PL Stock Report: Zee Entertainment Enterprises (Z IN) - Q2FY24 Result Update – Windfall from movies aids margins - BUY

Zee Entertainment Enterprises (Z IN) - Jinesh Joshi - Research Analyst, Prabhudas Lilladher Pvt Ltd.

Rating: BUY | CMP: Rs263 | TP: Rs314

Q2FY24 Result Update – Windfall from movies aids margins

Quick Pointers:

♦ After being in single digit for last 2 quarters, EBITDA margin improves to 13.6% aided by strong performance from movies and lower losses in ZEE5.

Zee Entertainment Enterprise’s (Z IN) operational performance was better than our expectation with EBITDA margin of 13.6% (PLe of 11.6%) amid strong performance from movie business and lower EBITDA losses in ZEE5 (Rs2.5bn in 2QFY24 versus past 4-quarters’ average loss of Rs3bn). Likely improvement in ad-environment and accrual of benefits from NTO 3.0 is likely to result in sales CAGR of 9% over next 2 years with EBITDA margin of 12.1%/18.2% in FY24E/FY25E. Given NCLT approval is already in place and SAT has overturned SEBI’s decision that barred Mr Punit Goenka from holding managerial position in a listed entity we do not foresee any further delay in merger with SPNI. We broadly maintain our estimates and retain BUY with a revised TP of Rs314 valuing the merge-co at 25x FY25E EPS.

Topline increased by 20.5% YoY: Revenues increased 20.5% YoY to Rs24,378mn (PLe Rs21,422mn). Ad revenues declined 3.3% YoY to Rs9,792mn while subscription revenues increased 8.0% YoY to Rs8,878mn. Revenues from other sale & services was up 201.5% YoY due to strong performance from movies like Gadar-2, Bro and King of Kotha.

EBITDA margin at 13.6%: EBITDA increased 5.7% YoY to Rs3,328mn (PLe Rs2,378mn) with a margin 13.6% (PLe 11.1%) as against a margin of 15.6%/7.8% in 2QFY23/1QFY24 respectively. After adjusting for the one-off charge of Rs1,198mn (merger related costs), PAT increased 35.8% YoY to Rs2,497mn with a margin of 10.2%. Apart from this, loss from discontinued operations stood at Rs69mn.

ZEE5’s revenue grew 58.7% YoY: ZEE5’s revenues increased by 58.7% YoY to Rs2,652mn aided by a syndication deal. 22 new shows/movies were launched in 2QFY24 which included 4 originals and the EBITDA loss narrowed to Rs2,539mn.

Con-call highlights: 1) The other sales and services revenue increased by 201.5% YoY to Rs5,708mn in 2QFY24, largely due to BO success of movies like Gadar-2, Bro, and King of Kotha. 2) ZEEL’s network share was up by 90bps to 17.9% in 2QFY24. 3) GEC viewership share is likely to be impacted in 3QFY24 due to World Cup. 4) ZEE5’s revenue increased by 58.7% YoY to Rs2,652mn driven by higher subscription revenue and syndication deal. 5) Total exceptional cost relating to merger amounted to Rs1,198mn. 6) Inventory has declined to Rs70,216mn amid slew of movie releases. 7) Receivables increased to Rs22,562mn as collections pertaining to movies have been spilled over to 3QFY24. 8) Outstanding receivable from Dish stands at Rs691mn 9) Industry is likely to see a high single digit growth in advertising in near future. 10) Zee Studios released 2 Hindi and 4 regional movies during the quarter. 11) Zee Music Company (ZMC) recorded ~142mn subscribers on YouTube in 2QFY24. 12) Finance cost includes BG commission and interest charges paid to Star/ICC for acquiring the ICC rights.

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