Zee Entertainment Enterprises’ Q1FY22 ad revenue rose 120% YoY on low base; subscription revenue growth slowed significantly. EBITDA beats our modest expectation, but the company sees much lower EBITDA margin in FY22 than earlier guidance of <25% (pre-covid: 30%). It is also seeing a gradual recovery in ad revenue as advertisers remain cautious, with rising input inflation worsening the situation. ZEEL is investing in TV to improve viewership rating in Hindi, Marathi and Tamil GEC, which has been declining. It expects continued investment in ZEE5 and movie production; we await early signs of a turnaround in these businesses to build a more constructive view. FCF generation seen <50%, lower-than-earlier guidance. We cut our EPS estimates by 13%/9% for FY22E/FY23E on lower ad revenue, and target price to Rs200 (from Rs254) valuing ZEEL at 12x FY23 EPS (from 14x earlier). We downgrade our rating to HOLD from Buy. • EBITDA margin guidance cut. ZEEL has witnessed slower ad revenue recovery than anticipated in previous quarter, with gradual ad revenue recovery. It is also working on re-pricing channel MRP and realigning bundles to meet NTO 2.0 guidelines, which will hurt subscription revenue. Also, the company plans to invest in content to improve ratings in Hindi, Marathi and Tamil GEC; likely to release >30 new shows in Q2FY22. It also sees much lower FCF generation than guidance of 50% of PAT earlier.
• Ad revenue recovery gradual: ZEEL is now seeing gradual recovery in ad revenue than earlier expected as brands are cautious on launch of new products, and worried on the next covid wave, if any. It believes higher input cost, which is putting pressure on FMCG companies’ margin, had no material impact as ad fall is seen only in personal care (which is due to lockdown), but we believe key advertisers would remain cautious on ad spend with huge input inflation. It is also working on improving viewership share, which has been declining and causing additional pressure on ad revenue.
• NTO 2.0 implementation to cause disruption in subscription revenue: Underlying subscription revenue grew only 2% YoY, reported was higher at 9.2% YoY to Rs8.1bn due to inclusion of music business. The company is implementing NTO 2.0 by reducing MRP for channels and re-bundling packages. This is expected to cause disruption in subscription revenue for next two quarters, and likely hurt reach for few channels.
• ZEE5 benefited from lower pricing and Radhe movie release: ZEE5 MAU and DAU saw net add of 1mn (+16% QoQ) and 7.6mn (10.5% QoQ) to 7.1mn and 80.2mn, respectively; benefitted from cutting annual fee by over 50% to Rs499 and release of Radhe movie. Revenue grew slower at 3.9% QoQ due to dip in ad revenue, subscription grew strong; EBITDA losses rose to > Rs2bn from rise in investment. The company has plans for investment in original content, and movies for next two years, which will keep losses high for now, but may reduce significantly later.
• Other highlights from earnings call. 1) ZEEL has cut guidance to <25% in Q1FY22 from pre-covid level of 30% due to rise in content investment for both TV and digital. Now, it sees risk to revenue growth from gradual recovery in ad revenue and NTO 2.0 disruption for subscription revenue, which may result in even lower EBITDA margin; 2) ZEEL’s focus is to improve viewership rating in Hindi, Marathi and Tamil, which take priority in content investment; 3) subscription pricing changes would cause disruption and will hurt revenues for next two quarter, post which it expects growth again; 4) ZEE5 has been launched in the US, which should help grow international presence; 5) ZEE5 revenues were impacted by lower ad revenues and subscription revenues had only part impact in the quarter of user growth. Next quarter will see full impact on subscription revenue from new user; 6) 40% of new subscription users have applied for annual plans; and 7) Dish TV continues to make payment towards overdue and balance left is only Rs3.6bn which it is scheduled to pay by end-FY22.