Zee Entertainment: Sony India’s resilient FY23; stark contrast to Zee

19 Jul 2023 , 10:39 AM

Recommendation: Add; Target price: Rs 226

 

Culver Max Entertainment’s (formerly Sony Pictures India) FY23 MCA filing indicates flattish YoY Ebitda performance and pre-exceptional PBT being at an all-time high. While both Sony India and Zee faced revenue headwinds in FY23, Sony’s flattish opex vs. 9% increase for Zee meant that Sony saw flattish Ebitda vs. Zee’s 38% decline. Sony India saw a sharp YoY FCF decline in FY23, but analysts of IIFL Capital Services note that its cumulative FCF in the past four years was +Rs32bn vs. Zee’s +Rs14bn. Analysts of IIFL Capital Services update their pro-forma financials for Sony India’s numbers which drives a marginal EPS upgrade. Roll-forward to Sep-24 results in TP increase from Rs206 to Rs226 even as analysts of IIFL Capital Services keep the probability of the merger unchanged at 70%. After the recent rally, analysts of IIFL Capital Services downgrade the stock from BUY to ADD.

Resilient FY23 for Sony India: 

Weak ad spending environment took a toll on Sony India’s ad revenue which declined 11% YoY in FY23 (vs. Zee’s 8% decline). However, Sony India fared better on subscription revenue growth (+8%) vs. Zee (+3%). While revenue was largely flattish YoY for both companies, Sony maintained its Ebitda margin at ~20% (flat absolute Ebitda). This compares with 38% Ebitda decline for Zee. Sony’s FY23 PAT was at an all-time high. However, after a strong FY22, Sony India’s FCF sharply came down to +Rs1.2bn in FY23 (Zee was at –Rs1.2bn).

Sony India has significantly outperformed Zee in recent years: 

A comparison of the performances of both companies over FY20-23 (tough period for the sector) suggests that: 1) Sony’s revenue Cagr was 4% vs. almost nil for Zee. 2) Sony’s FY23 Ebitda was similar to FY20 level while Zee’s was down by one-third. 3) Sony’s OCF and FCF generation have been well above Zee’s. Zee’s fall from FY19 (peak year) has been even more precipitous as ROE has declined from 19% to 5%. During this period, Sony India’s ROE improved from 10% to 14%. Further, analysts of IIFL Capital Services note that in FY17, both companies had ~120 WC days. Zee’s WC deterioration to 323 days is much sharper than Sony’s (158).

Merger awaiting NCLT approval: 

Multiple entities had moved NCLT against the Zee-Sony merger. Zee has reached settlement agreements with most parties, but this process has delayed the deal closure. The current merger completion timeline is end-H1FY24. The SEBI-promoter case at SAT may not have a direct bearing on merger timelines unless Sony Global reconsiders the merger.