Zee Entertainment: Margins will improve once ad revenues bounce back.

Update on the Indian Equity Market:

On Thursday, NIFTY closed in the green with 0.6% gains.  The gains were led by YESBANK (+6.6%), IOC (+5.9%), GAIL (+2.8%). The stocks that were beaten down in today’s session included ZEEL (-7.2%), UPL (-3.9%) and CIPLA (-1.4%). Most of the sectoral indices ended positive lead by REALTY (+2.1%), PSU BANK (+1.2%) and BANK (+1.0%). MEDIA (-2.1%) was the only sector that ended in the red.

Excerpts from an interview with Mr Rohit Gupta, CFO, ZEEL that aired on CNBC-TV18 on 22^nd January 2020:

• ZEEL reported 3QFY20 numbers. The growth in subscription revenue continued to be strong at 21.7% for 3QFY20 and 31.0% for 9MFY20. The economic slowdown and weakness in consumer sectors led to a decline in advertisement revenue.
• In the last 5 years, ZEEL’s advertising revenue has grown at a CAGR of 16% while the topline growth has shown a CAGR of 12%. EBITDA also doubled in the same period.
• Current year’s advertising revenue is impacted by 2-3 factors.  Two of ZEEL’s Free-to-air channels have become paid channels and removal of free dish had an impact of 500 bps. Also, in 3QFY19, the revenue growth was 20% on back of 30% growth in 3QFY18. On such high base, the decline this time is high at -15%. Advertising revenue should come back in the next 2-3 quarters.
• After TRAI’s new tariff order last year (NTO 1.0), ZEEL has grown stronger. The reasons being very strong customer connect and brand pull of channel. The implementation of the NTO 1.0 has not completed a year yet and industry is still in a stabilizing phase for the entire subscription revenues. However, NTO 1.0 has been good both for consumers and industry.
• ZEEL has been working on improving their balance sheet. The cash and equivalents have improved from 1,479 cr to 1,767 cr in 3QFY20. Management is working on improving FCF and PAT to cash conversion ratio. They expect to improve both in excess of 50% in the coming year.
• ZEEL’s margins have been in excess of 30% for many quarters. However, 3QFY20 margins were lower than 27%.  The management says margins will improve as the advertising revenue bounces back.

Consensus Estimate: (Source: market screener website)

• The closing price of ZEEL was ₹ 279/- as on 22^nd January 2020. It traded at 15.9x/ 13.5x/ 12.6x the consensus earnings estimate of ₹ 17.6/ 20.7/ 22.2 for FY20E/ FY21E/ FY22E respectively.
• Consensus target price is ₹ 334/- which implies a PE multiple of 15.0x on FY22E EPS of ₹ 22.2/-