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 
(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:
- Zee Stake Sale going off and company falling into management / control issues
- Poor pick up of ZEE5 subscription business due to competition
- Rise in inventories for further more years
- Advertisement & Promotion are 8% of revenues. Need to understand why?
- Rampant Piracy of Movies can affect ZEE5’s selling point
- 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.