Mumbai: Zee Entertainment (Z IN) reported revenue of Rs 20.46bn, down 16.1 per cent QoQ and 3.1 per cent YoY, slightly below our estimates. Ad revenue declined 3.4 per cent YoY to Rs 10.27bn whereas subscription revenue grew 3.0 per cent YoY to Rs 9.21bn. Revenue from Zee5 stood at Rs 2.33bn, up 20 per cent YoY. The company reported an EBITDA of Rs 2,092mn with an EBITDA margin of 10.2 per cent, down 340bp QoQ and 580bp YoY. Reported PAT stood at Rs 533mn.

Z reported muted ad revenue, in line with our estimates, as it declined 3.4 per cent YoY, due to the shift of ad spending toward the Cricket World Cup (CWC); linear TV ad revenue will continue to grow by 3-4 per cent YoY on steady state, in our view, for the near to medium term, led by mild outperformance in the regional genre. Linear subscription revenue too is set to grow by ~4 per cent YoY on a steady state, as linear TV household loss will be offset by price hikes, which could be subject to regulatory hurdles post-NTO implementation. Growth in the digital business remains strong, as revenue grew 33 per cent YoY in 9MFY24 (contributed 10.7 per cent of total revenue in 9MFY24), led by higher subscription and ad revenue, and the launch of 73 shows & movies (including 14 originals) over the past three quarters. EBITDA margin remains healthy for the linear TV business at ~27 per cent in 9MFY24 (ex of OTT losses and movie revenue); however, with OTT losses, it is weak at 10.8 per cent; management is confident of achieving sharp improvement in EBITDA margin, led by 1) lower losses in OTT as investments have peaked, and 2) cost rationalisation on employee, technology and content. We believe the EBITDA margin could expand 450bp during FY24-26E to 15.4 per cent in FY26E, below management’s aspiration of ~18-20 per cent.

▪ Valuation: Despite the potential for improved profitability, concerns persist, such as 1) increased disruption in the digital & linear TV space due to the potential merger of Disney and Reliance, 2) legal overhang on pending litigations with creditors and Sony Corp, and 3) the absence of a strategic partner which could pose a challenge to scale up digital business offerings, a key growth driver. Z has a robust catalogue of movies, TV shows, web series and music content, which limits potential downside from current levels despite risks; the stock currently trades at 19.6x FY26E P/E. Any potential tie-up with a strategic partner or a turnaround to scale up digital offerings with lower losses will be key monitorable for an upgrade. We raise our revenue by 0.2 per cent for FY25E and 1.9 per cent for FY26E. We increase our earnings by 2.5 per cent for FY25E and 21.1 per cent for FY26E, due to better margin. We retain Sell with a higher TP of Rs 180 from Rs 170 due to better margin. We value the broadcasting business at 10 times (unchanged) one-year forward P/E and OTT at 3.0 times (unchanged) one-year forward EV/sales

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