PL Stock Report: Zee Entertainment Enterprises (Z IN) - Q1FY24 Result Update - Margin pressure sustains - BUY

Zee Entertainment Enterprises (Z IN) - Jinesh Joshi - Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: BUY | CMP: Rs242 | TP: Rs276

Q1FY24 Result Update - Margin pressure sustains

Quick Pointers:

§ NCLT order on merger to be pronounced on 10th Aug, 2023.

§ EBITDA margin stood at 7.8% and was impacted by higher content, marketing and employee expenses.

Though we cut our FY24E EPS estimates by ~19% odd amid weak performance in 1QFY24 our FY25E EPS estimate is broadly intact as 1) gradual recovery in ad-spends 2) accrual of full benefits of NTO 3.0 and 3) loss moderation in ZEE5 (opex was flat on QoQ basis and widening of EBITDA loss is a function of revenue slippage) is likely to aid earnings. Zee Entertainment Enterprise’s (Z IN) operational performance was marginally better than our expectation with EBITDA margin of 7.8% (PLe of 6.3%) but PAT was derailed by an exceptional charge of Rs706mn. We expect sales CAGR of 8% over next 2 years with EBITDA margin of 12.4%/18.1% in FY24E/FY25E and retain BUY with a revised TP of Rs276 as we increase our target multiple to 22x (earlier 19x). Unfavorable NCLT verdict (Z IN has right to appeal in NCLAT in that case) and slower recovery in ad-environment can act as a key overhang in near term.

Topline increases by 7.6% YoY: Revenues increased 7.6% YoY to Rs19,838mn (PLe Rs19,537mn). Ad revenues declined 3.6% YoY to Rs9,409mn while subscription revenues increased 17.6% YoY to Rs9,075mn.

EBITDA margin at 7.8%: EBITDA declined 42.3% YoY to Rs1,549mn (PLe Rs1,231mn) with a margin 7.8% (PLe 6.3%). After adjusting for the one-off charge of Rs706mn (closure costs, merger related costs and legal expenses), PAT declined 55.8% YoY to Rs707mn with a margin of 3.6%. Apart from this, loss from discontinued operations pertaining to SugarBox stood at Rs573mn.

ZEE5’s revenues grow 21.4% YoY: ZEE5’s revenues increased by 21.4% YoY to Rs1,939mn. 32 new shows/movies were launched in 1QFY24 which included 5 originals and the EBITDA loss stood at Rs3,421mn.

Con-call highlights: 1) ZEE5's revenue declined on sequential basis due to high base (ILT20 revenue and B2B catch-up revenue). 2) Receivable from Dish stands at Rs622mn. 3) Fresh TV content of 4 languages in now behind paywall on ZEE5 which is expected to improve SVOD revenues. 4) Investment in SugarBox was ~Rs4.2bn. Roughly, Rs3bn has been written off so far. 5) ZEEL will be participating in the BCCI media rights auction that is due in next few days. 6) Due to continued legal proceedings and non-receipt of balances, ZEEL switched off its signal to Siti Networks except for East. 7) Ad-revenue growth was impacted due to IPL (shift of ad-dollars to sports genre). 8) Subscription revenue was up 17.6% YoY due to implementation of NTO 3.0 and ZEE5. 9) Zee Studios released 3 Hindi and 4 regional movies during the quarter. 10) ZEEL’s viewership share in 2+ years (U+R) and 15+ years (U) category stood at 16.2%/17.0% respectively.

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