Outlook and Valuation
We anticipate a good growth in Zee’s ad revenue growth as the DeMon negativity and GST pangs are more or less behind the industry and a broad based sectoral spending on advertising has been witnessed in the quarter. Market share gains have already taken place on the Hindi GEC front, regional channels, RBN and 9X acquisitions, newly launched channels, rising original programming hours and the movies basket (Marathi and Hindi) continue their excellence. Even internationally, the revenues are expected to move well on new content. This will enable the ad revenues to grow at a decent pace. Innovation in the form of new OTT channel Zee5 which would be launched in February would open an altogether new stream of revenues which is the buzz word currently. Possible entry into new market like Kerala will be an additional lever to the business. Subscription revenues may continue with their negative stint in Q4 as well as the delay in distribution deals and contracts may continue further. However, once it gets finalized, this business vertical will continue to get trigger from digitization (albeit with a delay) and the long term positives from the new tariff regulations. Margin guidance above 30% is heartening and we believe this to be quite achievable despite investments in new businesses and geographies. Robust FCF and stable dividend policy will allow the company to be a secular growth story. We have slightly reduced our FY18E and FY19E estimates on softness and uncertainty in the subscription business and management’s higher tax rate guidance of 40-42%(due to dividend tax) for FY18E. We roll over to FY 20 and assign a 30x multiple to value to the company. We maintain BUY on the stock with a rolled over TP of ₹678. Key concerns on the stock are 1). The proliferation of digital diaspora, which may eat into TV revenues. 2). Further delay in the tariff order implementation and execution glitches which it may face. 3). Competition coming up from the launch of Hindi GEC by Discovery and entry of Viacom 18 in Tamil markets.