Ad growth slowdown, new rules headwinds for Zee Entertainment stock

Valuations appear attractive, but near-term concerns remain

The Zee Entertainment stock has shed about 41 per cent over the last year because of the promoter pledge issue, slowing advertising revenue growth, and regulatory changes. While the overhang because of the ad growth slowdown and subscription rates will remain, some brokerages are turning positive on attractive valuations and reducing promoter pledge-related concerns.

CLSA believes that the company will continue to outperform the sector and expects a recovery in its cash flow. It estimates that the cash flow will recover in the March quarter of FY20, and the company will register 11 per cent annual earnings growth over the FY19-22 period.

Zee’s working capital expansion had led to negative operating cash flow in the first half of FY20. Any progress on loans and advances, inventory, receivables, and investments in offshore funds could lead to a rerating for the stock. In addition to free cash flow, analysts believe better supervision by an independent board will be a catalyst for the stock.

On the operational front, the company is expected to report a year-on-year fall of 13-15 per cent in advertising revenues in the December quarter. Because of the economic slowdown, most advertisers have cut their advertising spends in the December quarter.

Compiled by BS Research Team

 From mid-single-digit growth in FY20, analysts have now revised the advertising revenue growth estimates downwards to -2 per cent. The company has lost its viewership share in all its leadership markets of Kannada, Marathi and Bangla. The flagship Zee TV also saw a marginal dip in viewership share to 19.9 per cent, behind Star Plus and Sony SAB.

Further, the new tariff order on the restriction of bouquet prices and lower channel retail price will limit the ability of broadcasters to push weak and niche channels. Subscription revenues which have been strong in the recent quarters could take a hit. The company will also have to make investments in Zee5 and scale up its revenues from the over the top segment amid stiff competition.

While the stock is trading at attractive levels of 16 times one-year forward earnings estimates, investors should wait for an improvement on operational performance (advertising and subscription growth), before considering the stock.