ZEEL: Core business deterioration continues

The beauty of Zee’s broadcasting business from FY2012 to H2FY20 was steady in domestic subscription and advertising revenues that far exceeded cost inflation, driving EBITDA margin expansion to 30%. EBITDA margin has collapsed to 20% over the past 10 quarters led by: adverse externalities including structural risks (weak TV ad outlook attributable to pandemic and ad share loss to digital, regulatory embargo weighing on domestic subscription) and weak execution (viewership loss). 

Zee’s operating performance would improve over the next two years led by: gradual recovery in TV ad outlook, implementation of NTO2, some recovery in Zee’s viewership, and merger synergies. 

However, recent developments like Netflix’s plans to launch ad-supported subscription pack and James Murdoch and Uday Shankar’s acquisition of 40% stake in Viacom 18 would result increase in competitive intensity in TV/OTT for Zee. Further, delays in regulatory approvals do not augur well. 

Ad revenue continues to be impacted by cut in spends by FMCG sector (53-54% salience in overall ad spends) due to inflationary pressures. Demand momentum from new age businesses continues, especially on digital platforms.

Zee’s Management noted that the decision to withdraw General Entertainment Channels from Free-to-Air services and the aftershocks of Russia-Ukraine war can impact ad revenues in the near term. Despite this, ZEEL is confident to register positive growth in ad revenues in FY2023 on a weak Base. Ban on pricing is expected to be lifted in May-June 2022 continuing to weigh on linear TV subscription revenue while growth in overall subscription revenue is driven by Zee5. TV penetration has grown over the past two years primarily driven by Free-to-Air services.

The Management of Zee highlighted in the concall that margin recovery from current levels will be gradual as FY2023 will be a year of investments in:

(1) content: to create differentiated value propositions with a focus on digital and global partnerships. Zee will continue to invest in TV (Hindi, Marathi, Tamil) and movies (>20-25 in FY2023) to gain market share

(2) technology: upgrade capabilities to deliver a seamless experience

(3) people: high inflation is pushing the cost of programming, wages higher. Net-net, 1QFY23 margin will see a sharp drop followed by a gradual improvement through the year.

Other takeaways:

(1) Zee’s viewership share has declined by 20 bps QoQ to 17.1% 

(2) receivables from Dish TV is down to Rs.2.4 billion as of March 2022 vs Rs.5.8 billion as of March 2020 

(3) Siti revenues are recognized on collection basis, Rs.189 million of delayed receipts are not booked as revenue as of March 2022 

(4) C&CE split—bank balance of Rs8.2 bn, FD of Rs4.5 bn, and NCD of Rs0.3 bn 

(5) Zee’s own balance sheet can support an IPL bid given upfront payment will only be a part of overall bid

(6) movies had a positive contribution to EBITDA in 4QFY22.