Buy Zee Entertainment; target of Rs 630: Motilal Oswal

Motilal Oswal's research report on Zee Entertainment

Ex-sports revenue rose 7% YoY, led by domestic ad and subscription revenue. Consol. revenue fell 7% YoY to INR15.8b (in-line). Consol. EBITDA stood at INR4.9b (flat YoY, 4% beat) with a 31% margin (+210bp YoY), despite lower revenues, led by 25% YoY savings in content cost. PAT surged 148% to INR5.9b (est. of INR3b). PAT, after adjusting for INR1.3b exceptional gains from sports, INR1.6b other income from equity revaluation and reversal of INR81m interest provision, rose 21% YoY to INR2.9b (7% miss).

Outlook

We broadly maintain our ex-sports revenue growth of 11%/16% for FY18/19E. High original content, launch of OTT app – Z5 and rebranding Zee TV should reduce room for operating leverage. Thus, we cut EBITDA margin by ~300bp to 32.6% in FY19E. This is still above management’s guidance of 30%+ margin, building operating leverage from high revenue growth and &TV breakeven in two quarters. We have assigned 35x P/E on Sept'17 EPS v/s 32x earlier, given Zee's steady improvement in viewership share and a strong recovery in the ad market, which should support ~20% EPS growth on a sustainable basis. Maintain Buy with TP of INR630.

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