The stock of Zee Entertainment, one of the biggest players in the media and entertainment industry, is on the road to recovery and has gained 31% in the past year. As the business was hit hard, in terms of ad revenue and fresh content, due to movement restrictions and lockdown measures, the two began to pick up. Given its pan-Indian presence with a solid base in GEC (General Entertainment Category) and a good collection of movie libraries, the company should be able to build a solid audience base going forward. The company is among the top three players in the regional and Hindi markets. It had expanded its regional presence and now operates 49 channels in 11 languages. In addition, the overhang on the sale of the promoter’s stake has been resolved. Now, the company plans to undertake investments for the next two years with the creation of digital content, notably for Zee5 (its OTT platform) and the ramp-up of film production. It also plans to increase its original content and a larger portfolio channel (TV). This should contribute to the future growth of the company. This, along with a solid content base and sustained marketing investment plans, are key positive elements for the business.
At 209 yen, the stock is trading at a one-year futures PE of 13 times (Bloomber consensus) against a 5-year average of 23 times. Given its cheap valuation, strong presence in the Indian entertainment industry, and good growth prospects in streaming, commercial investors with a 2-3 year investment horizon can buy the stock.
Potential for revenue growth
Zee Entertainment derives around 40% of its revenue from subscription and the pandemic outbreak helped increase the subscription base as people were confined to their homes. This was at a time when ad revenue, which contributes a great deal (around 58%), was trying to make a comeback. For example, last year during the June and September quarters, when strict lockdowns and controls were put in place across all states, subscription revenue grew 5% and 10% in year-on-year respectively, while advertising revenue fell 64 and 26 percent year-on-year over the same period. .
In addition, a large audience base, presence in multiple languages ââand strong market penetration, especially in Hindi channels, have always worked in Zee’s favor. Now that ad revenue is slowly recovering, these key factors could help maintain top revenue streams over the next few quarters. According to the EY-FICCI Media and Entertainment 2021 report, consumption of regional content has increased and the pandemic has accelerated in the same way. As a result, regional ads have also increased. This is expected to continue as most businesses have started increasing their ad spend. In addition, once the new tariff order resolution (for pay TV) takes hold in the market, it is expected to contribute to the growth of the company’s subscription prices. It also offers international content to Indian audiences, which bodes well for the company’s prospects.
The increase in content consumption over the past year, especially via the OTT platform, bodes well for an entertainment company like Zee. The company’s OTT platform, Zee5, has steadily gained ground with 72.6 million monthly active users worldwide in March 2021 (63.1 million last year in March).
During the quarter, the company released 14 original shows and movies in Zee5 and the company plans to release more exclusive content on the platform in all languages ââin the coming quarters, which should improve its subscription. Investments in content are expected to continue even if the annual price (for Zee5) has been lowered to make it competitive (â¹ 499 per year). When it comes to film production, Zee already has an extensive collection of films in its library, across all genres and languages. This is where Zee’s presence in entertainment helps Zee not only retain the TV audience base, but also deliver exclusive movies or direct release on the Zee5 platform. For example, the company released ‘Radhe’, a big budget movie exclusively on Zee5. Film production and distribution rights will help the company monetize its activities in the broadcast, digital and music industries.
Despite a 4QFY21 affected by a pandemic, compared to 4QFY20 which had a low impact due to Covid, advertising revenue grew 8% year-on-year. Subscription revenue grew 8.4% year-over-year over the same period. This was mainly driven by Zee5. The company reported a profit of 210 crore, against the reported loss (impacted by one-time items) during the same period last year. The company’s adjusted EBITDA was 540 crore in fiscal year 4QFY21 compared to â¹ 319 crore last year. .
While Zee’s valuation and business outlook is attractive, there are some things that investors should consider and invest for the long term. Its advertising revenue could suffer, in the short term, if Covid infections increase. Additionally, TV and OTT operate in a highly competitive space and can impact Zee’s market share.