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Zee Entertainment Enterprises (ADD): Another tough quarter; all eyes on merger now, ICICI Securities

Zee Entertainment Enterprises’ (ZEE) had another tough quarter in Q4FY23. From recurring legal challenges delaying the merger, to adverse macro-conditions/ negative externalities significantly impacting revenue visibility. This has caused the stock to de-rate (~34%) in the last 6 months. While we understand that clarity on merger timelines would be a key trigger for re-rating, we believe the downside from here is very limited. Also, management mentioned that advertising revenues from FMCG spenders are likely to pick up post sports season and ZEE should benefit given network share gains (40bps in Q4FY23). Management also indicated that losses from the OTT business are likely to moderate hereafter. Keeping these factors in mind and correction in the share price, we upgrade the stock to ADD from HOLD with a revised price target of Rs205. We note NCLT’s next hearing is due on 16th June.

  • Q4FY23 performance. ZEEL’s overall ad revenue was down 10.2% YoY to Rs10.1bn. Domestic ad revenues were down 5.1%QoQ/10.2%YoY, due to 1) subdued spending from FMCG companies, 2) impact of exit from free dish and 3) some viewership loss due to NTO 3.0 standoff. Subscription revenue declined 1% YoY in Q4FY23. There was a steeper decline in linear TV due to pullout from a few cable operators in the month of February over NTO 3.0 stand-off. However, 36% YoY growth in ZEE5 helped offset some of the impact of the decline in linear revenue. EBITDA declined ~69% YoY to Rs1.5bn and EBITDA margin declined 1550bps YoY/880bps QoQ, impacted by 5.0% YoY/17% QoQ rise in programming cost to Rs13.2bn. Zee reported a consolidated loss of Rs1.96bn. There were a few one-time exceptional items such as 620mn towards employee settlements and Rs270mn towards IPRS settlement in addition to impairments due to discontinued operations.
  • Digital business, music business and content update: ZEE5 grew revenues 36% YoY to Rs2.2bn. MAUs and DAUs were slightly lower sequentially but this was more than compensated by   c36%QoQ increase in average watch time per user. This was led by an improved tech platform and strong content library expansion. 42 shows and movies (including 12 originals) were released during Q4FY23. Consequently, EBITDA losses also rose to all time high of Rs3.1bn.
  • Valuation. We reduce target price to Rs205 (from Rs225) valuing the stock at a lower target P/E multiple of 18x FY24E (20x earlier). We have reduced our target multiple given the likelihood of further de-rating amidst the uncertainty over the merger and muted operating performance. We upgrade to ADD given a favorable risk reward skew. Key risks: Further slowing of ad / subscription revenue recovery and higher inflation in expenses particularly programming cost.

Read the full report here –

BCS Bureau

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