Zee Entertainment Enterprises (Z IN) Q4FY22 Result Update - Margin headwinds ahead - BUY

Rating: BUY | CMP: Rs230 | TP: Rs358

Quick Pointers:

§     Network share declines by 20bps QoQ to 17.1% while 20+ new shows were launched in 4QFY22.

While ZEEL’s top-line was ahead of our estimates on the back of higher theatrical revenue from success of movies like The Kashmir Files & Valimai, EBITDA margin of 20.9% was broadly in-line with our estimate of 21.2%. We cut our EPS estimates by 11%/13% for FY23E/FY24E as 1) domestic ad-environment is weak due to rising inflationary pressure faced by FMCG companies 2) persistent growth challenges in the subscription business due to pricing embargo and 3) near term margin headwinds given continued investments in ZEE5. While there are near term challenges, ZEEL is taking steps to improve viewership share (90+ new shows launched in FY22) in linear business and is seeing improved traction in ZEE5 (revenue up 50.1% YoY) which should yield results over long term. We expect revenue/PAT CAGR of 9%/21% over FY22-24E and retain BUY with a revised TP of Rs358 (22x FY24 EPS after incorporating SPNI consolidation impact).            

Top-line growth backed by higher other sales & services: Revenues increased 18.2% YoY to Rs23,229mn (PLe Rs20,350mn). Ad revenues remained flat at Rs11,198mn while subscription revenues increased 6.4% YoY to Rs8,549mn. Other sales & services revenue increased 781.3% YoY to Rs3,482mn due to theatrical success of The Kashmir Files and Valimai.

EBITDA/PAT margin at 20.9%/11.3%: EBITDA declined 10.0% YoY to Rs4,866mn (PLe Rs4,317mn) with a margin 20.9% (PLe 21.2%). Adjusted PAT declined 6.8% YoY to Rs2,619mn (PLe Rs2,774mn) with a margin of 11.3% (PLe 13.6%).

ZEE5 revenues up 10.6% QoQ: ZEE5 revenues were up 10.6% QoQ to Rs1,614mn with global MAUs/DAUs of 104.8mn/10.5mn respectively. 64 new shows/movies were launched in 4QFY22 which included 13 originals and the EBITDA loss stood at Rs1,952mn.

Con-call highlights: 1) Merger timeline with SPNI is intact at 8-9 months 2) Zee Studios released 22 movies in FY22 3) ~20-25 movies are in pipeline for FY23E; ~6-8 will be large budget films. 4) Exceptional item of Rs1,002mn includes Rs733mn of one-time bonus, Rs73mn of legal expenses pertaining to merger scheme and Rs196mn of DSRA liabilities. 5) Outstanding from Dish is Rs2.4bn. Receivable of Rs189mn from Siti in 4QFY22 was delayed due to pending legal proceedings. 6) Hindi GEC channels have been pulled out from Free Dish. 7) Cash balance as of FY22 is Rs13.1bn which includes Rs8.2bn/Rs4.5bn/Rs0.4bn in bank/FD/NCD. 8) 1QFY23 margins to be impacted by inflationary pressure, FTA withdrawal and accelerated investments. Margins expected to improve in 2HFY23. 9) Other expenses declined due to reversal on provision for doubtful debts taken in earlier quarters. 11) ZEE5 subscriber growth is largely driven from B2C customers.