Company Report - Radio acquisition and tailwind in TV broadcasting business to boost profits

Zee Media Corporation          BUY           CMP: Rs44                           TP: Rs65

Company Report - Radio acquisition and tailwind in TV broadcasting business to boost profits

Entry into the radio market, demerger of the loss-making print business, and earnings expansion in the core TV broadcasting segment is likely to make Zee Media Corporation Ltd (ZMCL) a classic turnaround story. We expect radio business to be the biggest earnings contributor (35-40% EBITDA margin business). Our assessment reveals (see exhibit 7) that the radio acquisition can add Rs4,270mn to the topline and Rs293mn to the bottomline of ZMCL in FY20E. Demerger of the loss-making print business would further boost earnings and return ratios. Print business contributes ~20% to the topline but wipes out the consolidated EBITDA by 25-35%. Post demerger, balance sheet of ZMCL has become lean as print business is saddled with debt (Rs 2.9 bn; ~75% of the total debt pertains to print segment). Entire exercise of demerging print business and acquiring radio business is likely to double the topline and result in optical earnings expansion. As per our earnings estimates of both the businesses, consolidated entity will have a topline and PAT of Rs11.3bn and Rs1.1bn, respectively in FY20E.

Structural tailwind in the core TV broadcasting business will act as another earnings kicker. Backed by four new channel launches in the last 12-15 months, improvement in effective ad rates in the range of 20-25%, ironing out issues on the operational cost front and rationalization of employee cost with setting up of a common assignment desk, we expect standalone sales and profits of the TV broadcasting business to grow at a CAGR of 17.3% and 22.5% over FY17-20E. We value ZMCL on SOTP basis as there are three distinct businesses (print has already been demerged) – TV, radio and E-com with a vastly different risk return profile. Our SOTP value stands at Rs65 per share (for more details see outlook & valuation section). We initiate with a “BUY”. 

Why do we like ZMCL?

n Radio acquisition can turn out to be a golden goose: Reliance Broadcast Network’s Ltd’s (RBNL’s) radio business could be a potential money spinner as it is well poised to capitalize on the asset monetization phase witnessed by the industry, post conclusion of Phase 3 auctions. Mature stations are margin accretive, generate strong return on capital and FCFF (minimal capex needs post licence acquisition). Except for 14 new stations that were launched in 1QFY18, the entire portfolio of 45 stations is well established. We believe ZMCL is better placed to milk the existing stations by negotiating better with advertisers since now it can offer a bundled deal across all three platforms viz TV, Radio and Print (via DNA). The debt overhang concerns (Rs16-17bn of debt on books post radio acquisition) are overplayed as both the radio and TV broadcasting businesses can generate FCFF of Rs1.4bn in FY19E and Rs1.5bn in FY20E which is more than sufficient to service the debt in the interim. In fact, after a year when the new stations break even, the FCFF situation would strengthen further. We feel RBNL can turn out to be a cash generating machine for the ZMCL as a whole, once consolidation concludes by 4QFY18.

n TV broadcasting business in a sweet spot: The TV broadcasting business is on the verge of a turnaround due to engaging content and improvement in BARC ratings. ZMCL has specifically worked on the content part during 5 PM to 10.30 PM slot when viewership of the news genre is at its peak. Shows like DNA, Taal Thok Ke, Fun Ki Baat and Dr Subhash Chandra show have struck chord with the viewers which have led to improvement in channel rankings. From a distinct number 5 or 6, Zee News has consistently been a strong number 2 or 3 in the BARC ratings over the last few weeks. In addition, steps have been taken to optimize operational costs by gradually shifting focus from terrestrial entertainment network. Employee cost has also been rationalized by setting up a common assignment desk which reduces duplication of work.  Backed by these measures, we expect the EBITDA margin to expand from 20.5% in FY17 to 23.6% in FY20E.

n Demerger of the print business to boost profits: Demerger of the loss-making print business is expected to swing the profitability profile of ZMCL. Revenue of the three print subsidiaries was Rs1.4bn in FY17 with cumulative losses of Rs973mn. The print business is EBITDA negative, capital-intensive and saddled with debt. Post demerger, the interest and depreciation expenses will fall by ~Rs332mn and ~Rs141mn, respectively, resulting in an upswing in profits. We believe that the demerger which has happened will unlock value for shareholders of ZMCL as a loss making unit is hived off into a separate company.

n Valuation re-rating imminent:  ZMCL acquired the radio business of RBNL for an EV of Rs16bn (5x EV/Sales). Both ENIL and Music Broadcast, competitors of RBNL, trade at an EV to sales multiple of 6.7x and 7.1x, respectively (TTM basis). We value RBNL at EV/Sales multiple of 7x, in line with peer average (discount unwarranted as financial profile is similar), translating into an implied market cap of Rs14.2bn (per share value of Rs30.2) for the radio business. We value the standalone TV broadcasting business at a PER of 20x, in line with market leader TV Today Network Ltd (3-year average TTM PER of 21.4x), on the back of 22.5% CAGR in earnings over FY17-20E translating into per share value of Rs29.7. We value the E-com business at book value (Rs 0.8 per share) as it is likely to burn cash in the near term.  After incorporating the value of Zee Akaash News Pvt Ltd (Rs4.3 per share), a 60% subsidiary of ZMCL, we arrive at the final SOTP price of Rs 65 per share. We initiate with a “BUY”.