Zee Entertainment's Q3FY18 results (Outperformer) - Strong operating performance; to continue…

Q3FY18 results highlights

• Better than exp. LTL ad rev. growth (at 25.7% yoy vs. exp. of 17% yoy) led to 4% beat in cons. rev. and a 3% beat in EBITDA; management reiterated that outlook on ad growth is encouraging.
• Cons. rev. at Rs18.4bn grew by 12.1% yoy, adj. for sale of sports biz. cons. rev. grew by 22.7% yoy. Cons. EBITDA grew by 15.2% yoy to Rs5.94bn, adj. for sale of sports biz. cons. EBITDA grew by 17% yoy. Adj. PAT for MTM loss on pref. shares came at Rs3.6bn (+10% yoy). Despite 3% EBITDA beat, adj. PAT missed by ~14% due to higher D&A (some catch-up related to previous qtrs.), lower other income (bulk of cash sits abroad) and higher tax rate (at 38.3% vs exp. of 32%).
• LTL India ad rev. grew by 25.7% and overall India ad rev. grew by 30.4% yoy helped by RBNL and IWPL acquisition. LTL domestic subscription rev. grew by just 7.5% on delay in deal signings; management reiterated full year growth guidance of low-teens. Other sales & services grew 49% yoy as three movies were released.
• Cons. margin at 32.3% (IDFCe: 32.8%) improved by 80bp yoy due to strong ad growth limited by one-off of Rs~400m (towards 25 years celebrations and brand re-launch). Adjusted for this, margin would be 34.5% with LTL strong EBITDA growth of 25% yoy.

Key positives: Strong LTL India ad growth.

Key negatives: Higher D&A and tax rate, lower other income.

Impact on financials: Lower FY18E/19E EPS by 11%/6% as we increase D&A, increase tax rate and lower OI. Introduce FY20E financials.

Valuation & View

Z continues to outperform industry ad growth as network market-share is on an uptrend and management’s outlook on ad growth front is encouraging. LTL ad growth was very strong in a gradually recovering macro environment. We expect 26% CAGR in earnings for Z over FY18-20E led by 17.5% CAGR in ad rev. (with some help from digital) and 18% CAGR in domestic subs. rev., over the same period. Given Z’s cost-efficient business model, we expect a 15% CAGR in ex-sports expenses even as it invests more in TV, film and digital. Maintain OP with a revised PT of Rs654 as we roll-forward to FY20E (32.5x). Key risk to our call is any significant loss in viewership market-share. Z’s digital re-launch would be a key event to watch out for.