JM Financial recommended hold rating on Zee Entertainment with a target price of Rs 610 in its research report dated October 10, 2018.
JM Financial's research report on Zee Entertainment
Zee reported yet another strong set of results; 2QFY19 consolidated revenues (+25% yoy) were c.6% [INR 1.1bn] ahead of our forecast, led by c.10% [+540mn] beat on subscription (+21.3%), 2.4% [280mn] beat on ad (+22.7%) and c.19% [250mn] beat on Other revenues. 2Q EBITDA (+37.6%) was 13.5% [800mn] higher; EBITDA margin of 34.2% [235bps ahead] was the best-ever for Zee despite OTT losses. Normalised 2Q PAT was 6% higher; effective tax rate was 38.8% vs. our 35.0% forecast. Zee reported strong user and engagement metrics for Zee5; Sep-18 MAUs [monthly active users] of 41.3mn were up 190% from Apr-18, while average time spent per user was 31 minutes per day. Zee5 climbed to the #2 position among entertainment OTTs in Sep-18 [Google Play store rankings].Zee’s 1HFY19 revenue and EBITDA growth rates were 20% and 27.3% respectively, driven by 21%, 19% and 40% growth respectively, in ad, domestic subscription [DSR] and other revenues. While we remain bullish on ad growth sustaining at 20%+ in 2HFY19, we expect a significant slowdown in EBITDA growth, as: (1) 1H DSR growth was boosted by early closure of distribution deals + catch up revenues, and 2H growth should normalise to low-teens; (2) growth in other revenues would slow down, as 2H base quarter was boosted by big-ticket movie release [Secret Superstar]; and (3) EBITDA margin is unsustainable and may drop below 30% from c.31% in 2HFY18, driven by pick up in Zee5 losses [higher content costs, int’l roll out] and costs associated with the planned launch of Malayalam GEC in Dec-18.
We continue to like Zee’s strong diversified franchise and execution, and its differentiated OTT strategy; however, stock may be range-bound in the near-term, post recent 11% upmove and the likely 2H growth slowdown. Our estimates are TP are under review.
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