Shares of Zee Entertainment Enterprises Ltd (ZEEL) opened nearly 1.65 percent lower on May 25 but soon recovered to trade marginally higher. Many brokerages have slashed earnings growth targets after the firm posted a loss for the March quarter.
At 9.18 am, Zee Entertainment stock was trading at Rs 179 on BSE, up 0.18 percent from its previous close while India's benchmark Sensex rose 0.18 percent to 61,985 points. Earlier in opening trade, Zee stock fell 1.65% to hit a low of Rs 175.80 a share.
Brokerage firm Kotak Institutional Equities has cut its FY24-25E EPS by 9-15 percent while JM Financial has cut its EPS for FY24-25 E by 4-5%. Brokerage firm Motilal Oswal has cut its FY24 earnings estimate by 16% due to a slower recovery in the ad market and continued investment but largely maintains its FY25 estimate. Brokerage firm Nuvama has cut its EPS for FY24-25E by 19 percent each.
The firm reported a loss of Rs 196 crore for the quarter ended in March 2023 versus a net profit of Rs 182 crore in the year-ago period. Its total income fell 10 percent year-on-year to Rs 2,126 crore from Rs 2,360 crore in the same period last fiscal. Advertising revenue fell 11 percent to Rs 1,006 crore from Rs 1119.7 crore in Q4FY23.
Zee in a statement said its March-quarter domestic advertisement revenue slipped by a tenth, blaming a "slowdown in ad spending". Rohit Gupta, Chief Financial Officer of Zee Entertainment, described FY23 as a challenging year for the media and entertainment industry as a whole. Weak ad spending, delayed implementation of the New Tariff Order (NTO), and underwhelming movie content affected Zee's performance throughout the year.
"(We cut EPS target) as we factor in the ongoing delay in the merger and weak outlook—(1) Zee moderated its FY2024E domestic subscription revenue growth guidance to LSD from HSD and (2) it called out continued weakness in the ad environment in 1Q, even as FMCG companies are indicating an increase in A&P spends", said Kotak Institutional Equities in its latest report. The brokerage report has cut its target price to Rs 225 from Rs 255 a share.
Zee's operating revenue or EBITDA (earnings before interest, taxes, depreciation, and amortization) plunged 70 percent YoY to Rs 151.7 crore due to a decline in revenue and elevated strategic investments across the business. It had recorded Rs 505.3 crore EBIDTA in the corresponding quarter last fiscal.
Further, operating margins contracted to 7.2 percent from 21.8 percent after being impacted by an increase in costs across zee5, movies, and sports.
Zee is actively exploring various legal options to overcome any additional obstacles in the merger process with Sony. Following the recent dismissal of IDBI's insolvency plea against Zee by NCLT, the management has emphasized that all issues related to the company, no matter how remotely connected, have been addressed. The remaining matters are unrelated to Zee. Furthermore, Zee has lodged an appeal against NCLT's order to the exchanges, urging them to reassess the non-compete clause of the merger before the upcoming hearing scheduled for June 16. The management is optimistic and expects to share positive updates regarding the merger during the next earnings call.
"ZEEL’s sustained investment in content, while a drag on near-term profitability, should stand them in good stead once the demand turns, as has been the case in previous cycles. Healthy OTT growth and improvement in viewership share are encouraging signs. We sense that the impending merger with Sony is shaping ZEEL’s strategy to stay on the investment course to get into a post-merger position of strength. While a few minor hurdles still remain, we believe the merger is now closed", said JM Financial in its note to investors.
ZEE5 reported revenues of Rs 740 crore, up 35% on a yearly basis, and EBITDA loss of Rs 1100 crore, up 67% in FY23. It is worth noting that the ZEE5 loss has far exceeded Hotstar’s peak EBITDA loss of Rs 600 crore.
Despite increased investments in OTT, ZEE5's daily active users (DAUs) have shown slow growth in the past four quarters. Management has identified inflation in operating costs related to OTT, primarily due to investments in technology, which are expected to stabilize, and investments in content, which are anticipated to remain high. Consequently, analysts predict that ZEE5's losses will continue to be substantial, exceeding Rs1000 crore, for the foreseeable future.
"We expect ZEEL to reap the benefits once ad-spends revive, and we are positive on the proposed merger. Despite strong growth, Zee5 losses continue to widen. Weak ad revenues and movie performance are areas of concern", Nuvama said in its note. The brokerage firm has reduced its target price to Rs 265 from Rs 325 earlier. It maintained a buy rating on the stock.
According to B&K Securities, the ongoing macro challenges show no signs of diminishing in the near future. The slow rebound in advertising expenditures by FMCG companies has resulted in muted revenues. Additionally, the combination of high investments in content and ongoing pressure on margins has added further strain. Despite these challenges, investments in Zee5 will continue. The theatrical performance of movies has been lackluster, and a recovery in footfall is not expected anytime soon. Moreover, sports-related activities will contribute to a decline in margins. The recovery in subscription revenues is anticipated to occur only in the second half of the year.
However, FMCG companies are indicating a planned increase in advertising and promotion (A&P) spending in the upcoming quarters, which brings optimism for the revival of ad expenditures. The resurgence of FMCG ad spending, along with positive updates regarding the merger with Sony, will serve as near-term catalysts for the industry, the B&K report added. Given the elongated slowdown, the brokerage house has cut its estimates and continues to remain tactical buyers with a revised target price of Rs 236 a share from Rs 274 earlier.
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