Zee Entertainment's Q4FY18 results (Outperformer) - Strong operationally, higher tax hits PAT…

Q4FY18 results highlights

• Cons. rev. stood at Rs17.3bn (+12.9% yoy; 1% beat), cons. EBITDA at Rs5.06bn grew by 8% yoy (9% beat) and adjusted (for MTM profit on preference shares) PAT at Rs1.3bn fell by 48% yoy (40% miss due to higher than expected tax rate at 69% of operational PBT as it had to pay tax on dividend received from international subsidiaries on sale of sports business. However, this has no impact on cash flows as this higher tax can be off-set against tax paid on dividends in India.
• LTL India ad rev. grew by 21.5% yoy (better than exp. of 18%) as recovery was broad based across sectors. Cons. ad rev. grew by 23.9% yoy (IDFCe: 22.5%). LTL domestic subscription rev. grew by 18.1% yoy (marginally lower than our exp. of 20%) on account of catch-up rev. Other sales & services grew 5% yoy.
• International subs rev. fell by 8% yoy (IDFCe: 3% fall).
• Cons. margin at 29.3% (IDFCe: 27.2%) fell by just 130bp despite higher investment in content hours and launch of ZEE5, their digital video OTT platform, and was a positive surprise.
• Ex-sports business performance: Rev. grew by 21.4% yoy but expenses increased sharply by 27.7% yoy (led by higher content hours and ZEE5 launch); margin fell 350bp yoy to 29.3% from 32.9% yoy.
• Inventory increased by 55% yoy on higher investment in film content as Zee prepares to launch more regional movie channels.

Key positives: Strong LTL India ad growth, strong margins.

Key negatives: Higher tax rate, high investment in inventory.

Impact on financials: Increase FY19E/20E EPS by 2.1%/1.5%.

Valuation & View

Zee would continue to outperform industry ad growth as its existing channels continue to do well and network market-share would continue to improve over the medium-term as it launches in Kerala and other regional movie channels. We expect 18.3% CAGR in EBITDA over FY18-20E led by 17.5% CAGR in both ad rev. (with some help from digital) and domestic subs. rev. Given Z’s cost-efficient business model, we expect a 15.5% CAGR in expenses even as it invests more in TV, film and digital. Maintain OP with a revised PT of Rs654 (33x FY20E EPS).