Zee Entertainment's Q2FY19 results (Outperformer) - ‘TV’ stellar; over to you ‘Digital’…

Q2FY19 results highlights

• Cons. rev. stood at Rs19.8bn (+24.9% yoy; 6% beat), cons. EBITDA at Rs6.8bn grew by 37.6% yoy (16% beat) and adj. (for MTM profit on pref. shares) PAT at Rs4.1bn grew by 19.2% yoy (10% beat). Higher tax rate (39% vs 30% yoy) led to PAT growth lower than EBITDA growth.
• Domestic ad rev. grew by strong 23.3% yoy (IDFCe: 20%) led by market-share gains, favourable base and was broad based across sectors. International ad rev. surprised at 15% yoy. Cons. ad rev. grew by 22.7% yoy (vs est. 18.9%).
• LTL domestic subscription rev. grew by strong 26% yoy (IDFCe: +15% yoy) led by early deal signing and better monetisation of Phase III subs. Assuming that normalised growth for this quarter was 16-17%, EBITDA beat would still stand at a solid 9-10%. Other sales & services grew 67.3% yoy led by higher rev. accruing from movies released.
• Despite increasing investment across its TV and digital segments, cons. margin improved by 320bp yoy to 34.2% (IDFCe: 31.4%), and was a positive surprise. 30%+ guidance for FY19E has been retained.
• Guidance: Despite a higher base in H2, Z is confident of mid-to-high teen ad growth; will beat its low teen guidance of domestic subs. rev. growth and said margin will be comfortably higher than 30% in FY19E.
• Zee5: ~42m monthly active users (exp. of ~20m) with avg. viewing of 31 mins per day; as per Z, Zee5 also aided to surprise in ad rev growth.

Key positives: Strong ad/subscription growth rates

Key negatives: Higher than expected tax rate.

Impact on financials: Raise FY19E/20E EPS by 0.5%/2% respectively.

Valuation & View

Z’s traditional business continues its strong performance with improving viewership market-share and better monetisation per subscriber. The street is divided over Z’s ability to build capabilities to remain relevant in the brave new ‘digital media’ world. Nonetheless, we believe that ‘ZEE5’ is a genuine effort from Z and focussing on regional internet users (along with Hindi) coupled with Z’s ability to create relevant content for its core-audience, can provide competitive moat to migrate its core-audience to the digital medium as and when traditional TV slows down (not in the next 4-5 years though). Maintain OP with a revised PT of Rs553 (28x FY20E EPS, lower multiple to account for risk of digital and correction in market multiples).