Zee Entertainment Enterprises’ (ZEEL) EBITDA loss of Rs2.8bn was a result of multiple uncomforting one-offs and higher programming costs. In FY20, FCF came small positive, thanks to lower tax outgo, impacted from relentless rise in inventory yet again. It is un-impressing that rising inventory is not helping viewership; in fact, market share deteriorated in FY20. Ad revenue outlook remains bleak while subscription revenues will continue to grow in FY21E. We see downside risk to our estimates from higher than expected programming costs on rising inventory. We cut our EPS estimates by 10%/0.4% for FY21/FY22 and our target price to Rs168 (from Rs187). Downgrade to ADD (from Buy).

– Many one-offs: 1) Provisioning of Rs3.43bn including credit loss of Rs1.18bn from related party (Dish TV); 2) expense of Rs3.84bn on fair value measurement of investments in overseas mutual funds; 3) accelerated content cost of Rs2.6bn, and 4) Rs1.14bn goodwill impairment towards Online Media business. Further, a new liability of Rs3.93bn (towards LOC issued to subsidiary ATL) has not been recognised.

– Working capital impacted cashflow, yet again: In FY20, cashflow from operations was Rs20bn, up 3.3%, on lower tax outgo of Rs6bn. Working capital consumed Rs17bn of cash and capex was minimal at Rs1.8bn. Thus, ZEEL generated FCF of Rs1.5bn (15% of net profit). It has guided for reaching 50% of net profit in next few years. Further investment would be needed to develop content for ZEE5, new regional channel expansion, movie production and investment in Sugar Box.

– Ad revenues outlook weak: ZEEL’s domestic ad revenues dipped 15.1% YoY to Rs9.8bn on slowdown, Covid-19 outbreak and conversion of FTA to pay channel. ZEEL expects ad revenues to dip by 67% in Q1FY21 on peak impact of Covid-19; in worst case if sees ad revenues shrink by 28-30% in FY21. FMCG companies are coming back to advertise and telecast of fresh content should help.

– Subscription revenues to sustain growth: Domestic subscription revenues grew 41% YoY on low base, benefit of NTO 1.0 and ZEE5 subscription revenues (up 70%). ZEEL sees modest growth in subscription revenues in FY21 and does not expect immediate NTO 2.0 implementation. ZEE5 should continue its robust growth momentum.

– Programming costs pose risk to EBITDA margin: Programming costs rose 48% YoY to Rs13bn due to accelerated content cost and re-evaluation of amortisation of certain content. ZEEL expects programming costs to normalise from Q1FY21. Inventory rose by Rs15bn to Rs53bn in FY20, of which Rs3bn was due to pending theatrical movie release. We see possibility of sticky high programming costs on rising inventory.

– EBITDA loss of Rs2.8bn: ZEEL revenues dipped 3.4% YoY to Rs19.5bn while EBITDA slipped to a loss of Rs2.8bn on one-offs (positive Rs3bn adjusted for one-offs) and higher programming costs. Net loss was at Rs7.7bn.

Shares of ZEE ENTERTAINMENT ENTERPRISES LTD. was last trading in BSE at Rs.145.4 as compared to the previous close of Rs. 151.65. The total number of shares traded during the day was 1278904 in over 13054 trades.

The stock hit an intraday high of Rs. 154.95 and intraday low of 144.75. The net turnover during the day was Rs. 190188124.