Zee Entertainment falls 8% in 3 days on mixed Q2 nos; hits over 4-year low

Zee's revenues have continued their declining trend as ad revenue growth remained underwhelming, declining by another 7.9 per cent YoY during the second quarter

Shares of Zee Entertainment Enterprises (ZEE) hit an over four-year low of Rs 121.65, down 2 per cent on the BSE in Wednesday’s intra-day trade. In three days, the stock of the TV broadcasting and software production company has declined 8 per cent, after it reported a mixed operating performance in September quarter (Q2FY25). 

The stock is trading at its lowest level since April 2020. Thus far in the calendar year 2024, the market price of Zee has more-than-halved, or tanked 57 per cent, as compared to the 11 per cent rise in the BSE Sensex. At 10:47 AM, Zee shares were trading 1 per cent higher at Rs 124.90, as against 0.14 per cent gain in the benchmark index.

Zee’s revenues have continued their declining trend, as it fell 18 per cent year-on-year (YoY) to Rs 2,001 crore in Q2FY25, on softer advertising revenue and lower revenue from other sales and services (Q2FY24 boosted by Gadar 2 release).

Advertising revenue growth remained underwhelming, declining by another 7.9 per cent YoY. Ad revenue has now declined annually in the last eight of the nine quarters. Subscription revenue, meanwhile, saw an uptick of 9.2 per cent YoY. 

Margins surprised positively as Zee contained expenses across the board. In Q2FY25, earnings before interest, taxes, depreciation and amortisation (Ebitda) margin stood at 16 per cent, increasing by nearly 320 bps QoQ on effective cost management aided the profitability. The company’s profit for the quarter jumped 70 per cent YoY to Rs 209 crore.

However, domestic advertising revenues were impacted by a muted ad spending environment in the second quarter of the current fiscal. While ad spending is picking up with the onset of the festive season, sustained recovery remains the key, the company said.

Management stated that the advertising environment has picked up in September in the run-up to the festive season, although long term spending trends remains uncertain as of now. Zee has made some progress on its financial aspirations which were announced after the breakdown of the merger between it and Sony India, although the lack of ad revenue growth recovery remains the biggest concern, according to analysts at Emkay Global Financial Services. 

In the brokerage's view, going ahead, the absence of revenue pickup will act as a hindrance for further margin expansion. “We reiterate that a significant re-rating should be possible in case of a new partner/buyer. With persisting challenges on the advertising growth front, we cut our FY26-27 Ebitda by 8-10 per cent,” analysts noted.

The management indicated that advertising revenue saw a pick-up in September 2024, which should continue in Q3 with the onset of the festive season. However, a strong and sustainable pick-up in rural consumption is required to maintain the healthy ad revenue momentum beyond Q3, analysts at Motilal Oswal Financial Services said.

The brokerage firm lowered its FY25/FY26 revenue estimates for the company by 5-7 per cent due to weaker growth in domestic ad revenue and cut its Ebitda estimates by 3-10 per cent, largely on weaker revenue growth.

Zee aspires to deliver a compounded annual growth rate (CAGR) of 8-10 per cent in total revenue with its current portfolio and improve its Ebitda margins to an industry-leading range of 18-20 per cent. 

Analysts believe that a sustainable recovery in ad revenue remains key to meeting these aspirations and a potential re-rating. "Zee’s valuations have turned attractive. However, we await the outcome of the ongoing litigation for ICC rights with Star before we turn more constructive on Zee," analysts at Motilal Oswal added.