Zee Entertainment's Q1FY20 results (Outperformer) - One binding offer in hand, deal announcement awaited…

Q1FY20 results highlights

• Cons. rev. stood at Rs20.1bn (+13.3% yoy; 2% beat), cons. EBITDA at Rs6.6bn grew by 16.6% yoy (5% beat) and adj. (for MTM profit on pref. shares and one-offs) PAT at Rs4.6bn grew by 33.5% yoy (13% beat). Adjusted for Ind-AS 116 impact (of Rs140m) and subs. rev. (of Rs150m) attributable to Q4FY19 booked in this quarter, EBITDA would have been Rs6.3bn (in line), a growth of 11.5% yoy.
• Domestic ad rev. grew by 4.2% yoy (IDFCe: 5%) due to reach issues post NTO, shift of spends to sport channels due to Cricket World Cup, and withdrawal of two FTA channels from DD FreeDish. Reported ad rev (including international) grew by 3.6% (IDFCe: 5%).
• Domestic subs rev. grew by 46.7% yoy (IDFCe: 30%) as monetization improved post NTO coming into effect. Other services grew by 4.9% yoy as no new movies were slated for release during the quarter.
• Increasing investment across its Film, TV and digital segments (COGS increased by 16.7% yoy), was negated by flattish SG&A. EBITDA margin improved ~100 bps yoy to 32.9% (IDFCe: 32.1%). Z is confident of achieving 30%+ margin for FY20E, despite higher content investments.
• On promoter stake sale: 1 binding offer in hand, 1 binding offer expected soon. Hopeful to announce deal soon.

Key positives: Strong domestic subscription revenue growth.

Key negatives: Weak domestic ad performance.

Impact on financials: Broadly unchanged.

Valuation & View

Although ad growth was on the lower side in Q1, Z’s strong franchise is clearly visible in its domestic subscription performance as it quickly managed to pass on increased tariffs under the NTO, especially in Southern markets where its portfolio is popular but was at a subpar realisation earlier. ZEE5 ramp-up too is on track as seen by its MAU increase over the last four quarters. Z’s aggression in building a strong content slate is a near-term negative on the BS but builds a medium-term competitive advantage. On the stake sale front, the announcement that the promoter has one binding offer in hand (with one more possibly on the way) should allay concerns of pledged shares coming to the market over the next few months. With the increasing likelihood of a deal getting consummated, the market should start revaluing Z on its fundamentals rather than ascribing distress valuation multiples. Maintain OP with a PT of Rs478 (25x FY20E EPS).