Q2FY24 Review: Zee Entertainment: Gradual recovery in the run-up to merger

10 Nov 2023 , 02:40 PM

Zee’s Q2 Ebitda of Rs3.3bn (up 6% YoY) was above analysts of IIFL Capital Services/consensus est. of Rs2.7bn/Rs2.5bn. Lower ZEE5 losses and A&P costs helped. Reported PAT of Rs1.3bn also was a beat despite Rs1.2bn merger related exceptional charge. Cash balance saw a slight QoQ improvement to Rs5.66bn. On the earnings call led by MD&CEO Punit Goenka, the company stated that the merger with Sony India should close in the next few weeks. Zee was cautiously optimistic on ad revenue recovery, with Q3 likely to see some impact due to the ongoing Cricket World Cup. It also stated that ZEE5 investments have peaked. Analysts of IIFL Capital Services upgrade FY24 Ebitda for the pro-forma entity by 2% but maintain FY25/26 Ebitda. In their view, synergy benefits and potential improvement in capital allocation after merger should drive re-rating. Analysts of IIFL Capital Services raise their TP to Rs396 based on 16x Dec-25 Ebitda. Maintain BUY. 

Q2 beats low expectations: 

Ad revenue declined 3% YoY, as expected, while domestic subscription revenue saw 9% growth. Higher other revenue (movie and syndication) was matched by a similar increase in content costs. ZEE5 Ebitda loss narrowed QoQ partly led by syndication revenue from digital content. Consol Ebitda growth of 6% YoY marked the reversal of a string of declines. A reduction in inventory was offset by higher receivables (which Zee mostly attributed to distributor share of Gadar 2 and subsequently realised in October). Analysts of IIFL Capital Services note that in H1, Zee made Rs1bn settlement (as per its cash flow) towards parties that had challenged the merger in legal forums. 

Cautiously optimistic management commentary: 

Key takeaways from the earnings call: 1) Merger closure may take a few weeks; 2) 90bps QoQ network viewership share gain for Zee is among the highest in the industry; 3) while ad revenue recovery was gradual and led by FMCG (analysts of IIFL Capital Services note 65% YoY ad spend increase for HUL), higher allocation of ad budgets towards sports did not help Zee; 4) Healthy TV subscription revenue growth should continue; and 5) ZEE5 investments are close to peak. 

Raise FY24 pro-forma Ebitda by 2%; new TP Rs396: 

Impending closure of Sony deal should potentially lead to cost rationalisation, improved capital allocation and re-rating. Analysts of IIFL Capital Services target 1YF EV/Ebitda of 16x factors in some re-rating due to the MNC parentage, but is still below the 20x average multiple in its halcyon days (2011-2018), considering the stiff challenge in the OTT space.