Zee Entertainment: In the right channel - Buy

Zee Entertainment is one of the largest players in the media and entertainment space and among the few companies in the segment that are profitable. The company has pan-India presence and is among the top three players in regional and Hindi markets. Zee also has presence in the international markets such as the US, Europe and West Asia (offering 13 local language channels), though the Indian market is the highest revenue spinner (over 80 per cent).

Ads contribute nearly 60 per cent of the company’s revenue and are expected to grow at a healthy pace. Recovery in ad spends by corporates and the upcoming elections in several large Indian States augur well for ad revenues. The launch of new and original content and expansion into new territories should help the company’s subscription revenue. In addition, Zee’s increasing digital presence through the Zee5 app will also aid its revenue growth.

The stock has corrected more than 20 per cent since this January. At ₹442, it trades at 26 times its likely per share earnings for FY19, a tad expensive compared to peers. Nonetheless, Zee’s prospects remain bright. The company recently announced the promoters’ plan to divest 50 per cent of their stake in the company. While this creates some uncertainty in the near term, bringing in a strategic partner that can invest more in technology can help the company compete better over the long run. Zee also has healthy financials and negligible debt.

The company’s overall revenue has grown at a compounded annual growth rate (CAGR) of 13 per cent between FY13 and FY18, while profit has grown by 16 per cent during the same period.

Investors with two-to-three-year investment horizon can buy this stock.

Ad revenue to grow

For Zee, despite the GST-linked slowdown in various sectors, the ad revenue has grown steadily over the last few quarters. It recorded annual average growth of about 16 per cent between FY13 and FY18. This growth trend would continue, given the wide market reach and presence across genres in various regional languages. Also, given the macro economic factors and consumption pattern, the ad revenue in the television industry is expected to grow at annual average of 11 per cent between 2016 and 2020, according to the recent EY-FICCI report.

Zee currently produces about 500 hours of original content every week, and has lined up to deliver better content in the coming months; this could aid its ad revenue growth. The company has also planned to launch a new channel in Kerala by the end of FY19. Given its large content library, it should be able to leverage the new channel and attract advertisers.

Digital presence

Zee’s digital presence is slowly gaining traction. The company launched its Zee5 app combining its existing applications in digital platform — OZEE and Ditto TV — to offer more content to customers. Digital advertising is expected to grow at an annual average of 23 per cent from 2016 to 2020, as per the latest EY-FICCI report.

Currently, Zee offers 29 original content for Zee5 platform in six different languages. However, the monetisation from its digital platform will take time as the OTT (over the top) — where content is delivered over the internet without an operator — platform is crowded with players such as YouTube, Facebook, Hotstar, Netflix, telecom companies, and distribution platform owners such as Tata Sky.

Though the company plans to offer newer and differentiated content, the success and sustenance of the platform will have to be watched. This is one of the areas where the new strategic partner’s technology expertise can help the app globally and make it competitive.

Improving subscription

Zee’s domestic subscription revenue accounts for about 30 per cent and, in the recent September quarter, grew by 26 per cent Y-o-Y, thanks to the company’s improved content offerings.

With the digitisation of cable television yet to take off completely across regions, there is scope for the company to increase its subscription growth. Also, launch of new programmes should provide a leg-up to subscription revenues. This, along with the implementation of TRAI’s tariff order, will have a positive impact. According to this order, broadcasters are required to offer their channels on a la carte basis, where the maximum retail price (MRP), excluding tax, for each pay channel should be disclosed. This order will come into effect from January 2019, and the company is already in discussions with its distribution partners for smooth transition.

The company is among the leading players in the Hindi GEC (general entertainment channels) through Zee TV and Cinema. Other channels such as Zee Marathi and Zee Bangla rank among the top three in the market. The popularity of some weekday shows such as Kumkum Bhagya, Kundali Bhagya in Zee TV and Mazhya Bavryachi Bayko in Zee Marathi has been attracting subscribers and advertisers.

The company reported overall revenue growth of 25 per cent Y-o-Y during the September quarter. Operating profit margins improved to 34 per cent during the September quarter from 30 per cent compared with the same period last year. The profit, however, declined by over 38 per cent Y-o-Y due to increase in tax expenses (over 76 per cent Y-o-Y) during this quarter, compared with the same period last year, and an exceptional item of ₹135 crore pertaining to the company’s sale of its sports channel last September quarter.

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