Zee Entertainment, Sun TV may underperform on advertising growth worries

Between the two, Sun had better growth rates than Zee in the Sept quarter

Stocks of broadcasting majors Zee Enter-tainment Enterprises and Sun TV Network  have lost between 7 and 14 per cent from their respective monthly highs.

The July-September quarter (Q2 of FY23) numbers of both companies came in below Street estimates but Sun fared better than Zee. Sun’s advertising revenues remained unchanged as compared to the year-ago period while Zee reported a 7 per cent decline.
 

Both companies were impacted by the drastic cut in advertising by fast-moving consumer goods (FMCG) firms. This is significant as the consumer sector accounts for 50-60 per cent of the advertising pie in the broadcasting space. Zee also saw a market share loss of 130 basis points (bps) on a sequential basis.
 

Analysts led by Jaykumar Doshi of Kotak Institutional Equities highlighted that the company’s advertising and operating profit were 17-62 per cent below pre-Covid levels.
 

In addition to advertising and share losses, withdrawal of Zee Anmol from free-to-air channels and increase in over-the-top application or OTT losses resulted in a gloomy quarter. Also, regulatory embargo on subscription and higher amortisation pertaining to unabated increase in inventory led to disappointment. Sun’s subscription revenues, too, were impacted by the pricing embargo ahead of implementation of the new tariff regime (NTO2.0).
 

Over a three-year period, Sun TV’s operating profit was flat year-on-year (YoY) unlike Zee’s, which saw a sharp 28 per cent decline. This was due to large investments in content, especially OTT.
 

Kunal Vora of BNP Paribas Research said, “A key difference in strategy is that Sun TV has refrained from investing meaningfully in OTT. Zee’s significant investments have led it to incur losses of Rs 891 crore at the operating-profit level over the last four quarters.”
 

So far, large OTT investments have not yielded any meaningful revenue outperformance for Zee, he added.
 

Near-term outlook for both the companies is bumpy given the lack of clarity on implementation of NTO2 and the weak advertising outlook for H2, given the cautious stance of FMCG companies.

 

Analysts, however, believe that advertisements will come back as input cost pressures ease for consumer majors.
 

Given the slower recovery and margin pressures, Emkay has cut operating profit estimates for Zee by 13-19 per cent for FY23 and FY24. The key triggers for the stock are progress on the merger with Culver Max Entertainment (Sony) and expected improvement in advertising spends.

Most brokerages have a buy rating, given the re-rating potential on the back of merger gains and gradual growth recovery.

While analysts have cut their earnings estimates for Sun TV as well, they expect the company to benefit, given market share gains and attractive valuations.

JM Financial’s Abhishek Kumar said, “Sun TV’s sustained viewership share suggests it is well positioned to capitalise when growth revives. Our positive stance on Sun TV is also premised on its deep value. At six times FY24 core price-to-earnings ratio — excluding IPL value and cash — the broadcasting business is significantly undervalued.”

Investors should await clarity on advertising revenue growth trajectory (Sun/Zee) and merger progress (Zee) before considering the stocks. ­