View : Revenue growth momentum intact for FY22

Z has reported an outperformance on ad. growth vs industry averages in Q3FY21 backed by 1) traction in regional genre 2) launch of six new channels 3) shift of Zee Anmol from pay to FTA 4) marginal support from higher revenue in the digital business (Zee5); we expect the momentum to continue going ahead too as the overall ad. spends for TV is estimated report a V shape recovery in FY22 backed by strong demand across key verticals. Beat on the subscription revenue was supported by Zee5 SVOD revenue base as international subs revenue (+33%YoY) too reported a positive surprise; subs revenue for TV industry and ZEE is estimated to grow in mid-single digit in the medium term due to regulations on pricing as the industry awaits decision on implementation of NTO 2.0. Zee Studios has aggressive plans to scale its movie business by producing 35-40 films/year as against 8-9 films/year; we believe this will push revenue growth and help build a larger movie catalogue for TV/digital, however, this business is margin dilutive in nature that may negatively impact profitability in the medium term.

Zee5 has reported a growth of 19% QoQ as we believe a large portion of this may have come from growth in international subs which may not be sustainable in the medium term; key areas of concern for Zee remain 1) conversion of MAU to DAU has been slow being in range of mere 8-10% 2) scalability is highly dependent on Telco’s and will be a challenge moving to pureplay B2C model as cost of customer acquisition is high. 3) Widening EBITDA losses due to heavy content investments. Any potential opportunity for better than industry growth in Zee5 coupled with scalability may drive upgrades for the stock in near term.
Valuation: reiterate Buy with same TP of INR 300
Z is currently trading at fair valuations of 17.9x/16.3x based on FY22/FY23E earnings. We value the stock on a SOTP basis, valuing the TV business at INR 280 (after excluding write offs) basis 16x one year fwd. PER and the Zee5 business at INR 20 on one year fwd. 4x EV/sales