Zee Entertainment's Q4FY19 results (Outperformer) - P&L strong, BS weakens…

Q4FY19 results highlights

• Cons. rev. stood at Rs20.2bn (+17.0% yoy; 8% beat), cons. EBITDA at Rs5.7bn grew by 12.3% yoy (14% beat) and adj. (for MTM profit on pref. shares and one-offs) PAT at Rs3bn grew by 138.8% yoy (17% beat).
• Domestic ad rev. grew by strong 17.7% yoy (IDFCe: 10.8%) despite the uncertainty on reach prior and post the NTO implementation. Growth was supported by market-share gains and digital ad rev. ramp up.
• Domestic subs rev. grew by 3.9% yoy (IDFCe: 2.5%) due to NTO related disruptions. Zee guides to min. low teens growth in domestic subs. rev in FY20E. Other Services rev. up 83% yoy due to two movie releases.
• Increasing investment across its Film, TV and digital segments (COGS increased by 28.1% yoy), led to EBITDA margin falling 120 bps yoy to 28.1% (IDFCe: 26.7%). Z remains confident of achieving 30%+ EBITDA margin for FY20E, despite higher content/marketing investments.
• On promoter stake sale: Expect to sign a binding agreement by July 2019 (no other details shared).
• Balance Sheet: No qualified auditor opinion came through. However, it was highlighted that ST Loans was higher by ~Rs6.9bn on interest free deposits given to content creators in advance to lock their content output. An additional Rs2.45bn is under other current assets and is recoverable from content creators to whom advances were paid earlier. Inventory (mainly content) has increased sharply by 46% yoy, in FY19, to Rs38.5bn on higher content investments in films & digital.

Key positives: Strong ad rev. growth despite NTO uncertainty.

Key negatives: BS weakened (sharp increase in inventory/other assets).

Impact on financials: Cut FY20E/21E EPS by 4% each.

Valuation & View

Z’s traditional business continues its strong performance led by improving viewership market-share. While there is a mad rush in the industry to hoard content, Z is being very aggressive here and which is a near-term negative (as it weakens the BS) but builds further competitive advantage in the business from a medium-term perspective. No auditor qualifications would put some unwarranted rumours to rest. It is of prime importance now that Z consummates a deal (whether with a strategic or a financial investor) so that the promoter loan against shares issue is resolved and the market starts revaluing the co on fundamentals rather than deal based news flow. We are keeping the faith and maintain OP rating on Z with a revised PT of Rs480 (25x FY20E EPS, revised from 28x).​