We value the stock at 17x FY21e EV/EBITDA and upgrade it to a Buy with a target price of Rs 530, says a report by Anand Rathi.
Zee Entertainment Enterprises' robust domestic ad growth is expected to continue due to the favourable ad environment (FMCG contributes ~55 percent to ad revenues), sustained focus on regional markets (GEC launch in Kerala) and adding movie channels in Tamil and Kannada.
For the next 2-3 years the company will invest in digital all amounts that contribute to a more than 30 percent margin. (Excl. digital, Zee’s margins in Q3 FY18 were 32.3 percent, the highest ever.)
With a vast content range (in Tamil, Telugu, Kannada, Malayalam, Marathi and Bengali) and regional focus (six major regional languages), management believes that Zee5 will break even in the next 3-5 years.
On its digital platform Zee5, the company released 14 originals in six languages in Q1 and has 20 originals lined up for release in Q2 FY19. Overall, it plans to launch 80-90 original shows in FY19.
Marketing spends will be significant in the next few quarters to promote its content and it will double its investment in original content. As the company scales up its Hindi and regional offerings, coupled with digital content investment, operating margin expansion will be squeezed.
Over the last few years Zee has outpaced industry ad-growth; we expect this to continue. We value the stock at 17x FY21e EV/EBITDA and upgrade it to a Buy with a target price of Rs 530.Disclaimer: The views and investment tips expressed on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.