ZEE5 launch, ad growth key triggers for Zee Entertainment, stock falls

Attractive valuation makes the risk-reward favourable

The Zee Entertainment Enterprises (ZEE) stock has dropped about 12 per cent in the past three months. Profitability and cash flow worries, amid higher investments, and lack of clarity on Telecom Regulatory Authority of India’s (Trai’s) tariff orders weighed on the stock. However, this correction offers favourable risk-reward, given the strong outlook. Growth, going ahead, will be led by a revival in advertising spends by fast-moving consumer goods (FMCG) companies and the launch of ZEE5, its over-the-top (OTT) application.

Backed by a 22.3 per cent domestic advertising revenue growth, ZEE’s consolidated net profit rose 31 per cent year-on-year in the June quarter and operating profit margin was at about 32 per cent (50 basis point up y-o-y). 

ZEE5, which generates advertising revenue on free content and subscription revenue from original content, debuted with a lakh hours of content earlier this year. It will launch 80-90 new shows in addition to the 20 original shows slated to be released during the current quarter. Though not a major part of overall revenues currently, this is expected to boost ZEE’s advertising and subscription revenue. An incremental revenue boost will come from the global launch of ZEE5 by the end of the year. 

In addition to digitisation, analysts at Edelweiss Research say broad-based advertising growth and sustained focus on regional markets (GEC launch likely in Kerala) are expected to improve the company’s prospects, going ahead. The management is confident of clocking more than industry’s advertising revenue growth, with continued increase in network market share (19.2 per cent currently, against 18.5 per cent in the fourth quarter of FY18) and low-teens growth from subscription revenue in FY19.

Further, any deal between ZEE and Bharti Airtel’s for distribution of content on Airtel TV would also support top line growth, with improving overall content consumption (from 190-195 minutes earlier to 200-215 minutes now). 

Some analysts, however, are cautious about competition from other OTT apps like Netflix and Amazon Prime, which is key monitorable, besides the tariff order. But, given a large local content library, the management does not see the OTT competition as a big worry, and is positive on the impact of the tariff order. On valuation (26 times its FY20 estimated earnings versus 41-56 times of big consumer players), the stock appears attractive.