Zee Entertainment's Q3FY20 results (Outperformer) - Weak Q3; BS/Board repair begins!

Q3FY20 results highlights

• Cons. Rev. at ~Rs20.5bn fell 5.5% yoy (3% miss). EBITDA fell ~25% yoy to ~Rs5.7bn (4% miss), while APAT stood at ~Rs3.9bn (26% yoy fall; 12% miss). Adjusted for one-time credit loss of ~Rs376m, EBITDA decline would be ~20% yoy (in-line).
• Domestic ad rev. fell ~15.7% yoy (IDFCe: 13% fall) – weak market conditions, shift in festive season this time, exit of 2 FTA channels from DD FreeDish, and loss of Zee’s market-share contributed to the fall. Reported ad rev. (incl. international) fell ~15.8% yoy.
• Domestic subs. rev. grew ~21.7% yoy (IDFCe: 22.0%) as post NTO monetization has improved across Z’s markets (regional). International subs. rev. fell ~17.4% yoy. Other services rev. grew 21.5% yoy.
• Content cost was up 6.2% yoy for the qtr and 15% for 9MFY20; management attributed the low increase to one-off high expenses in the base. Going forward it expects content cost to rise by 12-13% yoy.
• One-time charge of Rs376mn was booked in other expenses towards time value credit loss in receivables from Dish/Siti. Extension of timeline to 12-24 months vs exp of 12 months came in as negative.
• Z generated FCF of Rs2.5bn in this qtr and BS content investments were curtailed as inventory (including advances and deposits) increased to Rs60bn from Rs58bn qoq.

Key positives: Positive commentary on Board and Balance sheet.

Key negatives: Weak domestic ad performance.

Impact on financials: 11%/14% cut in FY20E/21E EPS. Introduce FY22E.

Valuation & View

Q3’s performance was slightly weaker than baked in tepid expectations. However, Mr. Goenka outlined many milestones which Z would want to achieve in the next 12 months namely (a) Board to be reconstituted with him being the sole representation of the promoter family, (b) an eminent personality, with Media/Tech. experience, to be inducted in the Board by early FY21, (c) surplus cash generated to be invested only in high quality liquid instruments, (d) inventory to come-off in FY21 (in terms of no of days) and (e) funds invested abroad to be repatriated by FY21E end. Outlook on Ad & Subs revenue is also fairly decent in tough economic and regulatory environment. We believe the street will anchor its expectations around the above deliverables and as these steps materialize it should be a strong re-rating event for Z. Current valuations, we believe, are attractive for the franchise (~18% viewership market-share, lowest cost content sourcing, and ability to run a tight ship while expanding its OTT space). Maintain Outperformer (TP Rs356 / 17.5x FY21E EPS).