Zee Entertainment Enterprises’ (ZEEL’s) Q1FY21 revenue came in line; however, Ebitda and PAT belied our estimates. Ad revenue plunged 65% y-o-y (66% dip in domestic ad revenue) leading to 34.7% and 67.0% y-o-y decline in revenue and Ebitda, respectively. Domestic subscription growth remained modest at 6.2% y-o-y. ZEEL’s digital platform ZEE5 clocked Rs 949 mn revenue against Ebitda loss of Rs 1.45 bn. For FY21, we believe with major impact on ad revenue due to Covid-19 felt in Q1, resumption of fresh programming and a strong market share will benefit ZEEL through the year.

Key positives under ZEE 4.0: (i) R. Gopalan (Independent Director) will be the new Board Chairman; (ii) three-four new board members will join in FY21; and (iii) working capital (down ~Rs 3.9 bn q-o-q) and content investment to moderate going ahead. We remain positive on ZEEL’s long-term prospects and maintain Buy.

Covid takes a toll; resumption in GEC to benefit: ZEEL’s domestic ad growth fell 66.1% y-o-y owing to: (i) deep cuts in advertising by businesses; and (ii) migration of viewership away from GECs. Despite reduction in operating costs (16% y-o-y) and other expenses (35%), Ebitda declined 67% y-o-y. Ebitda margin contracted 16ppts y-o-y to 16.8%. Reported PAT declined 75% y-o-y owing to lower Ebitda and a notional fair value loss of Rs 1.1 bn.

Outlook: Positive—With the worst behind in Q1FY21, we believe ad revenue is slated to recover gradually through FY21, aided by strong market share, festive season advertising and resumption of businesses. Addition of board members, better governance and steps towards resolution of working capital concerns give further support. Over the long term, ZEEL’s pan-India viewership, and focus on digital are likely to anchor growth. We maintain ‘BUY/SP’ with TP of Rs 230 (12x FY22e EPS). The stock is trading at 9.1x FY22e EPS.