Event update: Zee Entertainment; Annual Report Analysis - Group liquidity issues and changing business dynamics weigh on BS…

Zee Entertainment (Z) continues to be India’s largest entertainment network in terms of viewership market share (+170bps yoy) and is also India’s largest digital original content producer (~60 titles across 6 languages). However, as digital medium gains prominence in terms of content consumption, Z has significantly ramped up investments, through WC, which has led to it reporting negative FCF of Rs1.4bn (vs +Rs2.4bn in FY18), for the first time. Promoter entities have also been extended ICDs worth Rs1.7bn and almost the entire ~Rs3bn increase in receivables is from Dish TV alone. In addition, Z’s investment in exotic mutual funds (Poseidon Opportunities Fund  & Actinium Investments Fund) rose to ~Rs6bn (vs ~Rs5.4bn yoy) and we highlight that despite management’s commitment in H2FY19, these investments have not been repatriated to India thus far. Contingent liabilities fell 21% yoy to Rs5.5bn. While high BS investments are near-term negative but it is imperative to secure future content pipeline which should help Z continue to deliver industry leading growth. As of now we are keeping the faith in promoter’s ability to de-pledge Z’s shareholding and maintain our OP rating on the stock with a target price of Rs480.

FCF turns negative on WC (content) investments: Z has reported negative free cash in FY19 of ~Rs1.5bn (OCF down ~75% yoy to ~Rs1.4bn). The decline was fuelled by higher working capital investments on account of (1) ~19% yoy rise in receivables (mainly on account of DITV), (2) ~47% yoy rise in inventory (higher content investments for film rights/original content for ZEE5), (3) outstanding advances of ~Rs2.5bn to content providers, and (4) interest-free deposits given to content houses of ~Rs6.9bn to secure future content rights.

Help extended to Related parties: Z issued ICDs worth ~Rs1.7bn to three related parties (Widescreen Holdings Pvt. Ltd., Konti Infrapower & Multiventures Pvt. Ltd. and Edisons Infrapower & Multiventures Pvt. Ltd.) in FY19. Receivables from Dish TV increased to Rs3.3bn from Rs268m yoy while that from Siti Networks increased to Rs1.6bn vs Rs639m yoy.

Razor-sharp focus on digital continues: Z continues to hedge itself for the future by heavily investing in digital. This is not just apparent from its original digital content investments but also on the repetition of this theme in the management commentary in the annual report. The word ‘digital’ was mentioned 164 times in FY19 (vs 140 in FY18), while ZEE5 was mentioned 115 times (vs 47 in FY18) – a clear reflection of management’s focused thought process. For FY20E, Z plans to add 70+ original shows/movies to its existing ZEE5 line-up of 60 original titles.