Zee Entertainment Falls To 20-Month Low After Morgan Stanley Downgrade
Shares of Zee Entertainment Enterprises Ltd. fell to a 20-month low after Morgan Stanley lowered its rating on the stock.
The brokerage downgraded the Mumbai-based media company to ‘Underweight’ from ‘Overweight’. It cut the target price to Rs 410—the lowest among the Bloomberg consensus of 38 analysts—implying a potential downside of 15 percent.
Competing with digital and over-the-top platforms such as Netflix, Amazon and possibly a larger domestic rival like Reliance Jio Infocomm Ltd. will be an overhang, Morgan Stanley said. Digital play Zee5, it said, will have to spend disproportionately on high quality content, as creating over-the-top content is more expensive than traditional TV. And hence, investments in Zee5 is likely to drag margins in near term by 3-5 percentage points, it said.
But Zee is CLSA’s top pick in the media sector. Video-content owners are best positioned to ride the over-the-top wave in India, it said.
While Morgan Stanley expects Zee5 to break-even only by financial year ending March 2025, or earliest in the next five years, CLSA expects digital advertising revenue to jump fourfold led by an explosive growth of digital video.
A global case study by Morgan Stanley showed that Netflix penetration in the U.S. increased to 55 percent last year from 32 percent in 2012, and that of television subscribers declined. The TV advertising revenue growth in the U.S., it said, slowed down due to loss of share to digital platforms.
India is in early stages of this transition, so the share of digital advertising in the country is expected to increase from 17 percent to 31 percent in 2024-25, it said. This may slowdown Zee’s traditional TV advertising revenue in the medium term, which contributed 63 percent to its top line in the financial year-ended March.
A transition from traditional medium to digital is likely to weigh on Zee’s stock performance and may lead to its further de-rating as over-the-top losses start flowing through, Morgan Stanley said.
CLSA too said that though Zee is set up for success in both TV and digital platform, margins may come under pressure in the near term because of rising content cost for the over-the-top platform.
Shares of Zee fell as much as 9.6 percent intra-day to Rs 436.05 apiece.