Zee Entertainment: Better days ahead

6 Sep 2023 , 12:26 PM

Recommendation: Buy; Target price: Rs 390

 

Analysts of IIFL Capital Services upgrade Zee from ADD to BUY with a new TP of Rs390. The merger with Sony looks set for consummation, which should potentially lead to cost rationalisation, improved capital allocation and re-rating. It remains to be seen whether the recent appeal by IDBI Bank in NCLAT against the Zee-Sony merger can potentially delay the merger timelines. However, analysts of IIFL Capital Services do not see the merger falling out; in the worst case, Zee could pay the entire Rs1.5bn claimed by IDBI Bank. Analysts of IIFL Capital Services target 1YF EV/Ebitda of 17x factors in some re-rating due to the MNC parentage, but is still below the 20x average multiple in its salad days (2011-2018), considering the stiff challenge in the OTT space. 

Zee-Sony merger on the last lap: 

With the NCLT approval in place, the next steps entail ROC filing and intimation of record/effective date. While the record date appeared set for late September or early October, IDBI Bank has recently moved NCLAT against the NCLT approval. While a potential delay in the above-mentioned timeline cannot be ruled out, analysts of IIFL Capital Services do not see the risk of merger fall-out. In the worst case, Zee could concede to pay the entire Rs1.5bn that IDBI Bank is demanding (Zee’s cash balance as of Q1-end was Rs5.3bn). While the SEBI-Punit Goenka case is sub judice at SAT, this should not have an adverse impact on merger timelines. 

Significant scope for content cost rationalisation and/or OTT loss reduction: 

In the past five years, Zee’s content cost as % of revenue has jumped from 35% to 50%. On the other hand, Sony’s has trended down to 45% over the years. Zee’s inventory days stood at 330 vs Sony’s 134 in FY23; this also manifests as higher content cost when the inventory is amortised. So, any inventory write-off could boost Ebitda for subsequent periods. ZEE5’s Rs11bn Ebitda loss in FY23 also offers significant room for rationalisation, considering Hotstar’s Rs4.5bn Ebitda loss and SonyLiv’s estimated Ebitda loss of Rs2-3bn. A combination of revenue synergy and cost rationalisation should result in Rs34bn/Rs44bn Ebitda for the proforma merge-co vs Rs25bn in FY23, despite higher sports losses. 

Healthy re-rating on the cards: 

Pre-2018 (before the start of Zee’s promoter group issues), Zee traded at an average 1YF PE of 28x and 1YF EV/Ebitda of 20x. Currently, the company trades at 13.6x 1YF pro-forma EV/Ebitda; analysts of IIFL Capital Services TP is based on 17x.