Zee Entertainment rises on brokerage upgrades, ad and viewership growth

The Zee Entertainment Enterprises (ZEEL) stock has gained over 13 per cent after brokerages upgraded it on the back of improved disclosures, reconstitution of the board, and management commentary on free cash-flow generation. Besides, an expected recovery in advertising growth from the December quarter onwards and improving viewership are perceived as positive triggers by the Street. Analysts at JPMorgan believe the stock, which has dropped by half over the past year, can be re-rated significantly if the management delivers on its commitments. 

In addition to the upgrades, a favourable judgment by the Bombay High Court on a YES Bank petition seeking to enforce personal guarantees against ZEEL’s promoters boosted the sentiment. 

A key trigger has been improved disclosures by the company, which include quarterly balance sheets, performance metrics for Zee5, and the strengthening of corporate governance policies. The company is reconstituting its board with new board members having expertise in media, finance or law. Consistent free cash-flow generation is key for sustained re-rating, given the underperformance in the recent past, say analysts. 

The other positive is an improvement on the operating front. While the company reported a 66 per cent fall in domestic advertising revenues in the quarter, given weak corporate spending, it believes the trend is reversing with advertisers gradually coming back, led by the FMCG sector. It expects growth to bounce back in the  December quarter. 

 

 
This can be led by an improvement in the share of general entertainment channels and bounce-back in the company’s viewership share from 15.8 per cent in the June quarter to 19.2 per over the last four weeks. The firm highlighted that gradual resumption of original content and the launch of two channels on the free-to-air platform led to the gain in market share.

Unlike advertising, domestic subscription revenues posted growth of 6 per cent year-on-year (YoY) on a higher base, led by subscription sales from its over-the-top (OTT) application, Zee5. The company disclosed the revenue of Zee5 for the first time and it stood at Rs 95 crore, while the loss at the operating level came in at Rs 145 crore. ZEEL’s performance on the subscription front, however, lagged Sun TV’s as the latter reported 18 per cent growth. Zee5’s user base fell to 40 million (monthly average), from 63 million in the March quarter, given the lack of original content because of the lockdown. In addition to advertising revenue, digital assets get subscription revenues from tie-ups with telecom companies and direct subscriptions. 

While the company will continue to invest in its digital assets, it will be an uphill task to breakeven at the operating level and gain scale. Zee5 accounts for 7 per cent of its operating revenue currently. 

 
Though operating costs came down as there was limited new content in the first two months of the quarter, flattish employee expenses, purchase of licensed content, and home-based content creation offset the drop in programming costs. The result was a sharp 67 per cent slide in operating profit YoY in the quarter. Going ahead, the company’s plan of lower inventory acquisition as compared to earlier periods, moderation of capex, and lower receivables for 2020-21 are positive.   

While the company is hopeful of a rebound in advertising, the near term can see some impact, given the IPL scheduled in September, weakness in advertising, and gradual availability of new content. Its ability to post consistent growth, including free cash flows, will be key if the stock is to sustain recent gains. 



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