Zee Entertainment's Q1FY19 results (Outperformer) - Strong operationally; promises to improve BS…

Q1FY19 results highlights

• Cons. rev. stood at Rs17.7bn (+15% yoy; in line), cons. EBITDA at Rs5.66bn grew by 16.8% yoy (1.5% beat) and adjusted (for MTM profit on preference shares) PAT at Rs3.47bn grew by 15% yoy (7% miss on lower than exp. other income, higher D&A and marginally higher tax rate than exp.).
• Domestic ad rev. grew by strong 22.3% yoy (better than exp. of 20.5%) as recovery was broad based across sectors. Cons. ad rev. grew by 18.6% yoy (in line). LTL domestic subscription rev. grew by 12.3% yoy (IDFCe: +13% yoy) but international subs. rev. fell by 7% yoy vs exp. of fall of 3% as it went FTA in UK vs being pay earlier. Other sales & services grew 13.4% yoy on three movie releases this qtr.
• Despite increasing investment across its TV and digital segments, cons. margin improved by 50bp yoy to 31.9% (IDFCe: 31.5%), and was a positive surprise.
• Ex-sports business performance: Rev. grew by 16.6% yoy but expenses also increased in similar range of 16.5% yoy (led by higher content hours and Zee5); margin was flat yoy at 31.9%.
• Management highlighted that ad industry growth could be higher than earlier anticipated in FY19E and Z would outperform that. Z is in the process of overhauling its treasury management and from here on would invest in low risk/low yield mutual funds.

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

Key negatives: Lower other income, higher D&A & tax rate.

Impact on financials: Cut FY19E/20E EPS by 2.3% each due to lower OI.

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 as it launches Malayalam/ other regional movie channels. Finally Digital is getting its due in terms of investments by Z as it tries to participate in that opportunity while hedging its traditional TV business. We expect 18.3% CAGR in EBITDA over FY18-20E led by 17.4%/13.5% CAGR in ad/subs revenue. Given Z’s cost-efficient business model, we expect a 15% CAGR in expenses even as it invests more in TV, film and digital. Maintain OP with a revised PT of Rs639 (33x FY20E EPS).