- Advertisement growth typically returns with a lag to economic growth.
- Increased spend towards movie and OTT content to arrest declining market share.
“We have revised up ad revenues by 6%/6% for FY21/FY22E on better revenue visibility. But, we reduce revenue estimates from other sales divisions, maintaining our overall FY21/FY22E revenue. EBITDA remains unchanged, with increased content cost toward: a) movie/OTT, to arrest the decline in market share in key markets b) high inventory unwind, offset by lower other operating expenses. Thus, we factor in a 14%/22% EBITDA / adj. PAT CAGR. Maintain Neutral, with TP of INR 190,” read its press statement.
Ad revenues remain weak
Zee’s consolidated revenues declined 19% YoY to INR 17.2b (in-line). Advertisement revenues declined 26% YoY to INR9b on account of a drop in ad spends due to the impact of COVID-19.
On the other hand, subscriptions grew by 11% YoY to INR8b on the inclusion of music revenue in the Subscription segment. Hence, on a like-to-like basis, domestic subscriptions grew 2.3% YoY, primarily driven by growth in ZEE5 subscription revenues.
Zee’s total operating expenses were flat YoY at INR14b – as programming resumed in a staggered manner across regions – including a one-time provision toward subscription receivables of INR812m.
EBITDA thus declined 55% YoY to INR3.1b. (20% miss), with margins of 18.2% (32.7% in 2QFY20). Zee took one-time provisions of INR812m toward receivables from Siti Networks. Adjusted for a one-off, EBITDA increased 43% YoY to INR3.9b, with a 22.9% EBITDA margin.
Additionally, it incurred:
a) Exceptional items of INR970m toward provisions of receivables from Siti Networks – as ZEE has provided corporate guarantees
b) FV loss of INR207m – due to a change in the market price of redeemable preference shares. n Reported PAT declined 77% YoY to INR942m (est. PAT of INR2.5b), and adj. PAT (for exceptional items) declined 70% YoY to INR1.7b
Highlights from management commentary
Subscription growth in FY21 is expected to fall short v/s higher expectancy by the management earlier, while ad revenues should normalize by 3QFY21 and may grow from 4QFY21. n Margin trajectory may return to normal by FY22E and ZEE5 is expected to achieve breakeven by FY24E.
ZEE’s investment in SugarBox would depend on the upcoming contract from the Railways, to be received by SugarBox. n Inventory and advance deposits dropped to INR60b in Sep’20 from INR64b in Mar’20.
Valuation and view
Advertisement growth typically returns with a lag to economic growth. Furthermore, the risk of margin pressure remains from over INR1.9b quarter loss in OTT investments, along with increase programming cost towards: a) high inventory unwind and b) increased spend toward movie and OTT content to arrest declining market share.
However, since FY20, management has highlighted that it remains highly committed to bringing in a) increased governance and higher transparency toward investment in financial assets and working capital and b) high governance standard, including a robust and independent board.
“We remain watchful of the evolving business situation and governance measures, including the admission of new board members over the next few months and increasing financial disclosures for investors. We maintain our FY21/FY22E revenue and EBITDA estimates. Thus, we factor in a 14%/22% EBITDA / adj. PAT CAGR. The stock trades at 12.5x FY22E EPS of INR15; we value ZEE at 13x FY22E EPS, thus maintaining our Target Price at INR190. Maintain Neutral,” read the statement.