Zee Entertainment Shares Fall The Most In 11 Months

Shares of Zee Entertainment Enterprises Ltd. fell the most since March as analysts see pressure on margin and cash flows despite improving advertising and subscription revenue.

The broadcaster reported a 33% year-on-year rise in overall revenue at Rs 2,729.3 crore in the quarter-ended December, according to an exchange filing. That compares with the Rs 2,081.5-crore consensus estimate of analysts tracked by Bloomberg.

A Rs 552-crore content syndication deal signed by the company, too, aided the top line.

• Advertising revenue rose 7.5% over the year earlier and 43% sequentially, reflecting improving consumer demand and spending.
• A 9.3% year-on-year subscription revenue growth in the domestic business was led by television and Zee5.
• Operating profit rose 31%, but margin contracted 50 basis points to 26.2%.

The company in an analyst call said it will ramp-up investments in its movie production business as well as Sugarbox—its online content delivery subsidiary.

While some analysts see this as a significant negative, impacting margin, others said the company is prepared to sacrifice margin to pursue growth.

Shares of Zee Entertainment fell as much as 15% to Rs 212 apiece — the lowest in two months. Of the 27 analysts tracking the company, 13 have a ‘buy’ rating, nine suggest a ‘hold’ and five recommend a ‘sell’. The average of Bloomberg consensus 12-month price target implies an upside of 18.6%.

Here’s what analysts had to say:

Kotak Institutional Equities

• Downgrades to ‘reduce’ from ‘add’; but hikes price target to Rs 240 apiece from Rs 225.
• Downward margin guidance rules out earnings upside.
• Ramp-up of movie production business and Sugarbox capex will alter capital intensity and drag cash flows.
• Few balance sheet concerns continue.
• Key metrics and disclosures do not inspire confidence.
• Stock has run up and does not merit further re-rating, given the structural risks to the core business and lacklustre progress of Zee5.

Dolat Capital

• Downgrades to ‘sell’ from ‘buy’ and cuts price target to Rs 204 apiece from Rs 247.
• Adjusted for content syndication, free cash flow was negative.
• Stepping up investments will severely impact margins, working capital and thus free cash flow, which is a serious negative.
• Estimates a substantial drop in Ebitda margin of at least 500 basis points or more in FY22.
• Investment in high-risk, low-margin movie production business is likely to make the earnings trajectory significantly volatile.
• Persistent backtracking by the management on its own words/guidance is concerning.

Morgan Stanley

• Maintains ‘underweight’ rating with a price target of Rs 170 apiece.
• Zee5 revenue increased but engagement did not show much change sequentially.
• Content investment rising in FY22 will impact margins, working capital and free cash flow.
• Risks in the business are fast changing and investments in content, tech and marketing are likely to pose new challenges.
• Incremental success in digital and core business will be the key to drive confidence on near-term earnings.

Macquarie

• Maintains ‘outperform’ rating; hikes price target to Rs 308 from Rs 258.
• Likes intent to invest further in core business.
• Welcomes readiness to sacrifice industry leading margins to pursue growth.
• Expects to further build on ad growth momentum after third quarter.
• Remains positive on improving ad outlook, balance sheet and efforts to restore credibility.
• Lowers FY21-23 EPS estimates by 1-3% largely on lower other income.

Motilal Oswal

• Maintains ‘neutral’ rating with a price target of Rs 245 apiece.
• Revenue recovery has been encouraging.
• High investments in content acquisition, acceleration in low margin movie production and investments in digital platform will keep margins contained at 27% in FY22.
• Remained committed to bringing in increased governance and transparency towards investments.
• Raises FY21, FY22 Ebitda estimates by 9% and 5%, respectively, led by quicker recovery in ad revenues.
• Any potential rerating will be governed by a consistent and disciplined investment approach.