Digital business remains a drag

View
Zee has reported a domestic ad revenue decline of 20% YoY, largely in line with industry estimates, despite a hefty ad revenue gain due to Zee Anmol moving towards FTA in June ’20. Ad growth challenges are expected to persist throughout H1FY22 due to lock-down in most states. However, the negative impact on ad revenue is estimated to be lower versus the first wave of COVID due to: 1) better contingency planning and preparedness in terms of live GEC shoots, which are largely ongoing, 2) ramp up in vaccinations, which may lead to lock-downs easing sooner than Wave I. We thereby expect a sharp recovery H2FY21 onwards, which will lead to a 20%YoY ad growth in FY22E over a low FY21 base (still down 5% versus FY20-pre-COVID levels). Subscription revenues are expected to remain muted, with uncertainty around NTO 2.0 implementation – This is an overhang which should cap margin improvement. lure EBITDA margin estimates are largely in line with management guidance after factoring in negative impact from increased content cost. On the digital business front, Zee5 is estimated to report huge gains in Q1FY22 on Radhe’s TVOD/OTT premiere. This is because subscriber addition has not shown enough strength to match up to hefty content costs paid for the film. Also, piracy has been an added drag on viewership. On a steady-state basis, excluding the impact of Radhe, Zee5 is still not promising enough to post better-than-industry average (video advertising) growth despite a low base versus other OTTs (Hoststar, YouTube etc.). Over dependence on telecom too limits strong growth prospects on the company’s SVOD revenue base for now. Despite all these concerns on the digital front, traditional business prospects remain strong with: 1) traction in regional genre and 2) best profitability versus peers.

Valuation
The stock is trading at an inexpensive 13.6x/12x basis FY22E/FY23E. We maintain Buy on Zee with a TP of lNR 300 based on 16x one-year forward P/E after factoring in Zee5 valuations (SOTP basis). We believe positive surprise on Zee5 revenue will act as a re-rating catalyst.

(The views expressed in the article are those of the writer and indianbroadcastingworld.com need not necessarily subscribe those views)