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MOSL: ZEE ENTERTAINMENT (Neutral)-Balance sheet issues, promoter stake sale to drive the narrative

ZEE ENTERTAINMENT: Balance sheet issues, promoter stake sale to drive the narrative; Subs growth strong
(Z IN, Mkt Cap USD3.6b, CMP INR265, TP INR285, 8% Upside, Neutral)

** Strong subscription revenue masked by margin contraction: Consol. revenue increased 7% YoY to INR21.2b (4% miss) on account of strong 19% domestic subscription growth, partly offset by subdued 1% ad revenue growth. EBITDA grew by a mere 2.5% YoY to INR6.9b (6% miss), with the margin shrinking 150bp YoY to 32.7% due to a 23% increase in production expenses. INR1,700m toward ICD was assigned to related parties, as the amount was not received but fully written off. Subsequently, PAT increased by 7.1% YoY to INR4.1b. For 1HFY20, revenue increased by 10% YoY to INR41.3b, while EBITDA/PAT grew YoY 9%/33% to INR13.5b/INR9.4b.

** Concall highlights: (a) Subscription revenue growth is expected to be over 25% for FY20. (b) Ad revenue to increase in 2HFY20 given festive season. (c) Fixed deposit worth INR2b was adjusted by a bank toward dues to certain related parties, which was reimbursed by the related party. (d) Other financial assets thus rose from INR10b to INR14b, including INR2b blocked in the bank (will be recovered from related parties over time).

** FCF pressured by increased investment: While revenue/PAT growth is expected to be strong at 12%/20% over FY19-21, FCF might come under pressure with INR14.1b investments in 1HFY20 attributed to (a) content for new channels and digital rights, (b) rise in trade receivables, of which ~INR7b are from Dish TV and Siti Cable (INR3b overdue) and (c) fixed deposit worth INR2b stuck with the bank. FCFF was expected to turn positive by FY21 but this will now be delayed, intensifying the worry about additional write-offs.