The stock of Zee Entertainment, one of the largest players in the media and entertainment space, has been on a recovery path and has gained 31 per cent in the past year. While the company was hit hard, in terms of advertisement revenue and fresh content, due to movement restrictions and lockdown measures both have started to pick-up. Given its pan-India presence with strong base in GEC (general entertainment category), and good collection of movie library , the company should be able to build a strong audience base going ahead. The company is among the top three players in regional and Hindi markets . It had been expanding its regional presence and now operates 49 channels in 11 languages. Also, the overhang on the promoter’s stake sale has been addressed. Now, the company plans to undertake investments for the next two years with digital content creation, particularly for Zee5 (its OTT platform) and ramp-up movie production. It also has plans to increase its original content and broader portfolio channel (television). This should aid in the future growth of the company. This along with strong content base and sustained plans for marketing investments are key positives for the company.

At ₹209, the stock is trading at one year forward PE of 13 times (Bloomber consensus) versus 5 year average of 23 times. Given its cheap valuation, strong prescence in Indian entertainment industry and good prospects for growth in streaming business investors with investment horizon of 2-3 years can buy the stock.

Revenue growth potential

Zee Entertainment derives about 40 per cent of its revenue from subscription and the outbreak of pandemic has helped increase the subscription base as people were confined to their homes. This was at a time when advertisement revenue which contributes to a major chunk (about 58 per cent) was trying to make a comeback. For instance, last year in June and September quarters, when strict lockdown and control measures were put in place across states, the subscription revenue registered 5 and 10 per cent y-o-y growth respectively while advertisement revenue fell 64 and 26 per cent y-o-y during the same period.

Further, large audience base, presence in multiple languages and strong market penetration, particularly in Hindi channels, have always worked in favour of Zee. Now with advertisement revenue slowly recovering, these key factors could aid in sustaining key revenue streams in the coming quarters. According to EY-FICCI Media and Entertainment report 2021, the regional content consumption has been on the rise and the pandemic accelerated the same. As a result regional advertisements too have been on the rise. This is expected to continue since most companies have started to increase their ad spends. Also, once the new tariff order resolution (for pay TV) settles in the market, it should help in the subscriber pricing growth of the company. It also offers international content to the Indian audience which bodes well for the company’s prospects.

Streaming Business

The increased content consumption in the past year, particularly through the OTT platform bodes well for an entertainment company such as Zee. The company’s OTT platform Zee5 has been steadily gaining traction with 72.6 million global monthly active users in March 2021 (63.1 million last year March).

During the quarter, the company released 14 original shows and movies in Zee5 and the company has plans to launch more exclusive content on the platform across languages in the coming quarters which should improve its subscription. The content investments are likely to continue even as annual pricing (for Zee5) had been lowered to make it competitive (₹499 per year). On the movie production business, Zee already has a vast collection of movies in its library across genres and languages. This is where Zee’s presence across entertainment helps where Zee can not only retain the television audience base but gets to offer exclusive movies or direct release in Zee5 platform. For instance, the company released ‘Radhe’, a big budget movie exclusively on Zee5. The movie production and distribution rights will help the company to monetise across broadcasting, digital and music businesses.

Financials

Despite a pandemic-hit 4QFY21, compared to 4QFY20 which had low impact due to Covid, the ad revenue registered growth of 8 per cent y-o-y. Subscription revenue grew 8.4 per cent y-o-y during the same period. This was primarily driven by Zee5. Company reported profit of ₹210 crore, against the loss reported (impacted by one-off items) during the same period last year. The company’s adjusted EBITDA was at ₹ 540 crore in 4QFY21 vs ₹ 319 crore last year. .

While Zee’s valuation and business prospects are attractive, investors should factor a few things and invest for the long term. Its advertisement revenue could take a hit, in the short-run, if Covid infections rise. Also, both TV and OTT, operate in a highly competitive space and can impact market share of Zee.

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