Zee Entertainment- Outlook positive for ad revenue and subscription

Zee Entertainment: Outlook positive for ad revenue and subscription

Zee Entertainment (Zee) reported a 34% y-o-y decline in consolidated Ebitda, surpassing expectations, as the 8% y-o-y revenue growth was overshadowed by increased spending on content and Zee5. Ad revenue faced a 4% y-o-y drop due to a sluggish market and the impact of IPL, partially offset by a remarkable 18% y-o-y surge in subscription revenue, driven by NTO 3.0 and robust digital subscription growth in 1QFY24. We are largely maintaining our revenue/Ebitda estimates for FY24/FY25, factoring in an anticipated recovery in the ad market and ongoing strategic investments. Although current valuations may not fully reflect the merged entity’s substantial potential, bolstered by its robust competitive standing in both linear and digital sectors, the forthcoming NCLT ruling on the merger’s approval and completion will be a pivotal point to monitor. We reiterate a Buy recommendation with a target price of Rs 280, based on a multiple of 26x FY25E EPS. Zee’s consolidated revenue grew 7.5% y-o-y to Rs 19.8 billion driven by subscription revenue growth as ad revenue growth was muted in 1QFY24. Ad revenue declined 4% y-o-y to Rs 9.4 billion (in line) due to muted ad spends during the early part of the quarter and the impact of IPL. Subscription revenue grew 17.6% y-o-y to Rs 9.1 billion driven by NTO 3.0 and ZEE5. Zee reported an exceptional loss of Rs 706 million, which was related to employee and legal expenses pertaining to the proposed Scheme of Arrangement. Adjusted for the exceptional item, PAT declined 57% y-o-y to Rs 496 million (vs. Rs 162 million estimated) during the quarter.Valuation and view

The gradual ad revenue recovery, driven by increased spending from the FMCG sector, is a positive sign. We expect this recovery to gain momentum from the second half of FY24, coinciding with the festive season. Regarding subscription revenue, the implementation of NTO 3.0 is anticipated to boost its outlook. Investments in the digital segment (Zee5) may impact profitability due to the ongoing investment mode. The merged entity, with a revenue of Rs 160 billion and an Ebitda margin of 18% as of FY23, is currently trading at 10x EV/Ebitda based on FY23 figures. However, we believe that these valuations do not fully reflect the significant opportunities ahead. The timing of the merger remains an important aspect to monitor. The potential for stock re-rating hinges on two factors: (i) recovery in the ad market, and (ii) successful completion of the Sony merger deal. The merged entity holds a strong market position and substantial growth potential.