Why Analysts Remain Unfazed By Zee Entertainment’s Q1 Profit Drop

Analysts cheered Zee Entertainment Enterprises Ltd.'s efforts to improve governance and disclosures, better outlook on ad revenue and a decline in working capital, among others, even as the broadcaster saw its net profit nearly wipe out in a pandemic-marred quarter.

Zee Entertainment’s net profit slumped 94% year-on-year to Rs 29.3 crore in the April-June period, according to an exchange filing. Its revenue fell 35% over the year-ago period to Rs 1,312 crore in the three months through June.

That came as the company’s ad revenue tumbled 65% after the Covid-19 pandemic stalled businesses in April and most of May. Its subscription revenue, however, rose, aided by a surge in online streaming as people stayed indoors during the lockdown.

Besides, as part of its 4.0 strategy, the company expects new board members with expertise in media, finance or law to be inducted this year and improved disclosures to be in place with Zee5 revenue and Ebitda disclosures coming in, along with a strong rebound in viewership share across channels after the lockdown.

In line with this strategy, the company saw a reshuffle in its board with Subhash Chandra stepping down as non-executive director. R Gopalan, additional director at Zee Entertainment since 2019, has been appointed as the chairman of the board.

These may have prompted analysts to maintain their bullish investment recommendation for the broadcaster.

Of the 27 analysts tracking the stock, 12 have a ‘buy’ and ‘hold’ rating each, while three recommend a ‘sell’. The average of Bloomberg consensus 12-month target price implies an upside of 9.2%. Shares of Zee Entertainment rose as much as 5% in Wednesday’s trade compared with a 0.44% gain in the benchmark Nifty 50 Index.

Here’s what brokerages have to say about Zee Entertainment’s Q1 results:

Macquire

• Maintains ‘outperform’ with a target price of Rs 250 apiece.
• Raises FY21-23 earnings per share estimates by 3%-5%.
• Significantly improved disclosures, strengthening of board and guidance of advertising revenue growth from third quarter this year stood out.

CLSA

• Retains ‘buy’ rating with a target price of Rs 255 apiece.
• The company should emerge stronger post Covid-19, led by a strong board of directors, enhanced disclosures, governance and viewership improvement.
• The stock offers deep value at 10 times its estimated FY22 price-to-earnings.
• Net cash balance sheet should shows rising cash, and ad growth is set to return rapidly in second half this year.

BoFA Securities

• Maintains ‘underperform’ with a target price of Rs 138 apiece.
• Cuts FY21-23 earnings per share estimates by 8%-2% led by weaker Ebitda.
• The company has done sufficient investments in building a content inventory by movie acquisition. Going ahead in financial year 2021, it will see a decline in cash tied up for movie buying.
• Execution and governance a key for re-rating.

Edelweiss securities

• Maintains ‘buy’ with a target price of Rs 230 apiece.
• The company’s pan-India viewership and focus on digital are likely to anchor growth over long term.
• Ad revenue is slated to recover gradually through financial year 2021, aided by a strong market share, festive season advertising and resumption of business.
• Addition to board members, better governance and steps towards resolution of working capital concerns give further support.

Motilal Oswal

• Maintains ‘neutral’ with a target price of Rs 190 apiece.
• The challenging ad revenue environment in the near term and uncertainty over new tariff order 2.0 regime led to the neutral stance.
• Revises revenue and Ebitda estimates upwards by 7% and 27% for financial year 2021. This was due to management hinting at recovery in the ad market and minimum impact from new tariff order 2.0 on subscription revenues.
• Remains watchful of the evolving business situation and governance measures, including the admission of new board members over the next few months and increase in financial disclosures for investors.

Emkay Global

• Upgrades rating to ‘Hold’ with target price of Rs 190 apiece.
• Improvement in disclosures and policies, along with corrective steps led to the upgrade.
• The company has improved disclosures with quarterly balance sheet, standardised Zee5 metrics and strengthened corporate governance policies.
• Consistent free cash flow generation is key for sustained re-rating, given the underperformance in the recent past.
• Remains watchful of timely subscription receivables from Dish Tv and Siti, and investments in Sugarbox.

IIFL Securities

• Upgrades to ‘buy’ with a target price of Rs 258.
• Expects strong re-rating.
• Board level changes, move towards improved disclosures and transparency and improved viewership are positives.
• With a reasonably positive outlook, current levels of the stocks are attractive.

Watch the video here: