Q3FY24 Review: Zee Entertainment: New targets; many moving parts

14 Feb 2024 , 03:05 PM

Zee’s Ebitda declined 43% YoY to Rs2.1bn, inline with IIFL and consensus estimate. Pre-exceptional PAT declined 50%. Increase in cash balance by Rs2.6bn QoQ to Rs8.3bn was aided by inventory reduction. On the earnings call, MD&CEO Punit Goenka stated that Zee would focus on frugality, cost optimization and quality content. The target is to grow revenue at 8-10% p.a. while improving Ebitda margin to 18-20% by FY26 (from 10.2% in Q3). With management alluding to one-off costs in the next 1-2 quarters and indicating a margin recovery by H2FY25, Analysts of IIFL Capital Services cut FY25 EPS by 11%. Analysts of IIFL Capital Services maintain FY26 EPS. The stock trades at 25x 1YF PER. Zee believes that its sub-licensing agreement of TV rights of ICC events starting in June 2024 from Disney Star stands cancelled after the latter breached certain conditions. In Analysts of IIFL Capital Services TP, they assume 50% probability of adverse outcome for Zee. Analysts of IIFL Capital Services SoTP-based March’25 TP moves to ₹160 (15% downside) from ₹149. Maintain SELL as any significant re-rating event could be prone to protracted litigation. 

Inline Q2: 

Ad revenue declined 3% YoY as the Cricket World Cup garnered a disproportionate share of ad spend. Subscription revenue, after removing Rs590mn bunched up revenue from Siti in Q3FY23, grew 10% led by NTO 3.0 and ZEE5. Rs2.44bn ZEE5 Ebitda loss was the lowest in six quarters. 

Focusing on frugality, cost optimization and quality content: 

Key takeaways from the earnings call: 1) the focus will be on frugality, cost optimization and quality content; 2) FMCG companies are circumspect on rural demand and volume recovery; 3) there has been a 6-8% increase in bouquet pricing of channels, which should aid subscription revenue; 4) Zee’s steady state aspiration is 8-10% revenue Cagr with digital growing at a much higher pace; and 5) it sees a gradual recovery in margins from 2HFY25 and targets 18-20% Ebitda margin by FY26. 

Uphill climb ahead:

Analysts of IIFL Capital Services note that Disney Star issued a notice to Zee seeking Rs17bn first instalment pertaining to the ICC TV rights deal. Zee believes that Disney Star breached certain conditions which should lead to repudiation of the agreement. In analysts of IIFL Capital Services view, an adverse outcome in this litigation could stretch Zee’s finances materially. Separately, Zee could face a formidable rival if the RIL-Disney Star deal consummates. Analysts of IIFL Capital Services revenue growth estimate of ~6% is below management target of 8-10% while Ebitda margin est. is closer to the lower end of 18-20% target.