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  • Company update: Zee Entertainment Enterprises — Add — TP Rs. 625

    Publish date: July 12, 2018


    FY 2018: Annual report analysis

    Zee’s free cash flow hit a bump this year, mainly due to the network’s heavy investment in acquiring movie rights. The network is also banking on its digital strategy to hit the sweet spot in the market and diversify its revenues.

    One hint of worry was the company’s aggregate investment in high-risk assets such as unknown overseas funds, real estate entities and inter-corporate deposits (ICDs).

    The annual report also mentioned that they had become the number non-sports entertainment network in the country.

    Key Highlights

    • The network’s free cash flow slid this year as it made heavy investment in purchasing rights of movies. Around Rs 14-15 billion were spent to buy satellite and digital rights. This means the network has spent around Rs 25 billion to acquire movie rights in the last two years.
    • Zee’s gross yields have dropped to 4-5% in the last two financial years. It was 8-9% between FY 2013 and FY2015.
    • Zee has made some high-risk investment strategy. It finds itself in a scrap to recover its investment of Rs 1.7 billion stuck in non-convertible debentures of SGGD Projects. The network has also made additional investments in offshore funds, up by 27%. The network’s loans under current assets have also increased from Rs 1.5 billion last financial year to Rs 2.4 billion now.
    • Zee’s core broadcasting business is in fine fettle, but the network has major plans of establishing itself as a key digital player. We believe the company’s next phase of stock impetus will depend on the network’s digital success. Zee5, the network’s digital platform, has so far leveraged its market positioning by concentrating on Hindi and regional content. Zee also plans to produce 90 originals by March 2019.
    • Zee’s ad revenues increased by 15.5% yoy. The jump comes close on the heels of the network becoming the number one non-sports entertainment channel in the country. The network now has an 18% viewership share and its 39 channels now reaches 700 million people in India.

    Valuation & Outlook

    We are expecting Zee to monetize its investment in movies. But our eyes will be on Zee’s digital strategy. If the network is able to adapt to the fast-evolving digital landscape, Zee5 — its online platform — can be a revenue driver, especially in the Hindi and regional markets. We maintain a neutral stance and value the company’s stocks at 28x FY2020E core earnings.

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