While we expect ZEE to gain in the new tariff regime, near-term ad growth is likely to be subdued. Though festive season could offer some respite, material growth is likely to resume once demand from FMCG, auto, among others, revives. In our view, though the valuation is attractive now, resolution of promoter’s pledged shares remains key trigger for the stock. We maintain our target PE of 18x and retain TP at INR399. The stock is trading at ~13x/12x FY20E/21E EPS. We maintain ‘BUY/SP’.
Near term concerns like a softer ad outlook due to macroeconomic challenges, promoter pledge issues as well as possible risks of tweak in NTO policies makes us cautious. Furthermore, steep spending in content seems aggressive. We also remain wary of related party dues, given their weak financial position. We, therefore, downgrade the stock to REDUCE from HOLD earlier, with a revised target price of Rs 220/share, valuing it at 10x FY21 P/E. (vs. Rs 380/share at 18x FY21 P/E earlier). Lower multiple is on account of cash flow challenges and promoter debt issue.
Deal provides some relief but overhang stays; Maintain Hold: The deal with Invesco Oppenheimer will provide some credibility to the stock along with retaining management’s control. We believe the streetmay be upset with ZEEL’s decision to go with the financial investor ratherthan a strategic investor who can take the company to the next level. The deal provides relief to the promoters’ liquidity concern to some extent, butthe overhang remains till the finalisation of other assets’ sale by the endof September 2019. Hence, we maintain our Hold rating on the stock with a revised PT of Rs. 400.
We had turned constructive with the possibility of a deal and complete removal of pledge, which did not play out. Furthermore, a stake sale to financial investors (vs. a global tech/media player) that could have added value in expanding its OTT reach, is another dampener, in our view. The overhang on the stock will remain as promoters grapple to sell a stake in non-media/media assets in a time bound manner. On the business front, steep and aggressive spending in content to enhance Zee5 offering, a necessary evil, is likely to keep FCF generation modest. We expect the stock price to hover below fair value till there is a complete removal of pledge. Therefore, we downgrade the stock to HOLD with target price of Rs 380/share, valuing it at 18x FY21E P/E.
We expect the company to continue performing well backed by strong growth in subscription revenue and resurgence of advertising business. Proposed stake sale also remains a key catalyst for the stock in the near-term. The stock is currently trading at 20.5x FY20E P/E. We roll forward to FY21E and value the stock at 20x FY21E adj. EPS. We rate the stock a BUY with a target price of Rs. 444.
We witnessed a slowdown in ad revenues in Q1 mainly due to softness at its main client verticals. The impact of new tariff order as well led to this slowdown. On the other hand, subscription revenues zoomed on the new tariff order and FTA conversion. Digital business and further investments in TV and movies content is expected to follow post stake sale, which has been the overhang on the stock since last few quarters. We believe with management’s confidence to strike a deal shortly, the stock will gain a direction. With sound fundamentals, we maintain our BUY rating on the stock with a pruned down (based on lower ad revenues) TP of ₹425.
Valuation: reiterate Accumulate with a TP of INR 410 Management has guided for strong subscription revenue growth of over 20% YoY in FY20, which translates into a CQGR of 11% over Q2 onwards on a robust Q1 performance. Subscription revenue growth came as a pleasant surprise to us and on track faster than what we had anticipated, given robust growth in core viewership as regional genre channels witnessed strong pull demand. However, ad growth may take more time to revert to double-digit growth as Z has not reported major gains in viewership share within key genres. The stock is currently trading at 18x FY21E P/E, which is inexpensive, and this would prevail until further deal clarity emerges. Our estimates remain largely unchanged as positive impact of higher subscription was offset by negative impact of lower ad growth. We reiterate Accumulate with a March 2020E TP of INR 410 on 20x one-year forward P/E; we still believe a favorable deal indicates the promoter group hold on business strategy post the announcement will trigger a slight rerating.
Signing of binding term sheet for stake sale with one of the bidder is a key positive. The company now expects another binding term sheet to be signed in a few days to zero in on a final buyer. On the other hand, steep and aggressive spending in content (largely to enhance Zee5 offering), in our view, is also a necessary evil that is likely to keep FCF generation modest. Given the certainty and proximity of deal, we upgrade to BUY with target price of | 425/share, valuing it at 20x FY21E P/E. However, we note that we would prefer strategic investors to buy the stake, which could enhance the overall prospect of Zee5 expansion globally.
Driven by 46.8% y/y growth in domestic subscription revenue, Zee’s Q1 FY20 revenue grew 13.3% y/y to `20.08bn. Domestic advertising revenue grew 4.2% y/y, as 5-6% of advertising growth has been hit by the conversion of two FTA channels into pay channels. Lower other expenses due to good cost control (8.6% vs. 12.8% y/y) resulted in the margin expanding 93bps y/y to 32.9%. We cut our FY20e/FY21e EBITDA 4% and 5.5% respectively and our target multiple to 15x FY21e EBITDA (earlier valuing it at 17x FY21e EBITDA) to reflect soft ad growth and increased investment in OTT, resulting in a target of`450 (earlier `550). The promoter stake sale is a near-term catalyst.
Zee’s superior execution, industry leading growth, margins, andviewership share deserve higher multiple. However, the sharp deterioration in its BS/FCF in FY17-19 and lag in the digital business are constraints. Improvement in FCF and acceleration in the digital business are vital triggers. Accumulate, with TP of Rs 408 at 20x FY21E EPS.
At a CMP of Rs. 445.0, ZEEL stock is trading at a TTM P/E multiple of 28.4(x), which is at a discount compared to its peer average of 31.3(x). Company's top line and bottom line are expected to grow at a CAGR of 16.2% and 18.8% respectively over FY18-20E led by increase in monetization from growth in market share and rise in ARPU, better cost efficiencies, digital consolidation and increasing device penetration, among other factors. According to the FICCI-EY Report, 2018 the M&E industry is expected to grow at 11.3% CAGR over CY17-20E whereby television and digital media to grow at 9.3% and 23.5% respectively for the same period. ZEEL have outperformed the industry average and with its strong leadership position along with a beneficial strategic partner it is expected to outperform it further as well. We value the business at a TTM P/E multiple of 28.4(x) to its FY20E EPS, to arrive at a target price of Rs. 556.0, reflecting a potential upside of 25% over a period of 12- 18 months. Thus we assign a ‘BUY’ rating on the stock.