Buy Zee Entertainment; target of Rs 572: LKP Securities

LKP Securities' research report on Zee Entertainment

Zee posted strong performance in Q2 as the numbers were lifted by subscription revenues which grew at 22% yoy on the back of 24.6% yoy growth in the domestic arm on the back of catch up revenues of the previous quarter and early closures of content deals as compared to previous year. Advertising revenues witnessed some moderation at 16% as FMCG and e-commerce verticals lowered their ad spending a bit. The company in the Hindi GEC had a market share of 24% with & TV combined, whereas it remained strong in the Marathi space with 55% market share. The highlight of the quarter was the Tamil channel of Zee which climbed up to second spot while in the Telugu and Kannada markets Zee remained at 3rd and 2nd spots respectively. In Oriya market, Sarthak TV continued its dominance. Sports business continued to post losses at the operating level with losses reduced at Rs 168 mn in the quarter v/s ₹ 236mn qoq, thus resulting the company to reduce the full year loss guidance for this business. Other sales and services which included syndication of sports business, Zee Music company, Ditto TV etc grew by 16.4% yoy. On the margin front, EBITDA margins have been continuously inching higher quarter by quarter. In Q2, they came in at 28.9% higher 290 bps yoy as sports losses reduced and subscription revenues moved up. Programming costs as a % of sales moved up to 45.3% (up by 150 bps yoy and 350 bps qoq) on higher cost involved with movie production and India cricket series. Other expenses as a % of sales moved down to 16.8% (300 bps qoq and 480 bps yoy) on account of cost control and low carriage fees. Despite higher depreciation and lower other income, PAT adjusted for exceptional losses came in at Rs 3.27 bn which was 17.3% higher yoy. Reported PAT was down 18.3% yoy at Rs 2.44 bn.

Although FMCG and e-com spaces will offer a reduction in ad revenues to Zee, telecom and auto verticals will more than offset this fall. Patanjali, which is still going aggressive and ambitious unlike other FMCG companies will also provide the necessary fillip to the ad business revenues. Higher market share gains are on the cards as Zee Anmol, regional channels, newly launched channels and the movies basket are expected to continue their excellence. Even internationally, the revenues are growing at a hefty pace on new content. This will enable the ad revenues to grow at a rate of 18-20% in the coming years higher than the industry average. Subscription revenues will continue to get trigger from finalization of content deals, digitization albeit with a delay and the long term positives to be seen from the new tariff regulations. Hiving off of the sports business will offer a good riddance from a business which was dragging down the profitability. This will lift up the margins from FY18E. In line with this, we have raised our sales as well as margins estimates for FY17E and FY18E and have arrived at a target price of Rs 572, an upside of 11%. Maintain BUY.