MOSL: ZEE ENTERTAINMENT (Buy)-Ad performance in-line-subscription surprises positively

​Zee Entertainment: Ad performance in-line; subscription surprises positively

(Z IN, Mkt Cap USD6.8b, CMP INR550, TP INR630, 15% Upside, Buy)

• Operational performance exceeds expectations: 1QFY18 EBITDA grew 7% YoY to INR4.84b (3.5% above estimate of INR4.68b). Revenue exceeded our expectation, led by better-than-expected subscription income and other sales & services. While revenue declined 2% YoY, it was up 10% YoY to INR15.4b (3% above our estimate of INR14.94b) on like-to-like basis (ex-sports). Despite the EBITDA beat, PAT missed estimate by 24% to INR2.5b (+16% YoY). This was a function of (i) lower-than-expected net other income and (ii) MTM losses on preference liability and higher-than-expected tax outgo.
• Domestic ad growth largely in-line: Headline ad revenue grew 6% YoY to INR9.65b (in-line), of which domestic ads contributed INR9.1b (8% YoY; est. of INR9b).Domestic ad revenue (ex-sports and RBNL) grew 6.9% to INR8.7b. Softness in ad growth was on expected lines, as advertisers pulled the plug in June as primary sales suffered in the run up to GST roll-out. Management expects July to be soft too. International ad revenue fell 18% YoY to INR578m (est. of INR663m) as international biz was bogged down by continuation of certain region-specific issues and currency appreciation.
• Subscription surprises positively; margins in-line: Ex-sports, domestic subscription grew 14.5% YoY to INR3.78b (10% above our estimate of INR3.43b) and international subscription (ex-sports) remained largely flat YoY at INR1b (est. of INR0.93b). On a reported basis, domestic and international subscription declined 9% YoY each. Management is confident of mid-teen growth in domestic subscription over the next three years – we have modeled +17%/20% in FY19/FY20. Non-sports margin remained largely flat YoY at 31.4% (in-line).