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Anand Rathi
Zee Entertainment (Buy)
CMP: ₹392.2
Target: ₹450
Driven by 46.8 per cent y-o-y growth in domestic subscription revenue, Zee’s Q1 FY20 revenue grew 13.3 per cent y-o-y to ₹2,008 crore. Domestic advertising revenue grew 4.2 per cent y-o-y, as 5-6 per cent of advertising growth has been hit by the conversion of two FTA (free-to-air) channels into pay channels. Lower other expenses due to good cost control (8.6 per cent versus 12.8 per cent y-o-y) resulted in the margin expanding 93 bps y/y to 32.9 per cent. We cut our FY20e/FY21e Ebitda 4 per cent and 5.5 per cent, 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.
Investments in digital will further increase in FY20 as the company ramps up production of ZEE5 Originals and movie offerings across languages. These content investments would be complemented by marketing spend. FY20 slate of original content is building up well and the company is on track to launch more than 70 original shows and movies in six languages.
Risk: Any slippage in content ratings.
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