MSOL: ZEE ENTERTAINMENT (Buy)-Domestic ad growth moderates-opex levers help salvage margins

​Zee Entertainment: Domestic ad growth moderates; opex levers help salvage margins; Toning down earnings estimates and TP

(Z IN, Mkt Cap USD6.8b, CMP INR516, TP INR600, 16% Upside, Buy)

• Opex levers salvage operational performance: 4QFY17 EBITDA grew 14% YoY to INR4.68b (2% above estimate) despite muted revenues, led by controlled A&P expenses. Programming cost fell 6% YoY to INR6.5b (in-line). This quarter includes only two months of Sports biz numbers (which was sold to Sony). Hence, revenues and costs to that extent are lower than the base quarter. Revenue remained flat YoY at INR15.28b (in-line) despite disappointing ad growth (INR8.47b v/s est. of INR8.81b), as higher-than-expected other sales and services offset the impact of soft ad growth.
  
• Domestic ad growth marginally short of expectations…: Headline ad revenue remained flat YoY. Both international and domestic ad revenues fell short of already soft expectations (given Sports Biz sale and high base effect of 4QFY17). Domestic ad revenue grew 8% YoY to INR7.94b (est. of INR8.05b). However, Zee performed better than industry, which saw marginally negative-to-flat YoY ad growth in 4Q. The larger part of overall ad miss came from international ad revenue (-53% YoY to INR525m v/s est. of INR766m) as (1) the base quarter included two popular cricket events in Pakistan, which had boosted ad income and (2) certain international issues in Bangladesh/Nigeria.
  
• …but domestic subscription in-line: Domestic subscription declined 3% YoY to INR4.5b (in-line) as the base quarter included some catch-up revenue. Ex-sports, domestic subscription growth was 13.5% in FY17.