ZEE Entertainment - Large Cap M&E

Stock Opportunities
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Hello fellow ValuePickrs,

Starting off a thread to discuss Zee, a household company in India. Surprised to see this is not discussed yet in the forum.

Quick Intro:
Zee has 35+ channels in India with a viewership share of ~18%. It also has 35+ channels in rest of the world. It has also been venturing into various businesses like Digital subscription, Zee Studios, Zee Music Company, live ticketing…
Its revenue mostly comes either from Advertising (63%) or Subscription (30%) and it is venturing into other businesses like producing movies, owning music rights, hosting live / theatrical events.

TV Business:
Most of Zee’s revenues are derived from here through advertisements of subscription of Zee’s channels by DTH companies or Cable operators.
Zee TV, their flagship channel is one of the top channels in India. Their regional channels like Zee Telugu, Zee Kannada, Zee Bangla are also top channels in their respective regions. Zee channels typically fall in Top-3 channels in the region they are operating.
Zee also possesses niche channels focussing on urban population like &TV, Zing…
Before concluding that Internet will take over TV, it is important for us to remember that still TV is not properly penetrated in India (~66%). Zee believes that it will be ‘TV with Digital’ in India’s near future instead of ‘TV vs. Digital’.
FMCG companies are the top advertisers in Indian TVs and India being a third world country, FMCG is not properly penetrated yet (remote areas) and this can lead to increased ad spending by these companies.
While penetration of Digital OTT players is rising fast in Urban areas, penetration of TV households in rural areas is fast rising. See below link.


TV Advertising revenues seem to be in a long-term growth story (checking up with Digital once a year is still a good caution) due to this rural penetration and top players like Zee will not miss it.
Coming to subscription revenues, DTH players which are mostly present in urban areas are facing strong competition from OTT players. Since DTH players are mainly used by middle to high income families, they can mostly afford OTT platforms and people using OTT prefer to stick with it due to its flexibility and the ability to binge-watch. This can put DTH companies out of business (as they are unaffordable in rural areas) which implies a drop in subscription revenues for Zee. This can be visible in Zee’s revenue contribution trend too.
Note: Fall in subscription revenue in 2018 is attributed to sale of sports business (TEN Sports) which is mainly subscription driven.

2018 2017 2016 2015
Broadcasting Advertisement 42048 36375 33652 26603
Broadcasting subscription 20287 22629 20579 17935
Advertisement Fraction 0.6745488089 0.6164836282 0.6205306928 0.5973101621
Subscription Fraction 0.3254511911 0.3835163718 0.3794693072 0.4026898379

Digital Initiatives:
We all know the rise digital media is in, with Jio’s disruption.
ZEEL has launched ZEE5, their online platform for content viewing. Their content seems more complete compared to Prime Video / Netflix which seems to be targeting on English speaking audience. ZEE5 also has soap operas and not just movies. ZEE5 already has 5+ crore subscribers while Prime India has 1 crore and Netflix India has only 50 lakhs.
ZEEL management believes that there are too many OTT players currently in the market and Zee expects consolidation in this space as consumer’s experience can get cumbersome if he has to get subscription from multiple OTT players. With ZEE5 having different genres of content,
Zee Music Company (ZMC) is another initiative towards digital side which is discussed further below. Performance of ZEE5 should be monitored if one is interested in ZEEL for the long-term.

Zee Studios:
Zee has very good movies on its resume like Sairat, Rustom, Secret Superstar. FY17 was really good for Zee while FY18 was average. The focus seems to be on storyline. Zee identified that digital rights and international box office revenues are improving the economics of movie producing and hence ventured into this area. With around 160 crores movie revenues per year, this still seems to be a small part of Zee’s business.

Zee Music Company:
The music industry is set on boom with digital disruption. 65% of the industry revenues are from digital streaming now. ZMC is acquiring rights of songs from top films (music-wise) like Half Girlfriend, Secret Superstar, Baahubali… The industry is only of 1800 crores size which is much less than Zee’s annual revenues. And Zee has 14% market share in the digital streaming.

Live ticketing:
This industry is expected to be of the 6500 crores and also expected to grow fast. Zee’s event called Wicked Weekends is apparently India’s longest party marathon. I personally don’t like Zee diversifying into this industry as this falls more into a different orthogonal form of entertainment.

Recent Developments:
Zee Promoter Group’s i.e. Essel Group’s companies were alleged to have executed / associated with some transactions with Nityank Infrapower and a group of shell firms whom the SFIO is currently probing. This allegation was made by Wire.


However, Shubhash Chandra, Zee promoter, denied those allegations and came back on Wire with a defamation law suit.


He also came up with a good apology letter as he finds it difficult to clear his dues in other Essel group’s companies like Essel Infra. The promoter group plans to sell 50% of its already small stake (42%).
TRAI came up with a la carte based pricing for TV channels. I expect low income households in the rural areas to subscribe only to the base pack for FTA channels. Zee’s subscription income needs to be monitored in the coming time.

Quick Financials:
Debt Ratio - Low - 0.3
Current and quick ratios - High - 2+
ROCE - High - 25%+
ROE - High - ~20%
PAT Margins - High - ~20%

Positives Summary:

  1. TV penetration in Rural India is growing strong. 100% Electrification is only going to help here. This should increase the revenues for top TV channels like ZEE
  2. Strong financial ratios - ROCE, ROE, Margins, D/E…
  3. ZEE5 seems to be getting good traction even though it is competing with huge dinosaurs like Prime and Netflix
  4. Increasing presence in related fast growing sectors with tailwinds - Zee Studios, Zee Music Company, Zee Live

Negatives / Alerts Summary:

  1. Essel Group’s other companies like Essel Infra are unsuccessful causing the promoter family to fall into huge debts. This is causing the promoters to pledge their shares in the company
  2. Promoters’ ambition to run too many businesses and failing in couple of them causes me some discomfort
  3. Company is diversifying into too many verticals. We should ensure that capital is being deployed efficiently by monitoring vertical specific financials (if we get data)
  4. Low promoter holdings (~42%) which can get even lower with promoters planning for a stake sale to clear their dues
  5. With OTT players good traction in India, DTH players are already feeling the heat. With new TRAI regulations, one should keenly observe the impact on subscription revenues

Valuations:
On the light of recent developments, the stock is swinging wildly. I’ll let you assign your own fair P/E multiple to this company

Encouraging fellow members to take the discussion further. Will keep adding more info as I read up more.

Disclosure: Not a buy / sell recommendation. Not invested. Just started exploring. Noob investor.

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Another trouble with a promoter and role of rating agencies. I recall somebody was very sarcastic when I wrote these rating agencies are very poor cousins of their US peers.

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Seems they’ve got a formal consent now till end of September!
Below is conference call as of Feb 4th.

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I had a relook at Zee with the promoter stake sale efforts making a bit of progress. Invesco Oppenheimer funds has agreed to invest 4200 odd crores to acquire 11% stake in ZEEL (~400 Rs / share). Total outstanding debt of Essel Group is 11000 crores. Management says they are confident of achieving the the remaining by selling non-media assets like road and solar within September end timeline. If unable to do so, they are ready to sell further stake in ZEEL to achieve the same.

Now putting the stake sale part aside, I think we can recognise that this has been a reasonably good compounder over the past decade and this business has good amount of growth levers placed for the next five years as well.

ZEE5 & OTT landscape:

OTTs typically have either AVOD, SVOD, AVOD + SVOD models. Good examples for AVOD are YouTube, DailyMotion, MXPlayer. For SVOD, we have Netflix, Prime Video. For AVOD + SVOD, we have all the broadcast-led OTTs. AVOD content is typically catch-up TV content and SVOD is more of premium content like originals and latest movies.

Netflix, Prime Video: English speaking urban audience
Hotstar: Cricket & Sports category
ZEE5: Films + Regional
ALTBalaji: Pure original series
SonyLiv, SunNxt, ErosNow, Hungama: These look very in-competitive at the moment in terms of content. They just have a few hits from 2010-2019 and lots of very old movies

ZEE5’s OTT strategy is to focus on movies and original content. The best part is they are focussing on “regional” markets. Customers from Telugu and Tamil markets don’t have good options if they want to watch good latest movies / original content in the digital world except ZEE5. And please note that Telugu and Tamil markets together are as big as 60% of Hindi market. And its also important to note that ZEE5 is not behind other OTTs in the Hindi market. I’m just pointing out the advantage ZEE5 has in its cards with respect to South Indian market.

If you look at the South Indian digital subscription market, there is no good option than ZEE5 to be honest. South India is a lot crazy about movies and for 1000 Rs, you get to watch both Telugu + Hindi content (I’m based out of Hyderabad). Prime is not that good for South Indian content and Hotstar & SonyLiv are even worse in that category. Netflix, ALTBalaji don’t even have any Telugu content. SunNxt is based out of South but they are unable to capitalise the new digital opportunity. Just look at the SunNxt website :slight_smile: (https://www.sunnxt.com/). To summarise, if someone wants to watch good and latest Indian films in the digital screen, he will have to subscribe for ZEE5.

The competitive advantage is that other OTTs can’t compete with ZEE5 in the films category. This is because ZEE has been aggressively acquiring exclusive digital rights to the regional and Hindi movies. So competitors can’t really showcase the same movie as ZEE5 is already showcasing.

I personally think lots of pure-play OTT apps will eventually declare bankruptcy and incumbents will rule the show. The reason being pure-play OTT apps don’t have a cash-cow and also doesn’t have AVOD content. Zee and Hotstar already have a strong TV business. And their catchup-TV content plays out very well for them giving Free Ad revenues until the Indian market gets used to subscription. So players like ALTBalaji, ErosNow will have to keep raising cash or give up.

A brief look at ALTBalaji numbers suggest lots of customers give you an ARPU of just about Rs 20 / year (subscribe for a month, binge-watch and forget). So you need a cash cow until SVOD model becomes mainstream. ALTBalaji has 2 crore subscribers with 40 crores of revenue (FY19) while Hotstar already has 571 crores of revenues with 70 lakh subscribers (FY18). This shows how important Ad revenue is for OTTs to survive. Another stat to look at is 70%-90% of the content watched online in ZEE5 is the AVOD content as per management commentary.

However, one needs to note that this is a fast evolving landscape and the above situation can completely change in just an year or two.

ZEE5 might also do very well in the international markets. Indian movies are gaining good traction from foreign audience (especially China) in the recent years. I have lived in Hong Kong for six months last year and have seen it myself. Some of my Chinese friends watched Dangal, Three Idiots, Sultan. One can also notice that Indian movie industry revenues from foreign theatre markets have tripled in FY18. If ZEE5 does its marketing right, wouldn’t be surprised if we get good traction from foreign markets too.

Speaking of traditional TV shifting to Digital, I think this transition will be slow and would take about 5 to 10 years to see some material impact. Main reasons being viewership in TV is still increasing today and is expected to further increase due to low penetration of TV and that penetration would increase further as India gets more and more electrified. Another reason is that digital video content is mostly viewed via Smartphones (90%), and next Laptops but not much on TVs at the moment. If a house has a single TV, it would mostly be running broadcast but not Digital content and 94% of households with TV in India has only a single TV. So all the digital growth we get will be incremental growth.

Another important thing to note is the Western markets had a significant difference in their cable costs vs. digital costs, with digital subscription cost being much cheaper. Hence the customers had strong financial incentives in place to move to the digital medium. But in India, we have cable cost of Rs 200 / month on average. So with Rs 2400, you will end up with only two subscription packages in your pocket. So the rural mass is going to stick with TV.

Ratio of DAUs / MAUs is only 8% in ZEE5 but industry average is about 25%. This is bad and needs to be researched further.

Content synergy:

An interesting tailwind for entertainment companies is content produced for one technology pipe can be used to monetise through a different technology pipe. For example, all the TV content produced in-house for ZEE is also being monetised through ZEE5 as Catchup TV.

Similarly, movies produced by Zee Studios can be monetised by both broadcast business as well as digital business. Another point to note is that whenever a new technology / product is developed (eg: AR / VR / Something else… ) you can re-use the content IP you own have so far.

ZEE is a strong player in the industry and retains rights of all the content it produces. As long as the content stays with ZEE, it is going to be powerful.

Digitisation and A-la carte regime:

Lots of LCOs were making a lot of easy money before these two were implemented. Now the situation is changing and broadcasters are rewarded with the subscription money they really deserve. So we have strong tailwinds in place for the broadcast subscription business.

This is already observed in Q1FY20 which has shown a growth of 35%+ in subscription revenue, however, management maintained a guidance of about 25% growth for subscription revenue growth for the full year.

Coming to advertisement revenues, it is usually 10%+ and is expected to remain the same. Note that Zee has been capturing market share continuously over the past decade, rising from 10% market share to 20% market share and are now market leaders. So I believe Zee understands their customer best.

Why are inventories up by disproportionately?

This is due to aggressive acquisition of movie rights by the company. Zee is going to launch more and more movie channels (planned about three more) in regional markets. They have also acquired lots of digital rights to movies to use in ZEE5.

Management expects this to peak in FY19. So this will be a key monitor-able for me in the future.

Playing with Numbers:

Management said they would be highly disappointed if ZEE5 wouldn’t contribute at least 30% to the topline by 2023. This is very encouraging as assuming a conservative 10% growth to traditional business, we would have traditional revenues of 12000 crores in FY23 => Total revenues of 17000 crores. However, when an analyst made similar projections and asked the management if they would be sitting on 18000 crores revenues, management suggested that the Math doesn’t work out.

If the math works out, this is more than 2x revenue growth in four years. Management is also confident of maintaining their 30%+ EBITDA Margins. Another point to note is the company is trading at its low P/E of 20. It typically trades at 40 P/E (from 2015 to 2018). If the bull market returns with Zee trading at 40 P/E and ZEE5 really contributes 30% to the top-line, we would be sitting on 3x kind of returns by 2023. This is not a recommendation but just trying to get a sense of what the numbers could be like in few years. To achieve this, we would need 5000 crores of top line from ZEE5 which is indeed a stretched goal according to me.

Risks:

  1. Zee Stake Sale going off and company falling into management / control issues
  2. Poor pick up of ZEE5 subscription business due to competition
  3. Rise in inventories for further more years
  4. Advertisement & Promotion are 8% of revenues. Need to understand why?
  5. Rampant Piracy of Movies can affect ZEE5’s selling point
  6. Why is ratio of DAU/MAU of ZEE5 low at 8%?

Discl: No holdings but interested from a long-term perspective. Not a buy / sell recommendation. Please do your own research.

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As I think more, I believe the digital subscription market is not super huge. We have only around 6-7 crore DTH subscribers in the country.

I think this number is a reasonable upper limit to the number of digital subscribers we will be having in the market, if you go by purchasing power of the customers. If ZEE captures about 1-2 crores of them as regular full year customers, we will be at around 1000 to 2000 crores of subscription revenue after few years down the line, so not very huge. FY19 top-line of Zee is 8000 crores to give you a perspective. Please note that we are not factoring the revenue from foreign countries. This need to be watched as it has the potential to be a big hit due to the established Indian diaspora in developed countries which has higher purchasing power.

I think AVOD model will be the key to success in the Indian OTT market. The potential for AVOD is very huge as there are increasing innovative modes of monetisation avenues being formed. This again increases my conviction further that pure-play SVOD OTT players might be out of business unless they have a parent flushed with cash to burn.

Edit: I got more interested in the international market for ZEE5 and tried to get some numbers.

The following website suggests we have about 60 lakh Indians in North America, 20 lakh in Europe, 10 lakh in Oceania, 1 crore+ in other Asian countries, 25 lakhs in Africa and 5 lakhs in South America. This gives me more than 2 crores of Indian population which has a stronger purchasing power than people in our country. Due to lack of good Indian film content on TV, they might find ZEE5 actually very interesting and cheap. Even if ZEE5 captures 50 lakhs of them (sounds possible) for full year and assuming similar rates in other countries too, we would be sitting on another 500 crores of revenue. I believe OTTs are smart enough to jack up their prices in markets with higher purchasing power to capture higher revenues (potential of 3x to 5x). This international revenues also doesn’t include non-Indian subscribers in foreign countries who are interested in Indian content. So there is more on the cards here…

Discl: Same as above

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Breather for Essel as lenders give six more months to clear its debt

  • A February deal to extend the repayment deadline had been criticized by Sebi and investors
  • The Essel group has embarked on sales of non-media assets, particularly those housed under Essel Infra
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Hello All,

Have you subscribed to ZEE5 OTT ? If yes, what is your feedback as consumer.

Few questions:

  1. Will you stop DTH service in future and continue only with OTT apps like ZEE5, Hot Star, Prime Video etc.
  2. If you already subscribed, what is the feedback of your family members especially elders who got used to traditional remote for switching between channels with lot of ease.
  3. Given the very high prices after TRAI new rules on DTH, doesn’t it make sense to shift to OTT completely ?

Personally, I have stopped DTH service at our home and subscribed to Hot Star and ZEE5 along with Prime Video. My family likes it a lot but few of our relatives who visited our home once in a while missed the DTH service.

Disc: Invested recently as part of Satellite Portfolio, thinking to invest more.

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Wanted to get some thoughts from other boarders on ZEEL.
The stock is currently trading at a PE of under 15, which is its all time low!
Considering the consistent growth shown by company on both topline and EBITDA front in the last 10 years, doesn’t the present situation makes this a value bargain?

Disclosure: Holding

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It is down because of a lot of uncertainty related to debt taken by pledging of shares. They are already seeking extension for the loan and the lenders have started selling pledged shares.

So, there is a chance in the worst case scenario that promoter holding comes down to uncomfortable levels and the company becomes a target of hostile takeover or other kind of management change.

Long term story of Zee Entertainment as a company is unchanged but how that will unfold under the new management, if the situation comes, is a point to ponder about. M&E sector is a very competitive place where a dull new management can destroy a solid company in a few years.

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Hi, Zee is up by 20% today. Does anyone know the reason for such sudden upmove.
Thanks
Vikas

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Nd this movement coming at a time when lenders are tightening up their stance on selling pledged promoter shares.

Either the company has found a strategic buyer for stake sale or retail investors are being duped by pumping up the price so the fall will come when lenders sell the shares.

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It might be because of Roumers on Second stake sale. I found the below article. It needs subscription though.

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Zee Entertainment AR & Q2 FY20 Key Points!

https://drive.google.com/open?id=1sy5faR-aA16pqM4Yva8DHZ0PxjISEaXf

Prepared by E-Global Group of Companies!
https://www.e-global.in/

(Disclaimer: Not an Investment/Trading Recommendation)

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One of the interesting medium for investment in Zee appears to be its Preference share (P2 category in NSE).
These shares appear to be trading at XIRR of approx 19-20%
Rs 2 principal is repaid every year plus 6% dividend on face value.
Currently FV = 6. Redemptions in Mar 2020, 2021, 2022

It is quasi debt kind of investment (but technically it is Preference share). Outstanding on Zee’s books is 1200 Cr. which means 400 cr plus dividends is going to be annual cash outflow.

I see Oppenheimer and other quality names invested in Zee Pref (source AR 2018-19).

Key concerns why it is trading at such yields seem to be promoter related news.
The fundamental question is: Will Zee pay as promised? 2 Rs plus dividend every yr for 3 yrs.

All-in-all, Zee as a company looks clean (not counting promoter debt). It generates cashflows though recently, cashflows have diminished due to content inventory built-up. Plus there are some concerns re. related party trxns…

But with professional ‘common equity’ stake, I think 400 Cr annual payments must be easy to service.

Plus, Oppenheimer (and others) are invested in a big way in common equity, so by holding payment of 400 cr, they would not likely let the common stock’s price get sabotaged. to the best of my knowledge, stoppage of pref.dividend will entail non-declaration of dividend on common stock.

Why is it STILL trading at 19-20% XIRR? No idea on that except what pros/cons I mentioned above. Of course, the only catch is that it is XIRR (assumes reinvestment again at same yield),so expect your realized IRR to be lower.

Appreciate if boarders give their perspective / counter-perspective.

Disc: Invested since April and added recently after last stake sale by Essel folks.

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To my understanding, the preference share is being redeemed in 5 equal stages of RS 2/- each with 6% annual interest on remaining value .Therefore it will not work out the way, u HV mentioned

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Current FV is INR 6
For the time being, if I ignore fractional dividends and slight cash-flow timings, the approximate calcs will be as follows
image

Disc: Invested so vested interest here. But divergent views on ‘ability’ and ‘intent’ to pay are most welcome. What can make or break this idea and why is market giving this 19% IRR pricing?

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What’s the current market price?