Q1FY24 Review: Zee Entertainment: Weak Q1; all eyes on merger

10 Aug 2023 , 12:24 PM

Zee’s 42% YoY Ebitda decline in Q1FY24 was not as bad as feared since 21% domestic subscription revenue growth surprised positively. PAT from continuing ops was almost negligible while deterioration in WC resulted in cash balance falling QoQ from Rs8bn to Rs5.3bn. NCLT order pronouncement on the merger with Sony is slated for 10th August. On the earnings call, management mentioned green shoots of ad revenue recovery and stated that ZEE5 costs should not materially rise from Q1 levels. While analysts of IIFL Capital Services upgrade FY24/25 pro-forma Ebitda for the merge-co by 6%/2%, they maintain PAT due to higher finance cost and taxes. They raise their Sep-24 TP from Rs226 to Rs252 while maintaining their probability of merger at 70%. Maintain ADD. 

Q1 performance not as bad as feared: 

While ad revenue decline of 3% YoY was weak, 21% growth in subscription revenue was a positive surprise. Zee has stopped disclosing ZEE5 KPIs, but ZEE5 Ebitda loss of Rs3.42bn was at an all-time high due to QoQ revenue decline (ZEE5 opex was flat QoQ at Rs5.3bn). The company booked Rs705mn exceptional item pertaining to merger costs. PAT from continuing operations was Rs39mn. During Q1, net cash balance came down by ~Rs2.7bn due to higher receivables. 

Cautiously optimistic management commentary: 

Key takeaways from the earnings call: 1) On the merger with Sony, NCLT Mumbai has completed its hearing and the order pronouncement is listed for 10th August. 2) Zee has seen viewership share gains across most genres, except Hindi GEC and Marathi, with the overall share in June at a 5-quarter high. 3) There are green shoots of ad revenue recovery. 4) NTO 3.0 aided Q1 subscription revenue growth, though the full benefit may flow through only after a couple of quarters. 5) ZEE5 costs should not rise materially from hereon. 

Raise pro-forma merge-co Ebitda by 2-6%; new TP Rs252: 

Analysts of IIFL Capital Services est. of ZEE5 Ebitda losses are Rs10.5bn/Rs9bn in FY24/25. Considering the sharp downgrades in the past 6 months, Zee’s stock is not cheap even on pro-forma numbers at 24x 1YF PE. In the scenario that the merger goes through, their TP comes to Rs297 based on 15x target PE multiple for the linear TV business and 4x P/S on OTT. With Star seeing a YoY TV revenue decline for IPL 2023, Zee (and potentially the merge-co) will have to take a call on ICC TV rights (starting from June 2024) as the losses could be substantial.