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Edelweiss, Elara Capital stay bullish on ZEEL; raise target price

Concerns persist on ad revenue growth

MUMBAI: Despite a decline in advertising revenue, EBITDA, brokerage firms Edelweiss and Elara Capital are bullish on the target price of Zee Entertainment Enterprises Ltd (ZEEL). The analysts also expect ZEEL to maintain its momentum in subscription revenue growth.

Edelweiss expects ZEEL to be a key beneficiary of the NTO regime given its strong pan-India viewership, comprehensive bouquet offerings, and entry in new markets. The firm maintains the target PE of 20x and roll forward to June 2021 to arrive at a target price of Rs 424.

“We expect ZEEL to maintain momentum in subscription revenue growth; however, its secular growth is hinged on the resumption of the advertising momentum, particularly by FMCG and auto players. In our view, though promoters have sought a resolution on share pledging, watch out for the outcome of the ongoing audits. We maintain the target PE of 20x and roll forward to June 2021 to arrive at a TP of Rs 424. The stock is trading at ~14x/12x FY21E/22E EPS. Maintain ‘BUY/SP’,” says Edelweiss in a research report.

“ZEEL trades at a fair valuation of 15x FY21E P/E and 14x FY22E P/E, which factor in concerns on ad revenues from macroeconomic headwinds and limit scope for potential downside. ZEEL also had an overhang due to strategic partner uncertainty, which negatively affected valuation for over a year; however, post the 22 November announcement that the promoter stake has reduced to 4.9 per cent to resolve group firm debt,” Elara Capital comments.

It has raised its target P/E by 25 per cent to 17.5x (from 14.0x) forward P/E. It reiterates Accumulate and raise its December 2020E TP to Rs 350 from Rs 310. It predicts ZEEL will continue to trade at a small premium to SUNTV, given better ad growth prospects and scale-up in digital (ZEE5).

However, it has mentioned that concerns persist on the ad growth front, as the FMCG vertical has yet to show signs of improvement in ad spend while macroeconomic headwinds persist with economic slowdown. Further, implementation to NTO 2.0 also would impact ad spend on the negative, given the transition period.

It also says that the positive impact of new channel launches for the ad segment is likely to be offset by the negative impact of a decline in international ad spend as ZEEL plans to move away from traditional TV in overseas markets. It also pared off its ad growth estimates to 8 per cent in FY21, given the scope of outperformance has converged for the network, as ad spend remains weak for the GEC genre and some select regional genres seem to have peaked for strong double-digit growth.  However, there may be some respite for ad growth if Zee Anmol becomes a pay channel post NTO 2.0.

After subscription growth of 23 per cent YoY thanks to NTO1.0, Elara Capital expects this segment to remain flat in FY21, due to NTO 2.0. It also adds that in an adverse scenario, scope exists for low single-digit decline. EBITDA margins remain under pressure, with content investment on the digital side and launch of five new regional channels in Q4FY20, which remain an overhang. Hence, it expects margin to fall below 30 per cent in FY21E.

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