Zee Entertainment's Q3FY19 results (Outperformer) - Business on a strong footing; promoter stake sale key monitorable…

Q3FY19 results highlights

• Cons. rev. stood at Rs21.7bn (+17.9% yoy; 3% beat), cons. EBITDA at Rs7.5bn grew by 26.9% yoy (5% beat) and adj. (for MTM profit on pref. shares) PAT at Rs5.3bn grew by 26.2% yoy (10% beat).
• Domestic ad rev. grew by strong 20.6% yoy (IDFCe: 18.5%) despite an unfavourable base (30.4% yoy growth in Q3FY18) led by market-share gains, digital ad rev. ramp up (utilisation rates on ZEE5 already 50%+) and was broad based across sectors. International ad rev. surprised by 40% yoy growth. Cons. ad rev. grew by 21.7% yoy (vs est. 18.3%).
• LTL domestic subscription rev. grew by strong 29% yoy (IDFCe: +19% yoy) led by catch-up rev. (to the tune of Rs400-500m) and better monetisation of Phase III subs. Adj. for this catch up rev., cons. EBITDA would be broadly in line. Other sales & services rev declined by 36% yoy due to lack of any major film releases in this qtr.
• Despite increasing investment across its TV and digital segments (COGS increased by 18.5% yoy), cons. margin improved by 250bp yoy to 34.8% (IDFCe: 34%), and was a positive surprise. 30%+ guidance for FY19E & FY20E has been retained (9MFY19 stands at 33.6%).
• On promoter stake sale: Promoters are in talks with more than 2 strategic players for a stake sale and they remain confident that they will be able to consummate a deal by March/April 2019.
• Zee5: ~56m monthly active users in Dec’19, up 36% vs Sep’19 with avg. viewing of 31 mins per day (constant); as per Z, Zee5 is now the largest producer of digital content in India.

Key positives: Strong ad/subs rev., strong margin

Impact on financials: Raise FY19E/20E EPS by 1%/1.5% respectively; introduce FY21E financials.

Valuation & View

Z’s traditional business continues its strong performance with improving viewership market-share (at 20.2%, highest ever) and better monetisation per subscriber. We believe the promoter’s plan to get a ‘global strategic partner’ on board could bring in the technological edge required for distribution and discovery of content in the digital domain while Z would continue to create great relevant content thus making Z future proof and giving it a play in the increasingly uncertain but exciting future of digital media industry. This would also lead to improved corporate governance. Maintain OP with a revised PT of Rs561 (28x FY20E EPS, maintained). Key risk to our call is significant increase in investments in digital content by peers.