Zee Entertainment (ZEEENT)

CMP: | 300 Target: | 345 (15%) Target Period: 12 months BUY

January 22, 2020

Steep ad decline hits operating performance…

Zee Entertainment (Zee) reported a weak set of numbers as ad revenue
decline percolated to the EBITDA and bottomline. Overall revenues came in
at | 2049 crore, down 5.5% YoY, impacted by advertisement revenues,

Result Update
which declined 15.8% YoY. Domestic ad declined steeply by 15.7% YoY
Particulars
owing to conversion of FTA channels into paid, high base and overall
Particulars Amount
weakness in ad environment due to macroeconomic challenges. Overall
Market Capitalization (| crore) 28,775.6
subscription revenues grew 15.4% YoY, led by 21.7% YoY growth in
Total Debt (FY19) (| crore) 2.0
domestic subscription to | 632 crore, driven by tailwinds of NTO. EBITDA Cash & Inv. (FY19) (| crore) 2,079.4
came in lower at | 565.8 crore, down 25% YoY, impacted by lower revenues EV (| crore) 26,698.2
as well as one-time charge of | 37.6 crore (included in other expenses) on 52 week H/L (| ) 490/ 203
account of credit loss on overdue related party debtors. Adjusted for one- Equity capital (| crore) 96.1
off, EBITDA margin at 29.5% was largely in line. Reported PAT came in at Face value (|) 1.0
| 349.4 crore, down 37.9% YoY.

Ad declines; growth rebound expected in FY21 Key Highlights

Q3FY20 witnessed the first quarter of ad revenue decline since Q4FY17 (post  The company expects ad growth
demonetisation) as weak macroeconomic environment weighed on key revival from FY21 wherein the
segment of FMCG wherein fewer product launches were seen. Furthermore, industry (ex-sports) is expected to
conversion of FTA channels to pay channel as well as healthy base was also witness low double digit growth with
the contributor to ad de-growth. Going ahead, the company expects ad Zee striving to beat the same

ICICI Securities – Retail Equity Research

growth revival from FY21 wherein the industry (ex-sports) is expected to
 Zee is taking up changes in NTO 2
witness low double digit growth with Zee striving to beat the same. We bake
legally but is confident of expanding
in ~12.5% and ~10% ad growth in FY21 and FY22, respectively. On the
domestic subscription revenues,
subscription front, given the impact of NTO 2, we conservatively build in
even if it is implemented, given the
overall subscription revenue CAGR of 5.4% (~6.5% CAGR for domestic
portfolio of channel offering
subscription) in FY20-22E to | 3169 crore.
 We upgrade our rating from HOLD to
Related party dues mounts; recovery expected in 12-24 months BUY, with a revised target price of
| 345/share, valuing it at 18x FY21 P/E
Receivables declined by | 86 crore QoQ to | 2332 crore, of which, ~| 750
(vs. | 352/share earlier)
crore (~| 350 crore, overdue) pertains to Dish TV & Siti Networks. We note
that the company has come to an agreement with them on a recovery plan
and expect the overall amount to be recovered in 12-24 months. Inventory
was up by ~| 200 crore sequentially to ~| 4800 crore while advances for
future output were down by | 50 crore to | 590 crore. We note that increase Research Analyst
in inventory, over the last couple of quarters, can be attributed to digital
content for Zee5 as well film rights for regional films channels launch. Bhupendra Tiwary, CFA
bhupendra.tiwary@icicisecurities.com

Valuation & Outlook Amogh Deshpande

amogh.deshpander@icicisecurities.com
We note that near term concerns include relatively softer ad outlook as well
as impact of NTO 2. However, the overhang of pledge led uncertainty is now
over and the company’s intent on improving corporate governance through
board reconstitution (by FY21 end) will drive investor confidence. The stock
has corrected ~15% since our last update. With a possible recovery in FY21
on low base, we upgrade our rating from HOLD to BUY, with a revised target
price of | 345/share, valuing it at 18x FY21 P/E.
Key Financial Summary
s

(Year-end March) FY18 FY19 FY20E FY21E FY22E CAGR FY20-FY22E

Net Sales (| crore) 6,685.7 7,933.9 8,272.7 8,929.6 9,768.8 8.7
EBITDA (| crore) 2,076.1 2,567.6 2,502.7 2,678.9 2,979.5 9.1
Adj. Net Profit (| crore) 1,393.3 1,573.4 1,760.6 1,841.6 2,145.3 10.4
Adj.EPS (|) 14.5 16.4 18.3 19.2 22.3
Adj. P/E (x) 20.7 18.3 16.3 15.6 13.4
Price / Book (x) 3.2 2.9 2.5 2.2 2.0
EV/EBITDA (x) 12.4 10.4 10.8 9.5 8.2
RoE (%) 15.3 15.7 15.5 14.4 14.7
RoCE (%) 25.6 25.7 22.6 20.6 20.3
Source: Company, ICICI Direct Research
 Result Update | Zee Entertainment ICICI Direct Research

Exhibit 1: Variance Analysis

Q3FY20 Q3FY20E Q3FY19 Q2FY20 YoY (%) QoQ (%) Comments
Revenues impacted by advertisement revenues, which declined
Revenue 2,048.7 2,093.1 2,166.8 2,122.0 -5.5 -3.5 15.8% YoY while overall subscription revenues grew 15.4% YoY,
led by 21.7% YoY growth in domestic subscription
Other Income 30.9 60.0 123.6 59.4 -75.0 -48.0
Raw Material Expenses 0.0 0.0 0.0 0.0 NA NA
Employee Expenses 207.5 209.3 183.4 212.3 13.2 -2.2
Admin & Other Expenses 237.0 224.0 230.2 195.3 2.9 21.3
Marketing Expenses 190.8 167.4 201.1 125.3 -5.1 52.3

Operational Cost 847.6 868.6 797.8 896.3 6.2 -5.4

Other Expenses 0.0 0.0 0.0 0.0 NA NA

EBITDA impacted by lower revenues as well as one-time charge
of | 37.6 crore (included in other expenses) on account of time
EBITDA 565.8 623.7 754.3 692.9 -25.0 -18.4
value hit due to overdue debtors (largely related parties). Adjusted
for one-off, EBITDA margin at 29.5% was largely in line

EBITDA Margin (%) 27.6 29.8 34.8 32.7 -720 bps -504 bps
Depreciation 65.6 61.0 61.5 58.3 6.7 12.4
Interest 20.0 18.0 5.5 18.0 263.0

Total Tax 162.2 152.4 248.4 92.1 -34.7 76.2

PAT was below our expectation largely due to weak operating
PAT 349.4 453.2 562.4 413.2 -37.9 -15.4 performance and lower other income (including MTM losses on
investments)

Key Metrics
Ad Revenue Growth -15.8% -13.0% 21.7% 1.2%
Domestic Subscription % 21.7% 22.0% 28.6% 26.8%
International Subscription % -17.4% 0.0% 1.2% -21.5%
Source: Company, ICICI Direct Research

Exhibit 2: Change in estimates

FY20E FY21E FY22E Comments
(| Crore) Old New % Change Old New % Change Introduced
Lower ad growth estimates to account for macroeconomic
Revenue 8,617.3 8,272.7 -4.0 9,341.8 8,929.6 -4.4 9,768.8 challenges. Further tone down subscription growth given NTO
uncertainty
EBITDA 2,763.9 2,502.7 -9.5 2,989.4 2,678.9 -10.4 2,979.5
Lower our margins estimate given lower revenue growth
EBITDA Margin (%) 32.1 30.3 -185 bps 32.0 30.0 -200 bps 30.5
trajectory ahead
PAT 1,875.1 1,635.3 -12.8 2,113.8 1,841.6 -12.9 2,145.3
EPS (|) 19.5 17.0 -12.8 22.0 19.2 -13.0 22.3 Earnings downgrade on account of lower operating profit
Source: Company, ICICI Direct Research

Exhibit 3: Assumptions
Current Earlier
FY18 FY19 FY20E FY21E FY22E FY20E FY21E
Ad Revenue Growth 14.5% 19.8% -2.3% 12.5% 10.2% 5.0% 10.0%
Domestic Subscription % -10.1% 17.3% 31.3% 4.7% 8.1% 30.4% 10.0%
International Subscription % -11.5% -0.6% -15.9% -11.0% 8.0% -19.2% -4.8%
Source: Company, ICICI Direct Research

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 Result Update | Zee Entertainment ICICI Direct Research

Conference Call Highlights

 Revised plan for related party dues repayment; credit loss of | 37.6
crore booked: The management indicated that a 12 and 24 months
plan has been devised for repayment form Siti Networks & Dish TV,
respectively, after a third-party assessment. They are confident of
repayment of total receivable amount | 750 crore (overdue amount
| 350 crore included) but recorded credit loss of | 37.6 crore as time
value of money lost (included in other expenses during the quarter)
 Ad revenue hit by multiple reasons; expected to grow in FY21: The
management indicated that ad revenue decline in the current fiscal
was owing to conversion of two channels from FTA to paid (impact
of ~450 bps on overall growth), high base and lower spend by
consumer products companies amid macroeconomic challenges.
The management guided that in FY21 ad scenario will improve and
overall ad growth expected in high single digits while ex-sports
growth will be in low double digits
 NTO 2 to be challenged legally: The management indicated that
subscription post NTO witnessed growth, primarily driven by gaining
market share in southern markets (Tamil, Kannada & Malayalam) as
well as better realisations. While cable operators in Tamil Nadu had
switched off the Zee channels over payment disagreements, ~60%
of customers chose a-la-carte channels post this incident, resulting in
strong subscription traction. The company is taking up the changes
in NTO 2 legally and expects low double digit growth for domestic
subscription in case implementation of NTO 2 is not done. The
management also added that the company will maintain some
growth trajectory even if NTO 2 is implemented given the portfolio of
channels. On the international business front, the company incurred
losses in the Middle East and UK markets. Going ahead, linear TV
business will be shut down in the UK market in FY21 with the
company operating through ZEE5. This will result in a drop in
international subscription revenue in FY21 but with a recovery
thereafter
 Investment in content to reflect in cash flow from FY21: Zee launched
three channels viz. Zee Punjabi, Zee Thirai, Zee Biskope in January
2020. Two more regional channels are slated to be launched in the
coming quarters. The management said that cash flow generation will
be witnessed after full-fledged launch of the channels. Programming
cost growth is expected to go down and may increase 10-12% in
coming years. Furthermore, no significant investment will be made
in the domestic broadcast business, which implies stronger cash
flows in FY21. Cash & treasury investments were at | 1768 crore (vs.
| 1480 crore in Q2FY20), with operating & free cash flow at ~| 250
crore, given no major capex during the quarter
 Zee5 investments at peak levels: The management said that the ZEE5
recorded a peak daily active user (DAU) base of 11.4 million in
December. During the quarter, Zee5 launched 26 original shows and
movies, of which 14 were in six different regional languages. With a
strong content line-up across genres and languages, ZEE5 is on track
to release 70+ originals in FY20. The investment in Zee5 has reached
the peak levels. Thus, no sharp increase in inventory is expected to
be seen for the same. A refreshed ZEE5 Progressive Web App (PWA)
was released in December to enable a seamless user experience on
mobile web. The company indicated that it would share industry
accepted absolute MAU metric of Zee5 from next quarter onwards
 The company has appointed an HR consultant to decide on Punit
Goenka’s compensation structure. The board is likely to be
reconstituted by FY20 end and independent directors from
media/tech industry will be added to the overall board strength of
eight to nine with Punit Goenka being the sole representative of the
Zee Group

ICICI Securities | Retail Research 3

 Result Update | Zee Entertainment ICICI Direct Research

Story in Charts

Exhibit 4: Ad revenue growth trend

7,000.0 25
19.8 6,099.8
6,000.0 5,537.3
20
14.5 5,036.7 4,921.8
5,000.0 4,204.8 15
3,673.5
| crore

4,000.0
10.2 10

(%)
12.5
3,000.0
7.1 5
2,000.0

1,000.0 -
(2.3)
- (5)
FY17 FY18 FY19E FY20E FY21E FY22E
Ad revenue Growth
Source: Company, ICICI Direct Research

Exhibit 5: Subscription revenue growth trend

3,500 3,169 30
2,850 2,932 25
3,000 23.4
13.9 20
2,500 2,263 2,311
2,029 15
2,000
| crore

10
8.1
(%)

1,500 10.0 5
2.9 -
1,000
(10.3) (5)
500 (10)
- (15)
FY17 FY18 FY19E FY20E FY21E FY22E
Subscription revenue Growth
Source: Company, ICICI Direct Research

Exhibit 6: EBITDA and PAT margin trend

35.0 31.1 32.4

29.9 30.3 30.0 30.5
30.0
25.0 20.8 21.3 20.6 22.0
20.0 19.8
20.0
%

15.0
10.0
5.0
-
FY17 FY18 FY19E FY20E FY21E FY21E

EBITDA margin PAT margin

Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 4

 Result Update | Zee Entertainment ICICI Direct Research

Exhibit 7: Recommendation History vs. Consensus

Source: Bloomberg, Company, ICICI Direct Research

Exhibit 8: Top 10 shareholders

es

%
Rank Name Latest Filing Date Position (m) Position Change (m)
O/S
1 INVESCO LTD 17-Jan-20 7.8 74.7 0.0
2 VANGUARD GROUP 31-Dec-19 7.2 69.6 9.4
3 LIFE INSURANCE CORP 30-Jun-19 4.9 46.9 0.0
4 ESSEL MEDIA VENTURES 21-Nov-19 3.5 33.2 -69.7
5 SCHRODERS PLC 30-Nov-19 3.0 29.2 0.0
6 BLACKROCK 16-Jan-20 2.7 28.6 8.4
CAPITAL GROUP
7 31-Dec-19 2.4 26.1 0.8
COMPAN
8 VONTOBEL Holding 30-Nov-19 2.2 20.9 0.0
9 VIRTUS INVESTMENT PA 30-Sep-19 2.2 21.7 21.7
10 ICICI PRUDENTIAL ASS 31-Dec-19 1.4 13.0 0.8
Source: Reuters, ICICI Direct Research

Exhibit 9: Shareholding Pattern

(in %) Dec-18 Mar-19 Jun-19 Sep-19 Dec-19
Promoter 41.62 38.20 35.79 22.37 4.87
FII 41.52 44.96 47.07 48.69 67.38
DII 10.91 11.20 11.24 11.93 9.98
Others 5.95 5.64 5.90 17.01 17.77
Source: Company, ICICI Direct Research

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 Result Update | Zee Entertainment ICICI Direct Research

Financial summary

Exhibit 10: Profit and loss statement | crore Exhibit 11: Cash flow statement | crore
(Year-end March) FY19 FY20E FY21E FY22E (Year-end March) FY19 FY20E FY21E FY22E
Total operating Income 7, 933. 9 8, 272. 7 8, 929. 6 9, 768. 8 Profit after Tax 1, 545. 8 1, 635. 3 1, 841. 6 2, 145. 3
Growth (%) 18.7 4.3 7.9 9.4 Add: Depreciation 234.7 256.5 276.8 302.8
Operational Cost 3,072.2 3,397.1 3,750.4 4,005.2 Add: Interest paid 130.4 168.5 150.0 80.0
Employee Expenses 724.9 829.5 910.8 976.9 (Inc)/dec in Current Assets -2,622.3 -1,460.5 203.1 -898.9
Admin & Other Expenses 870.0 835.2 839.4 976.9 Inc/(dec) in CL and Provisions 926.5 -87.0 98.4 148.3
Marketing Expenses 699.3 708.3 750.1 830.3 Others 0.0 0.0 0.0 0.0
Total Operating Expenditure 5,366.3 5,770.0 6,250.7 6,789.3 CF from op. activities 215. 2 512. 7 2, 569. 8 1, 777. 5
EBITDA 2, 567. 6 2, 502. 7 2, 678. 9 2, 979. 5 (Inc)/dec in Investments 554.7 -50.0 -850.0 -850.0
Growth (%) 23.7 -2.5 7.0 11.2 (Inc)/dec in Fixed Assets -301.1 -300.0 -300.0 -300.0
Depreciation 234.7 256.5 276.8 302.8 Others -132.5 -2.7 1.5 1.5
Interest 130.4 168.5 150.0 80.0 CF from inv. activities 121. 1 -352. 7 -1, 148. 5 -1, 148. 5
Other Income 251.5 312.0 240.0 300.0 Issue/(Buy back) of Equity 0.0 0.0 0.0 0.0
Exceptional Items 43.1 170.6 - - Issue of Preference Shares -413.2 0.0 0.0 0.0
PBT 2,410.8 2,219.1 2,492.1 2,896.7 Inc/(Dec) in loan funds 1.1 - - -
Minority Interest 0.2 (2.7) 6.0 4.0 Interest paid 130.4 168.5 150.0 80.0
PAT from Associates 2.4 1.9 2.0 4.0 Others -444.5 -677.0 -640.0 -500.0
Total Tax 867.3 588.4 646.4 751.4 CF from fin. activities -726. 1 -508. 5 -490. 0 -420. 0
PAT 1, 545. 8 1, 635. 3 1, 841. 6 2, 145. 3 Net Cash flow -389.9 -348.5 931.3 209.0
Growth (%) 4.5 5.8 12.6 16.5 Opening Cash 1,611.7 1,221.8 873.3 1,804.6
Adjusted PAT 1, 573. 4 1, 760. 6 1, 841. 6 2, 145. 3 Closing Cash 1, 221. 8 873. 3 1, 804. 6 2, 013. 6
Growth (%) 12.9 11.9 4.6 16.5 Source: Company, ICICI Direct Research

es esxes
Reported EPS (|) 16. 1 17. 0 19. 2 22. 3 es

Source: Company, ICICI Direct Research

Exhibit 12: Balance sheet | crore Exhibit 13: Key ratios | crore
(Year-end March) FY19 FY20E FY21E FY22E (Year-end March) FY19 FY20E FY21E FY22E
Liabilities Per share data (|)
Equity Capital 96.1 96.1 96.1 96.1 EPS 16.1 17.0 19.2 22.3
Preference Share Capital 1,111.3 1,111.3 1,111.3 1,111.3 Adjusted EPS 16.4 18.3 19.2 22.3
Reserve and Surplus 8,827.9 10,123.1 11,624.7 13,430.0 BV 104.5 118.0 133.6 152.4
Total Shareholders funds 10,035.2 11,330.5 12,832.1 14,637.4 DPS 3.0 3.5 3.5 3.5
Total Debt 2.0 2.0 2.0 2.0 Cash Per Share 9.5 12.1 15.0 18.2
Others 14.3 11.6 13.1 14.6 Operating Ratios (%)
Total Liabilities 10, 051. 6 11, 344. 2 12, 847. 3 14, 654. 0 EBITDA Margin 32.4 30.3 30.0 30.5
Assets EBIT Margin 29.4 27.2 26.9 27.4
Gross Block 1,867.7 2,167.7 2,467.7 2,767.7 PAT Margin 19.8 21.3 20.6 22.0
Less: Acc Depreciation 908.6 1,165.0 1,441.9 1,744.7 Inventory days 177.1 205.0 180.0 180.0
Net Block 959.2 1,002.7 1,025.9 1,023.0 Debtor days 84.1 105.0 90.0 90.0
Capital WIP 108.3 108.3 108.3 108.3 Creditor days 68.5 65.0 65.0 65.0
Total Fixed Assets 1,067.4 1,111.0 1,134.1 1,131.3 Return Ratios (%)
Investments 1,479.7 1,529.7 2,379.7 3,229.7 RoE 15.7 15.5 14.4 14.7
Inventory 3,850.5 4,646.3 4,403.6 4,817.5 RoCE 25.7 22.6 20.6 20.3
Debtors 1,827.4 2,379.8 2,201.8 2,408.7 RoIC 30.2 24.2 26.6 27.2
Loans and Advances 1,623.4 1,692.7 1,827.1 1,998.8 Valuation Ratios (x)
Other Current Assets 1,005.5 1,048.4 1,131.7 1,238.0 P/E 18.6 17.6 15.6 13.4
Cash 1,221.8 873.3 1,804.6 2,013.6 EV / EBITDA 10.4 10.8 9.5 8.2
Total Current Assets 9,528.6 10,640.6 11,368.8 12,476.7 EV / Net Sales 3.4 3.3 2.8 2.5
Creditors 1,489.7 1,473.2 1,590.2 1,739.7 Market Cap / Sales 3.6 3.5 3.2 2.9
Provisions 145.1 143.5 154.9 169.4 Price to Book Value 2.9 2.5 2.2 2.0
Other current liabilities 1,120.4 1,051.4 1,021.4 1,005.7 Solvency Ratios
Total Current Liabilities 2,755.2 2,668.1 2,766.5 2,914.8 Debt/EBITDA 0.0 0.0 0.0 0.0
Net Current Assets 6,773.4 7,972.4 8,602.3 9,561.9 Debt / Equity 0.0 0.0 0.0 0.0
Other non current assets 731.1 731.1 731.1 731.1 Current Ratio 5.1 6.0 5.5 5.5
Total Assets 10, 051. 6 11, 344. 2 12, 847. 3 14, 654. 0 Quick Ratio 2.7 3.2 3.0 3.0
Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 6

 Result Update | Zee Entertainment ICICI Direct Research

Exhibit 14: ICICI Direct Coverage Universe (Media)

CMP M Cap EPS (|) P/E (x) EV/EBITDA (x) RoCE (%) RoE (%)
Sector / Company TP (|) Rating
(|) (| cr) FY19 FY20E FY21E FY19 FY20E FY21E FY19 FY20E FY21E FY19 FY20E FY21E FY19 FY20E FY21E
ENIL (ENTNET) 252 270 Hold 1,203 11.3 8.6 12.2 22.3 29.4 20.7 7.5 6.0 4.5 6.2 9.0 7.1 3.5 5.8 4.4
Inox Leisure (INOX) 399 465 Buy 4,092 13.0 11.7 16.9 30.7 34.0 23.6 13.6 6.4 5.2 13.2 19.6 12.2 10.6 14.2 16.5
PVR (PVRLIM) 1,918 2,200 Buy 8,960 39.2 25.0 42.2 48.9 76.8 45.4 17.4 8.0 6.9 14.7 13.8 9.5 11.5 14.8 9.5
Sun TV (SUNTV) 486 500 Hold 19,152 36.4 35.6 41.3 13.4 13.7 11.8 6.3 7.2 5.9 35.5 38.5 29.5 24.2 25.9 22.5
TV Today (TVTNET) 249 380 Buy 1,483 22.0 24.5 31.6 11.3 10.1 7.9 6.0 5.4 4.3 30.4 26.2 29.1 19.3 16.9 18.6
ZEE Ent. (ZEEENT) 300 345 Buy 28,812 16.1 17.0 19.2 18.6 17.6 15.6 10.4 10.8 9.5 25.6 25.7 22.6 15.3 15.7 15.5
Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 7

 Result Update | Zee Entertainment ICICI Direct Research

RATING RATIONALE
ICICI Direct endeavors to provide objective opinions and recommendations. ICICI Direct assigns ratings to its
stocks according to their notional target price vs. current market price and then categorizes them as Buy, Hold,
Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined
as the analysts' valuation for a stock

Buy: >15%
Hold: -5% to 15%;
Reduce: -15% to -5%;
Sell: <-15%

Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com

ICICI Direct Research Desk,

ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai – 400 093
research@icicidirect.com

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 Result Update | Zee Entertainment ICICI Direct Research

ANALYST CERTIFICATION
I/We, Bhupendra Tiwary, MBA, CFA, Amogh Deshpande, PGDM, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views
about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above
mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in
the report.

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ICICI Securities | Retail Research 9