Zee’s robust domestic ad growth is expected to continue due to the favourable ad environment (FMCG contributes ~55% to ad revenues), sustained focus on regional markets (GEC launch in Kerala) and adding movie channels in Tamil and Kannada.
To tackle the digital disruption, it launched Zee5, expected to break even in the next 3-5 years. The stock has slid 30% in the last five months.
Introducing FY21E, we raise our recommendation to a ‘Buy’, with a TP of Rs 530, valued at 17x FY21e EV/Ebitda, from 19x earlier (FY20e), implied PE: 28x. Favourable ad-market context, market-share rise, regional expansion aiding advertising growth.
For FY19, the company is expecting to outstrip the industry’s 14% growth (KPMG M&E Report, 2018) following the consistent increase in viewership share (20% expected in Q2 FY19, up from 16.1% in Q4 FY17) due to its focus on regional channel expansion. Also, since the ad environment has turned favourable (FMCG companies, bringing ~55% to Zee’s ad revenue, have loosened advertising purse strings because rural spending is rising), the company is confident of low mid-teen revenue growth in subscriptions in FY19.
For the next 2-3 years, most of its investments will be in digital. For the next 2-3 years, the company will invest in digital all amounts that contribute to a more than 30% margin. (Excl. digital, Zee’s margins in Q3FY18 were 32.3%, the highest ever.) With a vast content range (in Tamil, Telugu, Kannada, Malayalam, Marathi and Bengali) and regional focus (six major regional languages), management believes that Zee5 will break even in the next 3-5 years (with 4/5 ratings, more than 10m downloads in Google play).
Over the last few years, Zee has outpaced industry ad-growth; we expect this to continue.