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Anand Rathi Share and Stock Brokers Limited (hereinafter “ARSSBL”) is a full-service brokerage and equities-research firm and the views expressed therein are solely of
ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient. Disclosures and analyst
certifications are present in the Appendix.
Anand Rathi Research India Equities
Media
Company Update
India I Equities
Mohit Jain
Research Analyst
+9122 6626 6531
mohitjain@rathi.com
Shobit Singhal
Research Associate
+9122 6626 6511
shobitsinghal@rathi.com
Key financials (YE Mar) FY15 FY16 FY17 FY18e FY19e
Sales (` m) 48,837 58,514 64,341 67,863 75,368
Net profit (` m) 9,775 10,598 9,970 13,388 15,104
EPS (`) 8.7 9.2 10.4 13.9 15.7
Growth (%) -5.7 5.8 13.2 34.3 12.8
PE (x) 62.3 58.9 52.0 38.7 34.3
PBV (x) 9.3 8.3 6.1 5.6 5.1
RoE (%) 19.0 18.0 13.5 15.0 15.5
RoCE (%) 27.7 27.8 24.8 24.7 24.6
Dividend yield (%) 0.4 0.4 0.5 0.7 0.8
Net debt / equity (x) -0.3 -0.3 -0.5 -0.5 -0.5
Source: Company, Anand Rathi Research
`
Rating: Hold
Target Price: `560
Share Price: `540
Key data Z IN / ZEE.BO
52-week high / low `590/ `428
Sensex / Nifty 32228 / 9965
3-m average volume $17m
Market cap `517bn/$8036.4m
Shares outstanding 960m
Shareholding pattern (%) June'17 Mar'17 Dec'16
Promoters 43.1 43.1 43.1
- of which, Pledged - - -
Free float 56.9 56.9 56.9
- Foreign institutions 44.7 46.4 46.6
- Domestic institutions 5.6 4.4 4.2
- Public 6.7 6.2 6.1
Change in Estimates Target Reco 
25 July 2017
Zee Entertainment
Revenue growth deferred to H2; maintaining a Hold
Adjusted for the sale of its sports business and acquisition of two
channels of “RBNL” (~`200m contribution in Q1), Zee’s Q1 revenue
growth, at ~7% yoy, was in line with our expectation. (Unadjusted for
the above, it reported a 2% decline.) The GST implementation in June
led to a slowdown; recovery is now expected in H2. The positive was a
31.4% EBITDA margin in Q1 on lack of sports-related costs, with the
more-than-30%-margin outlook being retained. We maintain our Hold
rating, with a target of `560, valuing Zee at 21x FY19e EV:EBITDA.
Advertising growth deferred to H2. Zee’s reported domestic revenue grew
1% y/y to `13.46bn (adjusted, growth was ~9% y/y). International revenue
declined 19% y/y to `1.95bn due to regulatory issues in Bangladesh and
currency movements. The EBITDA margin (31.4%, up 262bps y/y) was
commendable despite weak revenue growth. Net income at `2.51bn, up
15.9% y/y, was lower than expected due to higher taxes (effective tax rate:
48%) on `3.33bn taxable dividend from a subsidiary.
Continuing higher content ratings are key. Flagship Zee TV and &TV
have a combined 22.7% market share (up 170bps q/q) in Hindi general
entertainment channels. In the regional portfolio, Zee has maintained its
leading position in three languages (Marathi, Bhojpuri, Odiya) and is in the
top-2 in three (Bangla, Telugu, Kannada). Zee intends to increase
programming hours on its flagship channel (Zee) and &TV; this should help
it increase viewership further.
Retaining our Hold recommendation; estimate changes reflect slower
revenue growth. We are keeping our EBIT estimates unchanged for
FY18/19 as revenue weakness is offset through higher margins. However,
lower other income (partly due to cash invested in new businesses and digital)
and a higher tax rate lead us reduce our EPS estimates~6%. We value Zee at
21x FY19e EV:EBITDA due to its leading and superior margins. Risk: Any
slippage in content ratings.
Relative price performance
Source: Bloomberg
Zee
Sensex
400
450
500
550
600
Jul-16
Aug-16
Sep-16
Oct-16
Nov-16
Dec-16
Jan-17
Feb-17
Mar-17
Apr-17
May-17
Jun-17
Jul-17
Estimates revision (%) FY18e FY19e
Revenues -4.8 -4.3
EBITDA -0.6 -2.9
Net Profit -7.5 -6.6
25 July 2017 Zee Entertainment – Revenue growth deferred to H2; maintaining a Hold
Anand Rathi Research 2
Quick Glance – Financials and Valuations
Fig 1 – Income statement (` m)
Year-end: Mar FY15 FY16 FY17 FY18e FY19e
Net revenues 48,837 58,514 64,341 67,863 75,368
Revenue growth (%) 10 19.8 10.0 5.5 11.1
- Oper. expenses 36,299 43,420 45,073 46,588 52,178
EBIDTA 12,538 15,094 19,269 21,275 23,190
EBITDA margins (%) 26 25.8 29.9 31.3 30.8
- Interest 103 123 1,372 589 589
- Depreciation 673 840 1,152 1,244 1,244
+ Other income 2,278 2,016 36 1,889 1,880
- Tax 4,285 5,528 6,805 7,943 8,133
Effective tax rate (%) 30 34.3 40.6 37.2 35.0
+ Associates / (minorities) 20 -22 -5 - -
Adjusted PAT 9,775 10,598 9,970 13,388 15,104
+ Extraordinary items - -331 12,234 - -
Reported PAT 9,775 10,267 22,205 13,388 15,104
Adj. FDEPS (` / sh) 8.7 9.2 10.4 13.9 15.7
Adj. FDEPS growth (%) -6 5.8 13.2 34.3 12.8
Source: Company, Anand Rathi Research
Fig 3 – Cash-flow statement (` m)
Year-end: Mar FY15 FY16 FY17 FY18e FY19e
Adjusted PAT 9,775 10,598 9,970 13,388 15,104
+ Non-cash items 673 840 1,152 1,244 1,244
Cash profit 10,448 11,438 11,123 14,632 16,348
- Incr. / (decr.) in WC 3,668 899 5,707 611 3,012
Operating cash-flow 6,780 10,539 5,415 14,021 13,336
- Capex 1,197 3,546 -4,085 2,894 2,201
Free cash-flow 5,583 6,993 9,501 11,128 11,135
- Dividend 4,054 4,052 4,342 5,790 6,346
+ Equity raised 2,343 682 5,392 - 0
+ Debt raised -240 -37 -345 39 -
- Investments 1,911 888 6,040 1,408 1,549
- Misc. items - -331 12,234 - -
Net cash-flow 1,721 2,367 16,401 3,969 3,240
+ Op. cash & bank bal. 5,644 7,365 9,732 26,133 30,102
Cl. Cash & bank bal. 7,365 9,732 26,133 30,102 33,342
Source: Company, Anand Rathi Research
Fig 5 – Price movement
Source: Bloomberg
Fig 2 – Balance sheet (` m)
Year-end: Mar FY15 FY16 FY17 FY18e FY19e
Share capital 21,152 21,130 20,037 20,037 20,037
Reserves & surplus 34,346 41,184 65,608 73,206 81,964
Net worth 55,498 62,314 85,645 93,243 1,02,001
Total debt 22 9 11 51 51
Minority interest 4 85 10 10 10
Def. tax liab. (net) -531 -556 -903 -903 -903
Capital employed 54,993 61,853 84,763 92,400 1,01,159
Net fixed assets 4,091 5,590 6,301 6,173 6,154
Intangible assets 8,163 9,370 3,421 5,200 6,176
Investments 11,083 11,971 18,011 19,419 20,967
- of which, Liquid 9,619 8,923 14,080 15,488 17,037
Working capital 24,291 25,190 30,897 31,507 34,520
Cash 7,365 9,732 26,133 30,102 33,342
Capital deployed 54,993 61,853 84,763 92,400 1,01,159
Working capital (days) 182 157 175 169 167
Book value (` / sh) 58 65 89 97 106
Source: Company, Anand Rathi Research
Fig 4 – Ratio analysis @ `540
Year-end: Mar FY15 FY16 FY17 FY18e FY19e
P/E (x) 62.3 58.9 52.0 38.7 34.3
Cash P/E (x) 58.3 54.6 46.6 35.5 31.7
EV / EBITDA (x) 40.0 33.1 24.8 22.2 20.2
EV / sales (x) 10.3 8.5 7.4 7.0 6.2
P/B (x) 9.3 8.3 6.1 5.6 5.1
RoE (%) 19.0 18.0 13.5 15.0 15.5
RoCE (%) 27.7 27.8 24.8 24.7 24.6
Dividend yield (%) 0.4 0.4 0.5 0.7 0.8
Dividend payout (%) 26.6 24.5 29.0 32.4 32.4
Net debt / equity (x) -0.3 -0.3 -0.5 -0.5 -0.5
Debtor (days) 80 83 74 74 74
Inventory (days) 81 78 93 93 93
Payables (days) 42 44 40 40 40
CFO:PAT % 69.8 70.5 30.1 90.6 75.8
CFO: sales % 13.9 12.4 10.4 17.9 15.2
Source: Company, Anand Rathi Research
Fig 6 – Quarterly EBITDA performance
Source: Company
Zee
0
100
200
300
400
500
600
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Apr-15
Jul-15
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Jan-17
Apr-17
Jul-17
(`)
3,546
4,302
4,136
4,532
4,892
5,158
4,687
4,844
25.6%
27.0%
27.0%
28.8% 28.9%
31.5%
30.7%
31.4%
25.0%
26.0%
27.0%
28.0%
29.0%
30.0%
31.0%
32.0%
0
1,000
2,000
3,000
4,000
5,000
6,000
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
(`m)
25 July 2017 Zee Entertainment – Revenue growth deferred to H2; maintaining a Hold
Anand Rathi Research 3
Result Highlights
Q1 FY18 results at a glance
Fig 8 – Quarterly result
Year-end: Mar Q1 FY18 % q/q % y/y *FY17 FY16 % y/y
Sales (` m) 15,403 0.8 (2.0) 64,341 58,515 10.0
EBITDA (` m) 4,844 3.3 6.9 19,269 15,094 27.6
EBITDA margin (%) 31 77 bps 261 bps 29.9 25.8 415 bps
EBIT (` m) 4,533 3.7 5.9 18,116 14,256 27.1
EBIT margin (%) 29 82 bps 219 bps 28.2 24.4 379 bps
PBT (` m) 4,864 13.9 27.8 16,780 15,818 6.1
Tax (` m) (2,344) 60.1 44.2 (6,805) (5,528) 23.1
Tax rate (%) (48) -1390 bps -549 bps (40.6) (35.0) -560 bps
Net Income (` m) 2,514 (13.9) 15.9 9,983 10,268 (2.8)
* Note: FY17 figures do not include an exceptional gain of `12.23bn on the sale of the sports business for comparable analysis
Source: Company, Anand Rathi Research
Fig 7 – Segment-wise results
Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17* Q1 QFY18 Q/Q % Y/Y %
Revenues (` m) 15,716 16,954 16,391 15,280 15,403 0.8 -2.0
Growth Y/Y % 17.3 22.4 2.8 -0.2 -2.0 -176 bps -1929 bps
Advertisement 9,120 9,592 9,555 8,469 9,665 14.1 6.0
Domestic 8,415 8,800 8,737 7,944 9,087 14.4 8.0
International 705 792 817 525 578 10.1 -18.0
Subscription 5,282 5,833 5,935 5,580 4,791 -14.1 -9.3
Domestic 4,179 4,675 4,818 4,554 3,791 -16.8 -9.3
International 1,103 1,158 1,117 1,026 1,000 -2.5 -9.3
Others 1,315 1,529 902 1,231 947 -23.1 -28.0
Programming & Operating cost (6,575) (7,688) (7,035) (6,527) (5,863) -10.2 -10.8
As % of revenues -42 -45 -43 -43 -38 465 bps 377 bps
Staff Cost (1,499) (1,533) (1,419) (1,593) (1,669) 4.8 11.3
As % of revenues -10 -9 -9 -10 -11 40 bps -130 bps
Selling & Other costs (3,110) (2,841) (2,780) (2,474) (3,027) 22.4 -2.7
As % of revenues -20 -17 -17 -16 -20 -346 bps 14 bps
EBITDA 4,532 4,892 5,158 4,687 4,844 3.3 6.9
EBITDA margin % 29 29 31 31 31 77 bps 261 bps
Depreciation (251) (336) (249) (316) (311) -1.7 23.8
EBIT 4,280 4,556 4,909 4,371 4,533 3.7 5.9
EBIT margin % 27 27 30 29 29 82 bps 219 bps
Other Income -398 -397 -189 1,020 479 -53.1 -220.2
Interest expense (75) (86) (90) (1,122) (147) -86.9 96.0
PBT 3,807 4,074 4,630 4,269 4,864 14.0 27.8
PBT margin % 24 24 28 28 32 364 bps 736 bps
Taxes (1,626) (1,634) (2,081) (1,464) (2,344) 60.1 44.2
ETR % -43 -40 -45 -34 -48 -1390 bps -549 bps
PAT 2,181 2,440 2,549 2,805 2,520 -10.1 15.5
PAT margin % 13.9 14.4 15.6 18.4 16.4 -199 bps 248 bps
Source: Company, Anand Rathi Research * Note: Q4 FY17 figures do not include an exceptional gain of `12.23bn on the sale of the sports business for comparable analysis
25 July 2017 Zee Entertainment – Revenue growth deferred to H2; maintaining a Hold
Anand Rathi Research 4
Conference call highlights
Company-specific
 At present, flagship channel Zee has 23 hours a week of original
programming content, which is likely to go up to 28 by Q3 FY18.
 No pick-up can be seen in advertising and subscription revenues of
FTA channels currently.
 The company is taking various steps to create business on the digital
side. It is doing an OTT-offering re-vamp in H2 FY18 and is in the
process of putting all digital-related businesses into one division. For
its traditional business, it is looking to enter southern markets such as
Kerala.
 The low base will help the digital business to grow better than
television, and the company hopes it will not eat into the traditional
television market-share in the foreseeable future.
 The GST is impacting the quarterly performance and will continue to
do so in Q2.
 Bharat Kedia (from Parag Milk Foods) has been appointed CFO in
place of Mihir Modi, who will take up new roles in the company.
 The company has acquired an 80% equity stake in Margo Networks, a
technology start-up for `750m. It acquired a 12.5% equity stake in a
technology start-up Tagos Design for `162m.
 The company received dividend of `3.33bn from its subsidiary; hence,
its tax rate was higher this quarter (effective tax rate: ~48%). This will
be cash-flow neutral; for the full year, though, in the P&L A/c, the tax
rate will be `550m higher, besides the normal tax rate of ~35%.
Business outlook
 Zee foresees subscription revenue growing in mid-teens in the next
three years due to ongoing digitisation, after which growth will be in
line with ARPU growth (price increases).
 It will maintain a steady 30%+ margin, irrespective of whatever
investment it makes.
 Maintenance capex of ~`1.2bn-1.5bn and additional capex of ~`0.5bn
to build a studio.
Notes from the last quarter’s conference calls
From Q4 FY17
 Domestic advertising revenue. The de-monetization impact is now
behind us and advertising revenue is returning to pre-demonetization
levels. In Q4 FY17, growth in the industry ad market was flat to
negative, whereas the company’s ad revenue grew 8% due to an
increase in viewership in the regional genre. In FY18, the television ad
market could grow in low double-digits.
 EBITDA margin guidance. The company will maintain a steady
30%+ margin, irrespective of whatever investment it makes.
25 July 2017 Zee Entertainment – Revenue growth deferred to H2; maintaining a Hold
Anand Rathi Research 5
Factsheet
Fig 9 – Factsheet
Year-end: Mar Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 Q1 FY18
Revenue split (%)
Advertisement 58 57 58 55 63
Subscription 34 34 36 37 31
Others 8 9 6 8 6
Revenue split (` m)
Advertisement 9,120 9,592 9,555 8,469 9,665
Subscription 5,282 5,833 5,935 5,580 4,791
Others 1,315 1,529 902 1,231 947
Yoy growth (%)
Advertisement 17 14 1 -2 6
Subscription 14 22 14 -6 -9
Others 35 145 -31 69 -28
Advertisement revenue split (%)
Domestic revenues 92 92 91 94 94
International revenues 8 8 9 6 6
Subscription revenue split (%)
Domestic revenues 79 80 81 82 79
International revenues 21 20 19 18 21
Zee Sports (` m)
Revenue 1,700 2,125 1,411 1,066 201
Costs 1,529 2,293 1,334 1,049 ND
EBITDA 171 (168) 77 17 ND
EBITDA margin (%) 10.1 -7.9 5.5 1.6 ND
Source: Company
25 July 2017 Zee Entertainment – Revenue growth deferred to H2; maintaining a Hold
Anand Rathi Research 6
Valuations
Zee is uniquely positioned in the media sector due to its leadership in the
various sub-segments – specifically regional content. It also gets a scarcity
premium as the other two competitors are unavailable for investors in the
secondary market.
We believe that the media eco-system is evolving in favour of content
companies and, therefore, the ability to consistently procure and build
popular content would be even more valuable in the near future. Also,
advertising expenditure is expected to rise due to enhancements in the
economic environment. A part of these expectations is built into our
estimates for the next two years and part is reflected in our better-than-the
past target multiple. This, however, was delayed in FY17 due to the de-
monetization and overall slowdown in advertising expenditure toward the
second half of the year. The recovery in growth is likely to begin in H2,
with FY18 recovering only gradually. This is currently reflected in our
estimates for Zee.
At the CMP of `540, the stock trades at 20.2x FY19e EV:EBITDA. We
value Zee at 21x FY19e EV:EBITDA to arrive at a price target of `560,
offering 4% potential.
Fig 10 – Change in estimates
FY18 FY19
New Old Chg % New Old Chg %
Revenues (` m) 67,863 71,280 (4.8) 75,368 78,734 (4.3)
EBITDA (` m) 21,275 21,398 (0.6) 23,190 23,871 (2.9)
EBITDA margin % 31.3 30.0 133 bps 30.8 30.3 45 bps
EBIT (` m) 20,031 19,938 0.5 21,946 22,065 (0.5)
EBIT margin % 29.5 28.0 155 bps 29.1 28.0 109 bps
PBT (` m) 21,331 21,920 (2.7) 23,238 24,493 (5.1)
Net profit (` m) 13,388 14,467 (7.5) 15,104 16,165 (6.6)
Source: Anand Rathi Research
Fig 11 – EV/EBITDA
Source: Bloomberg, Anand Rathi Research
Risks
 Any loss in content rating in the flagship/leadership genres.
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EVEBITDARatio(1yearforward)
Appendix
Analyst Certification
The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the
compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research
analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange
Board of India (hereinafter “SEBI”) and the analysts’ compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have
no bearing whatsoever on any recommendation that they have given in the Research Report.
Important Disclosures on subject companies
Rating and Target Price History (as of 25 July 2017)
Date Rating
TP
(`)
Share
Price (`)
1 28-Jul-16 Buy 540 465
2 01-Sep-16 Hold 580 540
3 12-May-17 Hold 570 525
Anand Rathi Ratings Definitions
Analysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described
in the Ratings Table below:
Ratings Guide (12 months)
Buy Hold Sell
Large Caps (>US$1bn) >15% 5-15% <5%
Mid/Small Caps (<US$1bn) >25% 5-25% <5%
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Zee 1QFY18

  • 1. Anand Rathi Share and Stock Brokers Limited (hereinafter “ARSSBL”) is a full-service brokerage and equities-research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient. Disclosures and analyst certifications are present in the Appendix. Anand Rathi Research India Equities Media Company Update India I Equities Mohit Jain Research Analyst +9122 6626 6531 mohitjain@rathi.com Shobit Singhal Research Associate +9122 6626 6511 shobitsinghal@rathi.com Key financials (YE Mar) FY15 FY16 FY17 FY18e FY19e Sales (` m) 48,837 58,514 64,341 67,863 75,368 Net profit (` m) 9,775 10,598 9,970 13,388 15,104 EPS (`) 8.7 9.2 10.4 13.9 15.7 Growth (%) -5.7 5.8 13.2 34.3 12.8 PE (x) 62.3 58.9 52.0 38.7 34.3 PBV (x) 9.3 8.3 6.1 5.6 5.1 RoE (%) 19.0 18.0 13.5 15.0 15.5 RoCE (%) 27.7 27.8 24.8 24.7 24.6 Dividend yield (%) 0.4 0.4 0.5 0.7 0.8 Net debt / equity (x) -0.3 -0.3 -0.5 -0.5 -0.5 Source: Company, Anand Rathi Research ` Rating: Hold Target Price: `560 Share Price: `540 Key data Z IN / ZEE.BO 52-week high / low `590/ `428 Sensex / Nifty 32228 / 9965 3-m average volume $17m Market cap `517bn/$8036.4m Shares outstanding 960m Shareholding pattern (%) June'17 Mar'17 Dec'16 Promoters 43.1 43.1 43.1 - of which, Pledged - - - Free float 56.9 56.9 56.9 - Foreign institutions 44.7 46.4 46.6 - Domestic institutions 5.6 4.4 4.2 - Public 6.7 6.2 6.1 Change in Estimates Target Reco  25 July 2017 Zee Entertainment Revenue growth deferred to H2; maintaining a Hold Adjusted for the sale of its sports business and acquisition of two channels of “RBNL” (~`200m contribution in Q1), Zee’s Q1 revenue growth, at ~7% yoy, was in line with our expectation. (Unadjusted for the above, it reported a 2% decline.) The GST implementation in June led to a slowdown; recovery is now expected in H2. The positive was a 31.4% EBITDA margin in Q1 on lack of sports-related costs, with the more-than-30%-margin outlook being retained. We maintain our Hold rating, with a target of `560, valuing Zee at 21x FY19e EV:EBITDA. Advertising growth deferred to H2. Zee’s reported domestic revenue grew 1% y/y to `13.46bn (adjusted, growth was ~9% y/y). International revenue declined 19% y/y to `1.95bn due to regulatory issues in Bangladesh and currency movements. The EBITDA margin (31.4%, up 262bps y/y) was commendable despite weak revenue growth. Net income at `2.51bn, up 15.9% y/y, was lower than expected due to higher taxes (effective tax rate: 48%) on `3.33bn taxable dividend from a subsidiary. Continuing higher content ratings are key. Flagship Zee TV and &TV have a combined 22.7% market share (up 170bps q/q) in Hindi general entertainment channels. In the regional portfolio, Zee has maintained its leading position in three languages (Marathi, Bhojpuri, Odiya) and is in the top-2 in three (Bangla, Telugu, Kannada). Zee intends to increase programming hours on its flagship channel (Zee) and &TV; this should help it increase viewership further. Retaining our Hold recommendation; estimate changes reflect slower revenue growth. We are keeping our EBIT estimates unchanged for FY18/19 as revenue weakness is offset through higher margins. However, lower other income (partly due to cash invested in new businesses and digital) and a higher tax rate lead us reduce our EPS estimates~6%. We value Zee at 21x FY19e EV:EBITDA due to its leading and superior margins. Risk: Any slippage in content ratings. Relative price performance Source: Bloomberg Zee Sensex 400 450 500 550 600 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Estimates revision (%) FY18e FY19e Revenues -4.8 -4.3 EBITDA -0.6 -2.9 Net Profit -7.5 -6.6
  • 2. 25 July 2017 Zee Entertainment – Revenue growth deferred to H2; maintaining a Hold Anand Rathi Research 2 Quick Glance – Financials and Valuations Fig 1 – Income statement (` m) Year-end: Mar FY15 FY16 FY17 FY18e FY19e Net revenues 48,837 58,514 64,341 67,863 75,368 Revenue growth (%) 10 19.8 10.0 5.5 11.1 - Oper. expenses 36,299 43,420 45,073 46,588 52,178 EBIDTA 12,538 15,094 19,269 21,275 23,190 EBITDA margins (%) 26 25.8 29.9 31.3 30.8 - Interest 103 123 1,372 589 589 - Depreciation 673 840 1,152 1,244 1,244 + Other income 2,278 2,016 36 1,889 1,880 - Tax 4,285 5,528 6,805 7,943 8,133 Effective tax rate (%) 30 34.3 40.6 37.2 35.0 + Associates / (minorities) 20 -22 -5 - - Adjusted PAT 9,775 10,598 9,970 13,388 15,104 + Extraordinary items - -331 12,234 - - Reported PAT 9,775 10,267 22,205 13,388 15,104 Adj. FDEPS (` / sh) 8.7 9.2 10.4 13.9 15.7 Adj. FDEPS growth (%) -6 5.8 13.2 34.3 12.8 Source: Company, Anand Rathi Research Fig 3 – Cash-flow statement (` m) Year-end: Mar FY15 FY16 FY17 FY18e FY19e Adjusted PAT 9,775 10,598 9,970 13,388 15,104 + Non-cash items 673 840 1,152 1,244 1,244 Cash profit 10,448 11,438 11,123 14,632 16,348 - Incr. / (decr.) in WC 3,668 899 5,707 611 3,012 Operating cash-flow 6,780 10,539 5,415 14,021 13,336 - Capex 1,197 3,546 -4,085 2,894 2,201 Free cash-flow 5,583 6,993 9,501 11,128 11,135 - Dividend 4,054 4,052 4,342 5,790 6,346 + Equity raised 2,343 682 5,392 - 0 + Debt raised -240 -37 -345 39 - - Investments 1,911 888 6,040 1,408 1,549 - Misc. items - -331 12,234 - - Net cash-flow 1,721 2,367 16,401 3,969 3,240 + Op. cash & bank bal. 5,644 7,365 9,732 26,133 30,102 Cl. Cash & bank bal. 7,365 9,732 26,133 30,102 33,342 Source: Company, Anand Rathi Research Fig 5 – Price movement Source: Bloomberg Fig 2 – Balance sheet (` m) Year-end: Mar FY15 FY16 FY17 FY18e FY19e Share capital 21,152 21,130 20,037 20,037 20,037 Reserves & surplus 34,346 41,184 65,608 73,206 81,964 Net worth 55,498 62,314 85,645 93,243 1,02,001 Total debt 22 9 11 51 51 Minority interest 4 85 10 10 10 Def. tax liab. (net) -531 -556 -903 -903 -903 Capital employed 54,993 61,853 84,763 92,400 1,01,159 Net fixed assets 4,091 5,590 6,301 6,173 6,154 Intangible assets 8,163 9,370 3,421 5,200 6,176 Investments 11,083 11,971 18,011 19,419 20,967 - of which, Liquid 9,619 8,923 14,080 15,488 17,037 Working capital 24,291 25,190 30,897 31,507 34,520 Cash 7,365 9,732 26,133 30,102 33,342 Capital deployed 54,993 61,853 84,763 92,400 1,01,159 Working capital (days) 182 157 175 169 167 Book value (` / sh) 58 65 89 97 106 Source: Company, Anand Rathi Research Fig 4 – Ratio analysis @ `540 Year-end: Mar FY15 FY16 FY17 FY18e FY19e P/E (x) 62.3 58.9 52.0 38.7 34.3 Cash P/E (x) 58.3 54.6 46.6 35.5 31.7 EV / EBITDA (x) 40.0 33.1 24.8 22.2 20.2 EV / sales (x) 10.3 8.5 7.4 7.0 6.2 P/B (x) 9.3 8.3 6.1 5.6 5.1 RoE (%) 19.0 18.0 13.5 15.0 15.5 RoCE (%) 27.7 27.8 24.8 24.7 24.6 Dividend yield (%) 0.4 0.4 0.5 0.7 0.8 Dividend payout (%) 26.6 24.5 29.0 32.4 32.4 Net debt / equity (x) -0.3 -0.3 -0.5 -0.5 -0.5 Debtor (days) 80 83 74 74 74 Inventory (days) 81 78 93 93 93 Payables (days) 42 44 40 40 40 CFO:PAT % 69.8 70.5 30.1 90.6 75.8 CFO: sales % 13.9 12.4 10.4 17.9 15.2 Source: Company, Anand Rathi Research Fig 6 – Quarterly EBITDA performance Source: Company Zee 0 100 200 300 400 500 600 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 (`) 3,546 4,302 4,136 4,532 4,892 5,158 4,687 4,844 25.6% 27.0% 27.0% 28.8% 28.9% 31.5% 30.7% 31.4% 25.0% 26.0% 27.0% 28.0% 29.0% 30.0% 31.0% 32.0% 0 1,000 2,000 3,000 4,000 5,000 6,000 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 (`m)
  • 3. 25 July 2017 Zee Entertainment – Revenue growth deferred to H2; maintaining a Hold Anand Rathi Research 3 Result Highlights Q1 FY18 results at a glance Fig 8 – Quarterly result Year-end: Mar Q1 FY18 % q/q % y/y *FY17 FY16 % y/y Sales (` m) 15,403 0.8 (2.0) 64,341 58,515 10.0 EBITDA (` m) 4,844 3.3 6.9 19,269 15,094 27.6 EBITDA margin (%) 31 77 bps 261 bps 29.9 25.8 415 bps EBIT (` m) 4,533 3.7 5.9 18,116 14,256 27.1 EBIT margin (%) 29 82 bps 219 bps 28.2 24.4 379 bps PBT (` m) 4,864 13.9 27.8 16,780 15,818 6.1 Tax (` m) (2,344) 60.1 44.2 (6,805) (5,528) 23.1 Tax rate (%) (48) -1390 bps -549 bps (40.6) (35.0) -560 bps Net Income (` m) 2,514 (13.9) 15.9 9,983 10,268 (2.8) * Note: FY17 figures do not include an exceptional gain of `12.23bn on the sale of the sports business for comparable analysis Source: Company, Anand Rathi Research Fig 7 – Segment-wise results Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17* Q1 QFY18 Q/Q % Y/Y % Revenues (` m) 15,716 16,954 16,391 15,280 15,403 0.8 -2.0 Growth Y/Y % 17.3 22.4 2.8 -0.2 -2.0 -176 bps -1929 bps Advertisement 9,120 9,592 9,555 8,469 9,665 14.1 6.0 Domestic 8,415 8,800 8,737 7,944 9,087 14.4 8.0 International 705 792 817 525 578 10.1 -18.0 Subscription 5,282 5,833 5,935 5,580 4,791 -14.1 -9.3 Domestic 4,179 4,675 4,818 4,554 3,791 -16.8 -9.3 International 1,103 1,158 1,117 1,026 1,000 -2.5 -9.3 Others 1,315 1,529 902 1,231 947 -23.1 -28.0 Programming & Operating cost (6,575) (7,688) (7,035) (6,527) (5,863) -10.2 -10.8 As % of revenues -42 -45 -43 -43 -38 465 bps 377 bps Staff Cost (1,499) (1,533) (1,419) (1,593) (1,669) 4.8 11.3 As % of revenues -10 -9 -9 -10 -11 40 bps -130 bps Selling & Other costs (3,110) (2,841) (2,780) (2,474) (3,027) 22.4 -2.7 As % of revenues -20 -17 -17 -16 -20 -346 bps 14 bps EBITDA 4,532 4,892 5,158 4,687 4,844 3.3 6.9 EBITDA margin % 29 29 31 31 31 77 bps 261 bps Depreciation (251) (336) (249) (316) (311) -1.7 23.8 EBIT 4,280 4,556 4,909 4,371 4,533 3.7 5.9 EBIT margin % 27 27 30 29 29 82 bps 219 bps Other Income -398 -397 -189 1,020 479 -53.1 -220.2 Interest expense (75) (86) (90) (1,122) (147) -86.9 96.0 PBT 3,807 4,074 4,630 4,269 4,864 14.0 27.8 PBT margin % 24 24 28 28 32 364 bps 736 bps Taxes (1,626) (1,634) (2,081) (1,464) (2,344) 60.1 44.2 ETR % -43 -40 -45 -34 -48 -1390 bps -549 bps PAT 2,181 2,440 2,549 2,805 2,520 -10.1 15.5 PAT margin % 13.9 14.4 15.6 18.4 16.4 -199 bps 248 bps Source: Company, Anand Rathi Research * Note: Q4 FY17 figures do not include an exceptional gain of `12.23bn on the sale of the sports business for comparable analysis
  • 4. 25 July 2017 Zee Entertainment – Revenue growth deferred to H2; maintaining a Hold Anand Rathi Research 4 Conference call highlights Company-specific  At present, flagship channel Zee has 23 hours a week of original programming content, which is likely to go up to 28 by Q3 FY18.  No pick-up can be seen in advertising and subscription revenues of FTA channels currently.  The company is taking various steps to create business on the digital side. It is doing an OTT-offering re-vamp in H2 FY18 and is in the process of putting all digital-related businesses into one division. For its traditional business, it is looking to enter southern markets such as Kerala.  The low base will help the digital business to grow better than television, and the company hopes it will not eat into the traditional television market-share in the foreseeable future.  The GST is impacting the quarterly performance and will continue to do so in Q2.  Bharat Kedia (from Parag Milk Foods) has been appointed CFO in place of Mihir Modi, who will take up new roles in the company.  The company has acquired an 80% equity stake in Margo Networks, a technology start-up for `750m. It acquired a 12.5% equity stake in a technology start-up Tagos Design for `162m.  The company received dividend of `3.33bn from its subsidiary; hence, its tax rate was higher this quarter (effective tax rate: ~48%). This will be cash-flow neutral; for the full year, though, in the P&L A/c, the tax rate will be `550m higher, besides the normal tax rate of ~35%. Business outlook  Zee foresees subscription revenue growing in mid-teens in the next three years due to ongoing digitisation, after which growth will be in line with ARPU growth (price increases).  It will maintain a steady 30%+ margin, irrespective of whatever investment it makes.  Maintenance capex of ~`1.2bn-1.5bn and additional capex of ~`0.5bn to build a studio. Notes from the last quarter’s conference calls From Q4 FY17  Domestic advertising revenue. The de-monetization impact is now behind us and advertising revenue is returning to pre-demonetization levels. In Q4 FY17, growth in the industry ad market was flat to negative, whereas the company’s ad revenue grew 8% due to an increase in viewership in the regional genre. In FY18, the television ad market could grow in low double-digits.  EBITDA margin guidance. The company will maintain a steady 30%+ margin, irrespective of whatever investment it makes.
  • 5. 25 July 2017 Zee Entertainment – Revenue growth deferred to H2; maintaining a Hold Anand Rathi Research 5 Factsheet Fig 9 – Factsheet Year-end: Mar Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 Q1 FY18 Revenue split (%) Advertisement 58 57 58 55 63 Subscription 34 34 36 37 31 Others 8 9 6 8 6 Revenue split (` m) Advertisement 9,120 9,592 9,555 8,469 9,665 Subscription 5,282 5,833 5,935 5,580 4,791 Others 1,315 1,529 902 1,231 947 Yoy growth (%) Advertisement 17 14 1 -2 6 Subscription 14 22 14 -6 -9 Others 35 145 -31 69 -28 Advertisement revenue split (%) Domestic revenues 92 92 91 94 94 International revenues 8 8 9 6 6 Subscription revenue split (%) Domestic revenues 79 80 81 82 79 International revenues 21 20 19 18 21 Zee Sports (` m) Revenue 1,700 2,125 1,411 1,066 201 Costs 1,529 2,293 1,334 1,049 ND EBITDA 171 (168) 77 17 ND EBITDA margin (%) 10.1 -7.9 5.5 1.6 ND Source: Company
  • 6. 25 July 2017 Zee Entertainment – Revenue growth deferred to H2; maintaining a Hold Anand Rathi Research 6 Valuations Zee is uniquely positioned in the media sector due to its leadership in the various sub-segments – specifically regional content. It also gets a scarcity premium as the other two competitors are unavailable for investors in the secondary market. We believe that the media eco-system is evolving in favour of content companies and, therefore, the ability to consistently procure and build popular content would be even more valuable in the near future. Also, advertising expenditure is expected to rise due to enhancements in the economic environment. A part of these expectations is built into our estimates for the next two years and part is reflected in our better-than-the past target multiple. This, however, was delayed in FY17 due to the de- monetization and overall slowdown in advertising expenditure toward the second half of the year. The recovery in growth is likely to begin in H2, with FY18 recovering only gradually. This is currently reflected in our estimates for Zee. At the CMP of `540, the stock trades at 20.2x FY19e EV:EBITDA. We value Zee at 21x FY19e EV:EBITDA to arrive at a price target of `560, offering 4% potential. Fig 10 – Change in estimates FY18 FY19 New Old Chg % New Old Chg % Revenues (` m) 67,863 71,280 (4.8) 75,368 78,734 (4.3) EBITDA (` m) 21,275 21,398 (0.6) 23,190 23,871 (2.9) EBITDA margin % 31.3 30.0 133 bps 30.8 30.3 45 bps EBIT (` m) 20,031 19,938 0.5 21,946 22,065 (0.5) EBIT margin % 29.5 28.0 155 bps 29.1 28.0 109 bps PBT (` m) 21,331 21,920 (2.7) 23,238 24,493 (5.1) Net profit (` m) 13,388 14,467 (7.5) 15,104 16,165 (6.6) Source: Anand Rathi Research Fig 11 – EV/EBITDA Source: Bloomberg, Anand Rathi Research Risks  Any loss in content rating in the flagship/leadership genres. 15 18 21 24 27 Jul-13 Sep-13 Dec-13 Mar-14 Jun-14 Aug-14 Nov-14 Feb-15 Apr-15 Jul-15 Oct-15 Dec-15 Mar-16 Jun-16 Aug-16 Nov-16 Feb-17 May-17 Jul-17 EVEBITDARatio(1yearforward)
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Important Disclosures on subject companies Rating and Target Price History (as of 25 July 2017) Date Rating TP (`) Share Price (`) 1 28-Jul-16 Buy 540 465 2 01-Sep-16 Hold 580 540 3 12-May-17 Hold 570 525 Anand Rathi Ratings Definitions Analysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described in the Ratings Table below: Ratings Guide (12 months) Buy Hold Sell Large Caps (>US$1bn) >15% 5-15% <5% Mid/Small Caps (<US$1bn) >25% 5-25% <5% Research Disclaimer and Disclosure inter-alia as required under Securities and Exchange Board of India (Research Analysts) Regulations, 2014 Anand Rathi Share and Stock Brokers Ltd. (hereinafter refer as ARSSBL) (Research Entity) is a subsidiary of Anand Rathi Financial Services Ltd. ARSSBL is a corporate trading and clearing member of Bombay Stock Exchange Ltd, National Stock Exchange of India Ltd. 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ARSSBL does not provide tax advice to its clients, and all investors are strongly advised to consult with their tax advisers regarding taxation aspects of any potential investment. Opinions expressed are our current opinions as of the date appearing on this Research only. We do not undertake to advise you as to any change of our views expressed in this Report. Research Report may differ between ARSSBL’s RAs and/ or ARSSBL’s associate companies on account of differences in research methodology, personal judgment and difference in time horizons for which recommendations are made. User should keep this risk in mind and not hold ARSSBL, its employees and associates responsible for any losses, damages of any type whatsoever. Zee 3 1 2 200 250 300 350 400 450 500 550 600 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17
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None of the material, its content, or any copy of such material or content, may be altered in any way, transmitted, copied or reproduced (in whole or in part) or redistributed in any form to any other party, without the prior express written permission of ARSSBL. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of ARSSBL or its affiliates, unless specifically mentioned otherwise. Additional information on recommended securities/instruments is available on request. ARSSBL registered address: 4th Floor, Silver Metropolis, Jaicoach Compound, Opposite Bimbisar Nagar, Goregaon (East), Mumbai - 400 063. Tel No: +91 22 4001 3700 | Fax No: +91 22 4001 3770 | CIN: U67120MH1991PLC064106.