, our est. of ZEE5 Ebitda losses are Rs9.5bn/Rs8.5bn in FY24/25. Considering the sharp downgrades, Zee’s stock is not cheap at 24x 1YF PE in the absence of a merger (16x on pro-forma numbers). In case the merger falls apart, there could be a sharp de-rating. Moreover, Zee will have to take a call on ICC TV rights (starting from June 2024) as the losses could be substantial.

While analysts of IIFL Capital Services new TP of Rs217 (old TP: Rs243) suggests 21% upside, they believe that there could be significant downside in case the merger gets stalled.