Zee Entertainment BUY (Prime Time Play) 20211203

Zee Entertainment
Rs337.00 - BUY
Deepti Chaturvedi Prime time play

deepti.chaturvedi@clsa.com Rising adspend; potential merger with Sony a rerating catalyst
+91 22 6650 5066
Running India’s No.2 TV network and over-the-top video streaming (OTT) platform
ZEE5, Zee Entertainment, with improving viewership and content edge, is
benefitting from a strong uptick in industry adspend and phenomenal OTT user
growth. We forecast Zee’s profit after tax and cash on its balance sheet to double
by FY24 and base our Rs415 target price on 18x PE. Zee’s potential merger with
Sony India would spice up the show and could see the stock rerate to 30x PE.
However, if the deal is put off, the valuation could fall to Rs250.
Strong advertising upcycle ahead

3 December 2021 After a 3% fall in GDP in FY21, our economics team projects a strong upturn to 10-
15% growth by FY24. This should support adspend and TV has unparalleled reach
India of 892m, the highest among all media. Zee owns India’s No.2 TV network in terms
of viewership, which has risen 330bps from Covid lows in May 2020 to 21% in
Media September 2021, and we forecast a 16% Cagr for Zee’s ad revenue over FY21-24.
Reuters ZEE.BO
Bloomberg Z IB Explosive OTT growth and for ZEE5
We expect robust growth in OTT streaming to drive digital media’s reach to 650m,
Priced on 1 December 2021
CNX Nifty @ 17,166.9 surpassing that of print, making it the No.2 media after TV in India. We project a
34% Cagr for the OTT sector, taking industry revenue to US$3.2bn by FY24. With
12M hi/lo Rs342.45/168.00
content edge, ZEE5 is among the top-five OTT platforms and its monthly users have
12M price target Rs415.00 increased 70% YoY to 93m in 1HFY22. Nevertheless, we expect the rise of OTT to
±% potential +23% have a limited impact on TV’s reach because OTT has been supplementary to TV so
Shares in issue 960.5m far, and our proprietary survey of 1,000 consumers suggests the same. Also, about
Free float (est.) 96.0% 90m of India’s 300m households still do not own a television.
Market cap US$4.3bn
Big upside potential on likely Zee-Sony merger
3M ADV US$139.2m Regarding the potential Zee-Sony merger, Sony’s infusion of US$1.6bn cash and
Foreign s'holding 67.4% other deal terms are favourable to Zee which could also benefit from Sony’s
international presence and connections with global players. The combined company
Major shareholders
Subhash Chandra and family 4.0%
would be bigger than sector leader Star, and Sony would own 51% of the new entity
Foreign Institutions 67.4% and appoint majority directors. Management estimated there could be 10% revenue
synergies and we believe combined profits could jump 2.5x to US$680m by FY24.
Highly favourable risk reward

Zee’s ad revenue surged 52% YoY in 1HFY22 and we expect the momentum to
Blended ESG Score (%)*
Overall 66.5
continue, which could double profit and cash by FY24CL. Strong revenue growth,
Country average 69.9 cashflow and better governance should drive its valuation. We base our Rs415
GEM sector average 63.8 target on 18x December 23CL earnings, factoring in a 33% discount for risks of
*Click to visit company page on clsa.com for details delays to the merger. If the deal is sealed, Zee’s valuation is likely to return to
Stock performance (%) historical highs of 30x PE; Rs690. If not, it could fall to Rs250. There are also
macroeconomic and litigation risks.
1M 3M 12M
Absolute 8.4 93.8 72.3
Financials
Relative 13.2 92.8 31.6
Abs (US$) 8.1 89.1 69.8 Year to 31 March 20A 21A 22CL 23CL 24CL
(Rs) (%) Revenue (Rsm) 81,299 77,299 82,997 91,788 101,010
400 110
Zee Entertainment Ebitda (Rsm) 16,345 17,901 21,718 26,344 29,371
100
350 Rel to Nifty (RHS) Net profit (Rsm) 10,705 11,229 15,360 20,000 22,779
90
EPS (Rs) 11.1 11.7 16.0 20.8 23.7
300
80 CL/consensus (23) (EPS%) - - 123 127 128
250 70 EPS growth (% YoY) (31.7) 4.9 36.8 30.2 13.9
60 PE (x) 30.2 28.8 21.1 16.2 14.2
200
50 EV/Ebitda (x) 19.4 17.2 13.9 11.1 9.5
150
40 Dividend yield (%) 0.1 0.7 1.3 1.3 1.3
PB (x) 3.5 3.2 2.8 2.5 2.2
100 30
Dec 19 Aug 20 Apr 21 Nov 21 ROE (%) 11.7 11.6 14.3 16.4 16.4
Source: Bloomberg Source: www.clsa.com
CLSA and CL Securities Taiwan Co., Ltd. (“CLST”) do and seek to do business with companies covered in its research reports. As such,
investors should be aware that there may be conflicts of interest which could affect the objectivity of the report. Investors should consider
this report as only a single factor in making their investment decisions. For important disclosures please refer to page 59.
Zee Entertainment - BUY
We would like to thank Evalueserve for its help in preparing our research reports. Akshay Chandak (Strategy and Oil & Gas), Ayush Gandhi (Strategy), Dhaval
Parekh (Materials), Keshub Bhat (IT), Pratik Jain (Auto) and Zen Javeri (Power, Infra and Capital Goods) provide research support services to CLSA.
What’s the angle? Zee Entertainment - Rs337.00 - BUY

Why write this now? Zee’s TV network viewership is rising and we forecast a 16% ad revenue Cagr over
FY21-24CL. Zee’s OTT platform ZEE5, which currently has 93m monthly active
users (MAU) and ranks among the top five, enjoys a content edge over competitors.
Moreover, its potential merger with Sony will make it bigger than sector leader Star.
What is the Our Rs415 target is based on 18x Dec 23CL PE and factors in a 33% discount for
market missing? risks of delays to the merger with Sony. However, should the deal go through, we
expect its PE to return to pre-pledging crisis/Covid-19 levels of 30x, hence a higher
valuation of Rs690, but the market has not priced that in yet.
Devil’s advocate: After Zee’s promoter share pledging crisis, family ownership is at a low level of
Where could we be wrong? about 4%, and the company is at risk of hostile takeover. Also, the proposed merger
with Sony will need several approvals including 75% of shareholder. If the deal is
put off, we expect its PE to derate to 12x and stock to Rs250.
Valuation history
PE bands PB bands
850 log (Rs) 43.9x 900 log (Rs) 6.9x Zee’s PE derated with the
35.6x 5.4x
promoter share pledging crisis in
2019, followed by a fall in
500 27.2x 510 3.9x business cash conversion and
Covid-19 disruption. The
18.4x pandemic caused unprecedented
2.5x
300 290
7-20% YoY drop in ad revenue
in FY20/21. With ad revenue
entering an upcycle as network
9.5x viewership recovers, the stock is
170 160 1.2x rerating. Also on the potential
merger with Sony, the stock
could trade at the upper end of
100 90 the PE band.
Dec 16 Dec 17 Dec 18 Dec 19 Dec 20 Dec 21 Dec 16 Dec 17 Dec 18 Dec 19 Dec 20 Dec 21
Bands (from the top): max, +1sd, avg, -1sd, min
Target-price sensitivity
750 (Rs) Share price Target price Our blue-sky value of Rs690
Blue sky Rainy day assumes the Zee-Sony merger is
690 sealed, and stock valuation is
650 then likely to go back to historical
highs of c.30x PE.
Our base-case target price of
550 Rs415 assumes a 16% ad revenue
Cagr over FY21-24, driving
profits and cash to double by
450 FY24CL. We apply an 18x
415 multiple to Dec 23CL earnings,
factoring in a 33% discount for
350 risks of delays to the Sony
merger deal.
Our rainy-day valuation of Rs250
250 250 assumes the Zee-Sony merger is
set aside, and Zee’s stock
valuation derates to c.12x PE.
150
50
Dec 18 Jun 19 Dec 19 Jun 20 Dec 20 Jun 21 Dec 21 Jun 22 Dec 22
Source: CLSA
Find CLSA research on Bloomberg, Thomson Reuters, FactSet and CapitalIQ - and profit from our evalu@tor proprietary database at clsa.com
2 deepti.chaturvedi@clsa.com 3 December 2021

Investment thesis Zee Entertainment - BUY
Why BUY Zee Entertainment

Zee is entering a strong growth cycle, driven by increases in advertising revenue
Target price of Rs415
which could see profits and cash double by FY24CL. Our Rs415 target is based on
is based on 18x Dec
23CL PE, implying 23%
18x Dec 23CL PE, factoring in a 33% discount for risks of delays to the Zee-Sony
upside merger. We expect the firm’s PE multiple to return to historical levels of c.30x
should the deal be sealed; but if the merger is set aside, we forecast its PE to fall to
c.12x, leading to a lower valuation of Rs250, ie, our rainy-day forecast.
Zee valuation scenarios

PE should return to the Base-case Blue-sky Rainy-day
historical levels of 30x Zee standalone EPS Dec 23 (Rs/share) 23.0 23.0 20.8¹
if the merger goes PE multiple (x) 18 30 12
through
Calculated valuation (Rs) 415 690 250
Implied Zee market cap (US$bn) 5.3 8.8 3.2
Implied merged co market cap (US$bn) 11.3 18.8
¹ Pessimistic case uses a FY23 EPS as event could likely unfold in Dec-21. Source: CLSA
Strong advertising upcycle

India is seeing a strong advertising upcycle post Covid-19. The nation’s nominal
Strong GDP growth to
GDP growth will improve from a 3% fall in FY21 to increases of 10-15% by FY24CL.
drive 15% Cagr in TV
advertising revenue In this upturn, TV with leading audience reach of 892m will see ad revenue enjoy a
15% Cagr. TV penetration still has room for growth, as about 90m of India’s 300m
households do not own a TV.
India ad spend growth versus nominal GDP growth India TV individual reach
About 90m of India’s
25 (% YoY) (m)
300m households don’t Nominal GDP growth Ad spend growth
920
20 892
own a TV 900
15
880
10
860
5 836
840
0
820
(5)
(10) 800
780
(15) 780
(20) 760
(25) 740
FY00
FY02
FY04
FY06
FY08
FY10
FY12
FY14
FY16
FY18
FY20
FY22CL
FY24CL
720
FY17 FY19 FY21
Source: CLSA, GroupM, Federation of Indian Chambers of Source: Broadcast Audience Research Council India (BARC)
Commerce & Industry (FICCI), Reserve Bank of India (RBI)
Zee’s network viewership is improving

Ranking second, Zee’s TV network viewership share has risen 330bps from May
Having risen 330bp,
2020 to 21% in September 2021, close to the pre-Covid level. Also its advertising
Zee’s viewership is near
pre-Covid level revenue growth has already picked up to 52% in 1HFY22 after 7-20% decline in
FY20/21 due to Covid-19. With Zee’s network strength, advertising revenue
growth could surprise on the upside against our 16% Cagr over FY21-24CL.
Explosive growth in video OTT

Digital has become the No. 2 media in terms of reach, after TV, surpassing print.
Digital will see 12ppt
Explosive growth in over-the-top (OTT) video streaming platform ad revenue will see
increase in share of
adspend a 12ppt increase in share of adspend for digital, in our view, making it the biggest
category among all media. We expect OTT revenue (advertising plus subscriptions) to
deliver a 34% Cagr to US$3.2bn by FY24CL. However, with digital access led by
mobile, TV will likely see low cord-cutting because in India OTT access is on mobile
which is on a small screen while TV is on a big screen (see our proprietary survey of
1,000 respondents on page 20), and sector revenues, ie, advertising plus
subscriptions, will reach US$12bn by FY24CL.
3 December 2021 deepti.chaturvedi@clsa.com 3

Investment thesis Zee Entertainment - BUY
Digital video content available in India Ad revenue mix in India by medium

Share of digital media
(% of revenue) Digital Out of home Radio Print TV
will rise to 40% of ad Global OTT
100 2
revenues in India
platforms
28
80 40
Telco led OTT
platforms
60 51
28
18
Broadcaster led 40
OTT platforms
20 36 37 37
Independent
platforms
0
FY08 FY20 FY24CL
Source: CLSA Source: FICCI, CLSA
Set up for success in digital with ZEE5

Digital ramp-up has seen media buyers increasingly choosing TV and OTT. Zee, with
a content edge, is set for success in digital. Its over-the-top (OTT) streaming service,
ZEE5, ranks among the top-five OTT platforms and has seen monthly active users
(MAU) increase 70% in the past 12 months to 93m. ZEE5’s content, including 3,500
largely-exclusive movies, 100 movie digital premieres and more than 90 original
shows, is unmatched by peers.
Revenue models of key OTT players in India ZEE5 MAU

ZEE5 has seen MAU
100 (m) 93
increase 70% in the Subscription Video Advertising Video
90 80
on Demand on Demand
past 12 months SVOD AVOD 80
66
73
Netflix Disney+ Hotstar YouTube 70
55
Amazon Prime SonyLIV Facebook 60
Jio TV Eros Now MX Player
50 40
Jio Cinema ZEE5 Muvi
Airtel Xstream Voot
40
ALTBalaji Sun NXT 30
Vodafone Movies & TV YuppTV 20
YouTube Premium 10
0
1QFY21 2QFY21 3QFY21 4QFY21 1QFY22 2QFY22
Source: CLSA Source: Company, CLSA
Sector leadership after Zee-Sony merger

Zee’s potential merger with Sony Pictures Networks India (Sony India) and the deal
Merger terms are
terms are favourable for Zee’s shareholders. Sony will have 51% ownership post-
favourable for Zee
shareholders merger and appoint majority directors. The merged entity will become bigger than
sector leader Star and FY24 revenues could reach US$2.5bn and profit could jump
2.5x to US$680m.
Sony parent company is in pole position with US$79bn revenues in FY21 and current
Zee-Sony merged co
can benefit from Sony’s
US$154bn market cap. Also, Sony’s entertainment assets include music (ranked among
international presence global top two), TV production (global top five), cable networks (large emerging market
exposure), motion pictures (global top five) and gaming. Zee Sony merged company can
benefit from Sony parent’s international presence and leverage with global players.
TV network market share Sony entertainment sales break-up (FY3/20CL)

Both Zee and Sony TV Media Games
40 (%) Jul-Sep 20 Apr-Jun 21 Jul-Sep 21
networks are gaining 35
33 Television Networks (hardware)
6% 9%
market share in 2021 30
29 29 Productions
8%
24
25 Motion
21
19 Pictures
Games
20 15
13%
(software)
13 13 12 12 Visual Media
15 12 29%
and Platform
10 6%
Music
5 Publishing Recorded Games
4% Games (network
0 Music (others) services)
Star Zee TV18 Ent Sony 12% 4% 9%
Source: BARC, CLSA Source: CLSA
Key risks to the big upside of potential Zee-Sony merger include extended
delays and the merger being set aside and this is reflected in our rainy-day
valuation on page 2.

Financials at a glance
Year to 31 March 2020A 2021A 2022CL (% YoY) 2023CL 2024CL
Profit & Loss (Rsm)

Revenue 81,299 77,299 82,997 7.4 91,788 101,010
Cogs (ex-D&A) 0 0 0 0 0
Gross Profit (ex-D&A) 81,299 77,299 82,997 7.4 91,788 101,010
SG&A and other expenses (64,953) (59,398) (61,279) (65,444) (71,640)
Op Ebitda 16,345 17,901 21,718 21.3 26,344 29,371
Depreciation/amortisation (2,706) (2,649) (2,760) (2,854) (2,894)
Op Ebit 13,639 15,252 18,958 24.3 23,490 26,476
Net interest inc/(exp) 1,388 534 1,471 175.8 3,082 3,802
Other non-Op items 0 0 0 - -
Profit before tax 15,027 15,785 20,430 29.4 26,572 30,278
Taxation (4,317) (4,625) (5,142) (6,688) (7,621)
Profit after tax 10,710 11,160 15,287 37 19,884 22,657
Minority interest (5) 69 73 5 116 122
Net profit 10,705 11,229 15,360 36.8 20,000 22,779
Adjusted profit 10,705 11,229 15,360 36.8 20,000 22,779
Cashflow (Rsm) 2020A 2021A 2022CL (% YoY) 2023CL 2024CL
Operating profit 13,639 15,252 18,958 24.3 23,490 26,476
Depreciation/amortisation 2,706 2,649 2,760 4.2 2,854 2,894
Working capital changes (16,758) 809 (7,365) (6,108) (4,930)
Other items 2,845 (3,276) (5,612) (7,080) (8,002)
Net operating cashflow 2,432 15,434 8,741 (43.4) 13,156 16,438
Capital expenditure (1,818) (2,060) (2,235) (2,347) (2,464)
Free cashflow 614 13,374 6,506 (51.4) 10,809 13,974
M&A/Others 5,706 (3,002) 1,501 2,707 3,377
Net investing cashflow 3,888 (5,062) (734) 360 913
Increase in loans (12) 4 - - -
Dividends (5,227) (1,118) (2,692) (4,323) (4,323)
Net equity raised/other (5,229) (4,302) (4,120) 282 295
Net financing cashflow (10,468) (5,416) (6,812) (4,041) (4,028)
Incr/(decr) in net cash (4,148) 4,956 1,195 (75.9) 9,475 13,324
Exch rate movements 0 0 0 0 0
Balance sheet (Rsm) 2020A 2021A 2022CL (% YoY) 2023CL 2024CL
Cash & equivalents 5,529 10,485 11,679 11.4 21,155 34,479
Accounts receivable 20,847 19,452 22,739 16.9 25,147 27,674
Other current assets 69,149 68,100 72,815 6.9 78,367 82,875
Fixed assets 9,112 8,343 7,818 (6.3) 7,310 6,880
Investments 5,860 8,925 9,371 5 9,840 10,332
Intangible assets 4,070 3,804 3,804 0 3,804 3,804
Other non-current assets 8,264 7,994 7,994 0 7,994 7,994
Total assets 122,831 127,102 136,220 7.2 153,617 174,037
Short-term debt - - - - -
Accounts payable 16,803 13,982 14,019 0.3 15,240 16,683
Other current liabs 6,003 8,019 7,901 (1.5) 8,282 8,681
Long-term debt/CBs 526 195 195 0 195 195
Provisions/other LT liabs 0 0 0 0 0
Shareholder funds 93,439 100,945 113,904 12.8 129,581 148,037
Minorities/other equity 6,060 3,961 202 (94.9) 318 440
Total liabs & equity 122,831 127,102 136,221 7.2 153,616 174,037
Ratio analysis 2020A 2021A 2022CL (% YoY) 2023CL 2024CL
Revenue growth (% YoY) 2.5 (4.9) 7.4 10.6 10.0
Ebitda margin (%) 20.1 23.2 26.2 28.7 29.1
Ebit margin (%) 16.8 19.7 22.8 25.6 26.2
Net profit growth (%) (31.7) 4.9 36.8 30.2 13.9
Op cashflow growth (% YoY) 87.4 534.5 (43.4) 50.5 25.0
Capex/sales (%) 2.2 2.7 2.7 2.6 2.4
Net debt/equity (%) (5.0) (9.8) (10.1) (16.1) (23.1)
Net debt/Ebitda (x) - - - - -
ROE (%) 11.7 11.6 14.3 16.4 16.4
ROIC (%) 11.7 12.4 15.9 18.3 19.5
Source: www.clsa.com

Section 1: Strong advertising upcycle ahead Zee Entertainment - BUY
Strong advertising upcycle ahead

India is seeing a strong advertising upcycle post-Covid. Our economics team
forecasts India nominal GDP growth to improve from a 3% fall in FY21 to 10-15%
YoY growth by FY24CL. India’s GDP has already recovered with a sharp 23.9%
increase in 1HFY22. In this upturn, television broadcasters with leading media
reach of 892m will see their advertising revenues grow at 15% Cagr, thus, top
broadcasters are well-positioned to benefit from the upcycle ahead. TV should still
benefit from rising penetration, as about 90m of India’s 300m households have not
yet owned a television.
Zee’s advertising revenue India’s No.2 TV network with 21% market share, Zee’s viewership has risen 330bps
growth can surprise on the to close to pre-pandemic levels from lows in May 2020. In FY15-19, Zee delivered
upside against our 16% a 17% Cagr in ad revenues, about 4% higher than the industry growth. With Covid-
FY21-24 Cagr estimate
19 disruption, Zee’s ad revenue saw 7-20% YoY decline in FY20/21. However,
thanks to sharp recovery, its ad growth picked up to 52% in 1HFY22. Also with
Zee’s network strength and viewership performance improving, company
advertising revenue growth can surprise on the upside against our estimate of 16%
Cagr over FY21-24.
Covid-19 set lowest base for advertising spending

Covid 19 dented adspend in Advertising spend in India is poised for a sharp rebound as weak expenditure over
the past two year the past two years due to Covid-19 have set the lowest base ever. India’s
adspend/GDP ratio peaked in FY08 at 0.41x, was at 0.35x pre-Covid and has since
declined to 0.28 in FY21. We estimate advertising spending has fallen 22% in FY21,
versus a 3% decline in nominal GDP in the same period.
Figure 1
Adspend/GDP growth India’s total adspend to nominal GDP

at multi-year lows (%)
0.45
0.40
0.35
0.30
0.25
0.20
FY99 FY01 FY03 FY05 FY07 FY09 FY11 FY13 FY15 FY17 FY19 FY21CL
Source: CLSA, GroupM, FICCI, RBI
India’s GDP growth has Prior to the Covid first wave in March 2020, advertising growth has already been
started recovering sluggish due to slowing economy. Ad growth’s beta to nominal GDP fell to 0.8x over
FY11-14 post the Global Financial Crisis, versus 1.2x over the 10-year period of
FY00-09. However, with the government’s initiatives to revive the economy, India’s
GDP growth has started recovering and achieved 23.9% growth in 1HFY22. Thus,
we forecast ad growth beta to nominal GDP to rise to 1.3x over FY22-24CL. Our
economics team forecasts Indian nominal GDP growth to improve sharply from -3%
in FY21 to strong growth of 10-15% by FY24CL.

Economic recovery drives adspend rebound

Discretionary advertising is We believe the sharp recovery in the overall economy is driving a rebound in
returning advertising. Companies are increasing their promotional budgets to stimulate
consumer demand, particularly in growth-sensitive sectors, such as consumer
discretionary, retail, white goods, autos (although four wheelers’ adspend are
lagging), mobile phones, mobile services, banking and financial services, etc. Also
the marketing expenditures of newer categories, including ecommerce (eg,
Amazon), online food-delivery platforms (eg, Zomato), epayment (eg, PayTM),
elearning (eg, Byju) etc, have picked up during and more so post the pandemic.
Figure 2
With GDP growth set to India adspend growth versus nominal GDP growth
revive, increase in adspend 25 (% YoY)
should also accelerate Nominal GDP growth Ad spend growth
20
15
10
5
0
(5)
(10)
(15)
(20)
(25)
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22CL
FY23CL
FY24CL
Source: CLSA, GroupM, FICCI, RBI
TV high ad share amid rising digital

Over the past decade, adspend on TV enjoyed a 12% Cagr to Rs262bn (in
FY3/2020), faster than the overall ad-spend Cagr of 11%, thanks to the increase in
number of pay TV channels as well as rising reach and superior engagement.
However, during the Covid pandemic, TV adspend slumped 20% in FY21. But we
expect TV will remain the leading medium to reach mass audiences in India, and
expect TV adspend to continue to deliver 15% Cagr over FY21-24CL to Rs321bn
(US$4.3bn), partly driven by its relatively lower cost per thousand impressions
(CPM) versus digital and partly due to TV’s unparalleled reach.
Figure 3
We expect TV adspend to TV advertising revenue in India

deliver 15% Cagr over 350 (Rsbn) (% YoY) 20
FY21-24CL TV ad-spends TV ad-spend growth (RHS)
15
300
10
250
5
200 0
150 (5)
(10)
100
(15)
50 (20)
0 (25)
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21CL
FY22CL
FY23CL
FY24CL
Source: FICCI, KPMG, CLSA

Figure 4 Figure 5
TV home reach TV Individual reach

215 (m) 920 (m)
210
210 900 892
205 880
200 197 860

836
195 840
190 820
183
185 800
780
180 780
175 760
170 740
165 720
FY17 FY19 FY21 FY17 FY19 FY21
Source: BARC Source: BARC
The risk of TV losing share In India rising digital adspend has come largely at the cost of print media, which has
to digital advertising is lost a 23% market share since FY08, with digital rising by 26% and TV largely stable
limited in India at 37%. With print still running 28% in terms of market share, we believe TV runs
limited risk of losing share to digital advertising. Note that TV still benefits from rising
penetration, as about 90m of India’s 300m households still do not own a TV. Over
21-24CL, we expect TV advertising revenue to grow at 15% Cagr to US$4.3bn
driven by its unparalleled reach of nearly 892m viewers and as a result, TV’s share
to total ad-spend in India is likely remain steady at 37% over CY21-24.
Figure 6 Figure 7
Ad revenue in India by medium Ad revenue share in India by medium

h
1,000 (Rsbn) (% of revenue) Digital Out of home Radio Print TV

879 100 2
900
Digital
28
800 Out Of Home 715
Radio 80 40
700 Print 354
TV 199
600 60 51
500 28
18
400 160
40
198
300
196
200 4 20 36 37 37
321
100 262
100
71
0 0
FY08 FY20 FY24CL FY08 FY20 FY24CL
Source: FICCI, CLSA Source: FICCI, CLSA
OTT will drive digital ad share ahead of TV

Share of digital media in Rising reach of digital media is now led by increasing time spent on digital video
total advertising to rise to over the top (OTT) streaming platforms which has further improved engagement
40% by FY24CL with digital media. Both these trends combined will drive a 12ppt increase (from
FY20) in the ad-share of digital media to 40%, highest amongst all media by
FY24CL.Within digital, we see digital video platforms having highest 38% Cagr
growth in ad revenue to US$1.6bn and form c.33% of digital ad-spend. While video
platforms are likely to see sharp growth, we expect search- and display-driven
digital ad growth to moderate, given their lower engagement levels and the
availability of higher-engagement video streaming platforms, ie, OTT.

Figure 8 Figure 9
Digital advertising spending by segment Online video’s share of overall digital ad revenue
140 (Rsbn) Online video ad revenue (% digital ad spends) 40
Share in digital ad spends (RHS)
Other
4% 118
120 35
30
Search 100
23% 88
Online Video 25
22%
80
63 20
60
45 15
Display 40 36
Social 24% 10
24
27%
17
20 5
0 0
FY18 FY19 FY20 FY21 FY22CL FY23CL FY24CL
Source: Dentsu Aegis Network Source: Magna Global, FICCI, CLSA
Zee’s TV network viewership back to pre-Covid levels

Viewership data for Covid-19 led lockdowns, drove India’s TV viewership higher but top private
September 2021 shows Zee broadcasters at peak had 11ppt share decline largely due to lack of original fiction
network share has risen content. However with return of new shows top private broadcasters viewership
330bps from lows to 21%
has now recovered to higher than pre Covid levels. BARC viewership data for Sept-
21 shows that Zee No 2 TV network share has risen 330bps from lows to 21% and
is nearing pre-Covid levels. This has been driven by increased viewership in Hindi
and regional general entertainment channels (GEC) and as more new shows return
especially to flagship Zee TV channel the network will gain further viewership share.
Figure 10
Network share for Zee is Viewership breakdown by broadcaster

close to pre-Covid levels (% impressions) Star Zee TV18 Ent. Sony Sun Others
100
12 12 12 11 12 12 11 11 11 10 11 13 12 13 11
16 17 18 17
23
29 10 10 11
12 12 10 10 11 11 11 10 10 10 11
11
80
12 13 13
14 10 11
11 11 12 12 13 13 12
14 12 12 12 13 13 12
10 10
17 13 12 12
12
60 13 13
12 13
13 13 13 12 12 14
13 15 15 15
12 12
10 11
13 20 20
9
22 22 22 21
40 24 22 21 22 18 21
23 7 25 21 21
23 20
22
17
18
20 38 37
32 33 30 30 30 33 33 31 31
26 26 28 26 29 29
25 24 23
17
0
Apr 20
Sep 20
Dec 20
Apr 21
Sep 21
Aug 20
Aug 21
Jul 20
Oct 20
Nov 20
Jul 21
Feb 20
Mar 20
Feb 21
Mar 21
May 20
May 21
Jan 20
Jun 20
Jan 21
Jun 21
Source: BARC India data across leading channels/ genres, CLSA

Figure 11
Zee’s viewership gains in Zee’s network viewership breakdown by channel

have been driven by Hindi 30 (% impressions) Hindi GEC Hindi Movies Regional
GEC and regional GEC 25
24
25 23 23 22 22
22 22 21 22 22
21 21 21 21
20 20 20
20 18 17 18
11 13
13 14 12 12 12 13 13
15 10 11 13 13 12 13 13 12
9 8 12
11
10 5 4
3 3 3 4 3 3 2 2 2
5 5 3 3 3
4 3 3 3
2
5
6 7 7 7 7 6 6 6 6 7 7 7
4 5 5 5 5 5 5 5 5
0 Apr 20
Sep 20
Dec 20
Apr 21
Sep 21
Aug 20
Aug 21
Jul 20
Oct 20
Nov 20
Jul 21
Feb 20
Mar 20
Feb 21
Mar 21
Jan 20
May 20
Jan 21
May 21
Jun 20
Jun 21
Source: BARC India, CLSA
Zee’s play on advertising upcycle upturn

Ad growth to accelerate Content company Zee is best placed for the upturn in the advertising cycle not just
in TV but also in digital media which will provide an additional revenue stream via
its own OTT, ZEE5 (detail on pages 15). Zee delivered 17% Cagr in ad revenues in
pre Covid years of FY15-19, 4% higher than industry. Post-Covid crater and 7-20%
declined in FY20/21, Zee’s ad growth has already picked up to 52% in 1HFY22.
Meanwhile Zee’s OTT ZEE5 ramp-up continues and monthly active users (MAUs)
have increased 70%YoY to 93m which alongside improving TV network viewership
performance led us to forecast an 16% ad-revenue Cagr over FY21-24 and we also
see upside risk from a faster economic pickup and higher TV ratings.
Figure 12
Zee delivered 17% Cagr in Zee’s advertising revenue growth

ad revenues in pre-Covid 70 (Rsbn) (YoY %) 30
Ad revenue Growth YoY (RHS)
years of FY15-19
60 20
50
10
40
0
30
(10)
20
10 (20)
0 (30)
FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22CL FY23CL FY24CL
Source: Company, CLSA
Ad revenue growth can With Zee’s network viewership performance improving, company ad growth can
surprise on the upside surprise on the upside against our 16% FY21-24 Cagr. We estimate that a 3-5%
higher growth in advertising revenues lifts Zee’s FY24CL EPS by 5-9%.
Figure 13
A 5% increase in the Zee’s FY24CL EPS sensitivity

advertising revenue growth (%) Change in Advertising revenue growth
adds 8.6% to EPS (5%) (3%) Base 3% 5%
EPS change (8.6) (5.2) 0.0 5.2 8.6
Source: CLSA

Section 2: Explosive OTT growth and for ZEE5 Zee Entertainment - BUY
Explosive OTT growth and for ZEE5

Digital media’s reach will Digital media’s rising reach, especially after the Covid-19 outbreak, has made it the
rise to 650m by FY24CL second largest media after TV, surpassing print. Digital media’s reach will rise to
650m by FY24CL, driven by rising smartphone penetration, cheap data and richer
content. Thanks to the explosive growth in over-the-top (OTT) media services, we
expect digital advertising revenue to see 12ppt increase in share of adspend by
FY24CL, making it the highest among all media. We also forecast OTT revenues, ie,
advertising plus subscriptions, to deliver a 34% Cagr to US$3.2bn by FY24CL.
However, despite the growing popularity of OTT in India, since access is mainly on
mobile, we expect limited cord cutting. Our proprietary survey of 1,000
respondents reveals the same (see page 20) and TV industry revenues, including
advertising and subscriptions, will reach US$12bn by FY24CL.
ZEE5 has seen MAU rise Meanwhile, digital ramp-up increasingly sees media buyers choosing traditional TV
70% YoY to 93m in 1HFY22 and OTT platforms. Thanks to its content edge, Zee is set for success in digital with
its own ZEE5 seeing monthly active users (MAU) increase 70%YoY to 93m in
1HFY22, ranking among the top five OTT platforms. ZEE5’s content is unmatched
by competitors, with 3,500 largely-exclusive movies, 100 movie digital premieres
and more than 90 original shows. ZEE5 is also seeing strong response to new pricing
of Rs499/year, which is competitive versus other OTT operators. If ZEE5 surprises
on the upside and OTT loss drops by 10%, it will lift Zee’s FY24CL EPS by c.1%.
Digital media: Second highest reach

Digital media’s reach will India’s rising smartphone penetration and higher data adoption on the back of the
surpass that of print world’s lowest data prices have increased the time spent on digital media during
lockdowns, especially on OTT platforms, and the trend is continuing even after
lockdowns have eased. India currently has about 435m smartphone users, making
up 45% of total number of mobile devices in the country, and 24m of the country’s
300m households have broadband connections at home. By FY24CL we expect the
number of smartphone users to rise 54% to 668m. This will increase digital media’s
audience reach in India to 650m, more than the 425m of print media pre-Covid, but
still lower than TV’s audience reach of 892m. However rising digital reach and
ongoing growth in OTT should drive a 12ppt increase in digital’s share of adspend
from FY20 to 40% by FY24CL, the highest among all media.
Figure 14 Figure 15
India smartphone user base Broadband connections in India

800 (m) 25 (m) 23.5
22.8
668
700
590 19.2
600 20 18.2 18.4
18.0
520 17.0
500 442
15.5
403 15
400 355
303
268
300
230
10
200 159
100 5
0
FY22CL
FY23CL
FY24CL
FY15
FY16
FY17
FY18
FY19
FY20
FY21
0
FY15 FY16 FY17 FY18 FY19 FY20 FY21 1QFY22
Source: Telecom Regulatory Authority of India (TRAI), CLSA Source: Telecom Regulatory Authority of India (TRAI), CLSA

Digital gaining advertising share from print

Covid has hit print media Among traditional media, Covid-19 has hit print the hardest given their higher
the hardest dependence on advertising revenues. Given low cover prices in India, nearly two-
thirds of print media’s revenues come from advertisements. The growth in print
media has been supported by increasing Hindi readership, and total print media’s
reach was at 425m pre-Covid. The bulk of print media reach growth has been driven
by Hindi and regional newspapers. However, the aggregated, ie, English plus
Hindi/Regional languages, print media adspend share has fallen 23ppt from its peak
to 28%, and is likely to drop further to 19% by FY24CL. English print media have
been hit harder as their readers are in urban markets with high income and higher
broadband penetration, and have increasingly switched to digital media for news.
Figure 16 Figure 17
Print media readership by language Daily Hindi and English newspapers circulation (CY09-19)
24 (m copies)
Hindi circulation English circulation
18.6
19
13.4
14
Regional Hindi 11.2
10.5
languages 44%
49% 9
English (1)
7% 2009 2019
Source: IRS 1Q 2019, CLSA Source: Audit Bureau of Circulation
The rise of digital has limited impact on TV

Digital video/OTT are The growth of digital media in India is likely to have limited impact on TV going
supplementary to forward given that online video streaming is primarily through mobiles, and digital
traditional TV video or OTT platforms are proven to be supplementary to traditional TV in terms
of viewership. Therefore, TV and OTT are likely to coexist. While digital means
gradually gain share, TV will remain a major medium to reach the mass market given
its unparalleled reach of nearly a billion individuals. We expect TV’s ad revenue to
deliver a 15% Cagr, and maintain its 37% market share by FY24.
Figure 18
We expect TV’s adspend Adspend by medium

market share to remain (%) TV Print Digital Ads Radio/outdoors
stable at 37% over FY21-24 100
8 5 5 5 5
11 11 10 10 10 9 9 9 9 9 10 9
90 2 3 4 4 5 7 8 11 13 15
80 19 23 28 38 38 39 40
70
51 49 48 47 46
60 46 45 43 40 38
35 32
50 28
19 20 19 18
40
30
20 36 37 39 39 39 38 37 37 38 38 37 36 37 38 37 37 37
10
0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21CL
FY22CL
FY23CL
FY24CL
Source: FICCI, Magna Global, CLSA

Digital viewership is This is in line with the market like Japan and Indonesia where TV ad-spend have
primarily on mobile devices seen limited impact of digital. In India more so we expect digital/OTT to continue
to have limited impact on TV given that digital viewership will remain primarily on
the mobile devices which has not only added to total video viewership in India but
also limit the scope of cord cutting among Indian households.
Figure 19
Digital media has hurt Comparison of ad-spend mix across countries

ad-spend share of print (% in ad-spends) Television Digital Print Radio Out of home
across most markets 100
4 11
10
8 10 20
80 15 18
19 35
21 25
35
20
60 49 63 28 46 6
27 18 60
23 37
40
52 54 51
44
20 40 41 39
33 33 33
25 23
0
2012 2017 2020 2012 2017 2020 2012 2017 2020 2012 2017 2020
US Japan Korea Indonesia
Source: Magna Global, CLSA
Explosive growth in video OTT

Netflix and Amazon are India has over 30 OTT’s competing for subscribers and viewership including
following a pure international platforms, Netflix and Amazon which cater primarily to English-
subscription model speaking audiences; however, they have been expanding their local language
content and both these platforms are following a pure subscription model.
Figure 20
India has more than 30 Availability of digital video content

digital platforms offering
OTT content Global OTT
platforms
Telco led OTT

platforms
Broadcaster led
OTT platforms
Independent
platforms
Source: CLSA
Netflix’s subscription is While Netflix’s subscription pricing at Rs199/month is at the top end of the
priced at the top end of the subscription spectrum, Amazon Prime Video comes bundled with Amazon Prime
subscription spectrum membership of Rs999/year, which also offers preferential access to discounts,
terms of delivery on Amazon’s retail website as well as access to Amazon Music, its
music streaming platform.

Figure 21 Figure 22
OTT app interfaces are Netflix app interface Amazon Prime Video interface
highly user-friendly
Source: CLSA Source: CLSA
Telco-led platforms do not Besides international OTT’s there are telco-led platforms which are yet to build own
have content creation content expertise, although they are playing a crucial role in content aggregation.
expertise yet Currently telco-led platforms, such as JioTV, Airtel Xstream and Vodafone Movies &
TV, are aggregating live and catch-up TV content, movies, as well as aggregating
content from OTT platforms. Telco’s main aim is to ensure that mobile subscriber
churn remains low hence and given the high competition in the sector, it is unlikely
these platforms will have a focused content subscription model at least by FY24CL.
Figure 23 Figure 24
Telco-led platforms are Vodafone Play app interface Airtel Xstream app interface
aggregating live TV content,
movies and content from
OTT platforms

Broadcaster OTT’s set up for success

Broadcaster-led OTT In contrast to international platforms and telco’s, broadcaster-led OTT platforms
platforms offer the full offer the full spectrum of India-centric content. Broadcasters have an edge in terms
spectrum of India-centric of the quantum of local content they own and create on a regular basis. They also
content
have deeper insights into the mass viewers’ preferences. These platforms have a
freemium model with both AVOD (ad-based video on demand) and SVOD
(subscription video on demand). Their TV network catch-up content and some
movies are available free for users and monetised through advertising. However,
their premium content led by original shows and movie premier is behind a paywall.
Figure 25
ZEE5 follows a freemium Revenue models of key OTT players in India

model like most
broadcaster-led OTT
platforms Subscription Video Advertising Video
on Demand on Demand
SVOD AVOD
Netflix Disney+ Hotstar YouTube
Amazon Prime SonyLIV Facebook
Jio TV Eros Now MX Player
Jio Cinema ZEE5 Muvi
Airtel Xstream Voot
ALTBalaji Sun NXT
Vodafone Movies & TV YuppTV
YouTube Premium
Source: CLSA
Disney+ Hotstar is the Among broadcaster-led platforms, Star India’s Disney+ Hotstar is the leading OTT
leading OTT platform in platform with reportedly over 45m subscribers, largely due to sports content and
India its vast content library. It has kept its premium sports content (live cricket, premier
league), English-language shows (HBO, Fox, Disney and Showtime content) behind
paywall. ZEE5, too is among the top five OTT’s and aims to leverage its local
language content edge, extensive movie library and new movies premier’s, original
series created in local languages to grow in digital.
Figure 26
ZEE5 is among the top five OTT market share

OTTs
Others
Voot 2% 5%
SonyLIV 6%
ZEE5 7%
Disney+ Hotstar
26%
Netflix
9%
MX Player
Amazon Prime 34%
11%
Note: MX Player is only AVOD. Source: CNBC, CLSA

Figure 27
Star India’s Hotstar is the Mobile app interface of broadcasters’ OTT Platforms
leading OTT platform in
India
Disney+ Hotstar Zee5 Voot SonyLiv
Source: CLSA
OTT’s subscriptions revenues

OTT subscription market We believe OTT subscription market will largely be driven by audiences belonging
will largely be driven by to the New Consumer Classification System - NCCS-A segment. This consumer
audiences with highest segment comprising of top 12% of households/145m individuals is more discerning
disposable income
and has the highest disposable income. While they are likely to pay for both TV and
OTT subscriptions initially, they are likely to choose one of the two services as their
viewing preferences mature and or subscriptions rates of pay TV and OTT rise.
Figure 28
Internet can potentially India’s Pay TV versus OTT distribution of content

disintermediate traditional
distributors Value chain on TV
Content Broadcaster Distribution

Viewer
Production (Zee, Star etc) (MSO, DTH)
Value chain on digital
Distribution
Own platform
Content
production/ Viewer
aggregation
Distribution
3rd party
platform
Source: CLSA
Individuals are unlikely to Given the plethora of OTT platforms available, subscribers are likely to have
subscriber to more than multiple OTT subscriptions. However, individuals are unlikely to subscribe to more
three to four OTT services than three to four services primarily because it becomes difficult to manage
multiple subscriptions beyond a certain limit. Similar trends are seen in the USA
where less than 10% of households have subscribed to more than five OTT services.

Figure 29 Figure 30
India TV ownership by household income US household OTT platform subscription

(% of total) NCCS A NCCS B NCCS C NCCS D &E 35 (No. of apps subscribed)
100 31
9
90 30
80
33
25
54
70
60 20
50
15
31 12
40
20 9
10
30
6
5 5
20 14 5
27
10
12
0
0 >25% 10-20% 5-10% 2-5% 1-2% 0-1%
Total households TV owning households % of OTT streaming households in the USA
Source: BARC India, CLSA Source: ComScore, CLSA
OTT video subscription While the viewership of an individual subscriber is likely to be concentrated among
market having different two/three/four platforms, we see the digital video subscription market having
winners across different different winners across different customer segments. The top 60-70m urban elite
customer segments
audience that demands English-language content and sports will largely be
captured by Netflix, Amazon Prime Video and Disney+ Hotstar. The next 100m
mass-premium audience that may want to watch some English-language content
but is primarily looking to see high quality local language content, will opt for
broadcaster-led platforms like ZEE5, SonyLiv and Voot. Given smartphone reach of
668m - about 50% of the population by FY24CL - digital reach will also extend to
NCCS-B and C audiences. These will largely be TV audiences that will also watch
local and regional language content available on OTT platforms.
Figure 31
Estimated breakdown of OTT subscriber market
Market Monetisation Key Content Likely winners
70m SVoD English, sports Netflix, Amazon , Hotstar
100m SVoD/AVoD Premium local Broadcaster platforms

AVOD scope
SVOD scope
480m AVoD Mass local Telco led platforms
Source: CLSA

Figure 32
Expect OTT video OTT video subscription market size and number of OTT subscriptions
subscription market size to 140 (Rsbn) OTT subscription revenues (m) 120
rise to US$1.6bn by FY24 OTT subscriptions (RHS)
120 100
100
80
80
60
60 121,887
103,702
40
40 80,306
55,806
20 40,665 20
11,996 15,784
0 0
FY18CL FY19CL FY20CL FY21CL FY22CL FY23CL FY24CL
Source: CLSA
OTT wave’s unlikely to cause cord cutting

Viewers are unlikely to The ongoing cord cutting taking place in developed markets has been driven by
replace pay TV connections availability of infrastructure of high wireline broadband penetration and streaming
for video streaming on device penetration as well as a significant price arbitrage of OTTs versus traditional
mobile TV bundles. In India viewers are unlikely to replace pay TV connections for video
streaming on mobile connections especially as while 90% of US households have
wireline broadband penetration same is under 8% in India.
Some 60% of our survey In fact, to assess OTT impact on television in India we did a pilot survey and targeted
respondents saw an 1,000 respondents (Details on page 20). Of our respondents, 55% increased mobile
increase in television spend post Covid 19 and OTT was the dominant usage for 40% followed by social
viewership media and gaming. We noted that 71% of the respondents had paid OTT subscription,
yet 60% have seen TV viewership increase post pandemic.
Only 8% of India’s 300m Besides having the infrastructure in place, TV bundles in US at US$80-90/month
households have broadband are much more expensive than opting for a streaming service which along with
connection broadband connection would cost US$20-30 less. This price arbitrage is the key
reason for nearly 1/3rd of OTT streaming households cutting their Pay TV
connections in the US. As against US, currently, only 8% of India’s 300m households
have wireline broadband and even at current data prices, streaming digital content
is still 45% more expensive than comparable TV subscription bundle average
revenue per unit (Arpu).
Figure 33 Figure 34
OTT streaming cost versus TV cost in the USA OTT streaming cost versus TV cost in India
90 (US$/month) 600 (Rs/month)
Broadband cost Subscription cost Broadband cost Subscription cost
80
500
70
60 400
283
50 15
300
40 80
30 200
343
20 40
100 213
10
0 0
TV subscription OTT streaming TV subscription OTT streaming
Source: CLSA Note: Broadband cost is 1.5GB/ day pack Rs199 for 28 days, OTT subscription cost
is avg monthly cost for ZEE5, SonyLIV, Disney Hotstar+ and Voot., TV subscription
includes base packs of Sony, Zee, Star & Viacom + capacity charge. Source: CLSA

Wireline broadband market We believe that the wireline broadband market by FY24CL will largely be limited to
will largely be limited to the the top-40 cities in India which have ~30m households. Assuming that 80% of these
top-40 cities in India households have a wireline broadband connection with another 80% having means
to stream digital video content, the potential market of OTT on large screens will
be limited to 19m households (9% of TV households in FY24CL). Assuming that
33% of these households (6.3m) cut the cord with an Arpu of Rs500 (2x of industry
Arpu), then the maximum potential impact of cord cutting will be Rs38bn i.e. about
7% of estimated TV subscription revenues in FY24.
Figure 35
Cord-cutting may place 7% Estimated cord-cutting calculations

of TV’s subscription Total households in top-40 cities (m) 30
revenues at risk Share of households having wireline broadband (%) 80
Wireline broadband households (m) 24
OTT device penetration among WiFi households (%) 80
Potential market of OTT streaming on large screens (m) 19
Share of potential market cutting the cord (%) 33
Estimated cord cutters (m) 6
Estimated cord cutters (TV households) (%) 3
Average TV Arpu of cord cutters (Rs/month) 500
Subscription revenues at risk (Rsbn) 38
Subscription revenues at risk (% total subscription revenues) 7
Source: CLSA
Robust 4.5x larger TV subscriptions market

TV subscription revenue While we expect limited cord-cutting in India, the TV subscription revenue growth
growth is likely to moderate is likely to moderate due to New Tariff Order amendments (NTO 2) and also likely
due to NTO 2.0 as TV content distribution now competes with digital distribution/ OTT’s. Over
FY15-20, TV subscription revenues grew at 10% Cagr to Rs516bn. We see this
moderating to 4% over FY21-FY24CL to Rs556bn driven by lower Arpu increases
(2% Cagr). However TV subscriptions market will still be 4.5x larger than OTT
subscriptions market by FY24CL and TV revenues (Ad plus subscriptions) will be
over 3.5x of total OTT revenues.
Figure 36
We expect TV subscription TV subscription market forecasts

growth to moderate to 4% (Rsbn) (Rs/month)
700 260
over FY21-FY24CL to Subscription revenues Arpu (RHS)
Rs556bn
600 240
556
529
516
502 220
491
500 463
428
393
200
400 361
320 180
300
160
200
140
100 120
0 100
FY15 FY16 FY17 FY18 FY19 FY20 FY21CL FY22CL FY23CL FY24CL
Source: KPMG, CLSA

Survey of 1,000 consumers

To assess India’s mobile data and media content consumption Higher TV viewing: A key surprise
trends, CLSA’s proprietary online survey of 1,000 Indian was that 71% of respondents
consumers done in October 2021 highlighted the below trends. subscribed to paid OTT services.
OTT subscription rates in India
Rising spending on mobile data: India mobile data subscribers range from ~Rs42 (US$0.6)
used about 18GB data monthly on average in 2QFY22, up 33% monthly or Rs499 (US$7.1) yearly
from 4QFY20 pre-Covid. According to our survey, 55% out of for ZEE5, to Rs199 (US$3)
1,000 respondents said their monthly spending on mobile data monthly for Netflix.
increased during the pandemic. This is likely to be driven by rising
4G penetration and respondent shifting to bundled plans (voice + However, a bigger surprise was
data) and/or upgrade to higher-data plans. Although 35% of that, despite high OTT
respondents did not spend more on data, but it is likely that they consumption, 60% of respondents
were already mobile data subscribers to 4G plans which offer have still watched more television
(such as Rs199/US$2.6 for 24 days) high daily data limit of 1GB, since the Covid outbreak.
because in India data is cheap and basic plans also offer enough
data and hence users did not have to spend more. Movies in multiplexes: Finally, as
India’s vaccination rate has
OTT tops data usage: Video streaming over-the-top (OTT) ramped up, 59% of our 1,000 respondents were willing to
service was the dominant usage, with 40% of respondents watch movies in multiplexes. India has a movie-watching
choosing it as their top mobile data usage. Social media was culture and with big Bollywood contents set to return in the
next popular usage (29%), followed by gaming (17%) and then coming weeks, it is likely that multiplexes will be the top
ecommerce and payments (14%). entertainment destinations.
Bharti Airtel data usage per subscriber How has your monthly spending on mobile data changed since the
Covid outbreak?
25 (GB/month)
19.5
20 16.9
18.8 Lower 10
16.2 16.4 16.7
14.1 15.0
13.2
15 11.1 11.9
10.5
9.2
10 Same as last year 35
5
0 Increased 55
2QFY19
3QFY19
4QFY19
1QFY20
2QFY20
3QFY20
4QFY20
1QFY21
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
(%)
0 10 20 30 40 50 60
Source: Company, CLSA Source: CLSA
What is your top mobile data usage since the Covid outbreak? How has your TV viewership changed since the Covid outbreak?
Social Media Prefer mobile

29 8
(Facebook, Twitter, chat) video streaming
Payments, Remained
14 17
shopping etc. the same
Gaming 17 Decreased 16
Video streaming 40 Increased 60

(%) (%)
0 10 20 30 40 50 0 10 20 30 40 50 60 70
Have you subscribed to any paid mobile video streaming? Would you watch movies in multiplexes?
Prefer to watch Prefer mobile

8 13
free content video streaming
No 21 No 27
Yes 71 Yes 59
(%) (%)
0 10 20 30 40 50 60 70 80 0 10 20 30 40 50 60 70

Litigations on New Tariff Order amendments (NTO 2)

NTO 2 is still in litigation The Telecom Regulatory Authority of India (TRAI)’s new pay TV regime (NTO) took
three years to be implemented and was finally implemented in 2019 and was
followed by 2020 amendments of NTO 2 effective 1st March but these regulations
are expectedly still in litigation. Supreme Court has posted the final hearing on a
series of petitions filed against the Bombay High Court order regarding the
implementation of the NTO 2 to February 2022. Meanwhile TRAI has extended the
deadline for implementation of NTO 2 to 1 st April 2022.
Top broadcasters have The key change in broadcasting and distribution tariffs of NTO 2 is reduced cap on
complied with part of NTO maximum retail price (MRP) of individual pay channels which are part of any
2.0 regulations bouquet to Rs12per month from Rs19. Only channels with an MRP of Rs12 or less
are permitted to be in a bouquet and also the sum of MRP of all channels in a
bouquet cannot exceed 1.5x price of bouquet. The Bombay High Court in end June
had upheld the constitutional validity of NTO 2 but had struck down the second
provision of twin conditions as arbitrary. As per same a la carte MRP of each channel
forming part of bouquet shall not exceed three times the average rate of a pay
channel of the bouquet of which such pay channel is a part. Top distributors, under
NTO 2 have already lowered network capacity fee (NCF) to Rs130-160 (excluding
taxes) and charges for multi TV homes to ~ 40% of declared NCF.
Figure 37
Base channel bouquets of top broadcasters in Hindi speaking markets

No. of Bouquet Sum of channel Bouquet Key channels in the bouquet Price of Savings on key
channels Price (Rs/ prices in Discount key channels if
in month) bouquet (%) channels bouquet is chosen
bouquet (Rs/month) (Rs/ for (Rs/month)
month)
Zee base pack 25 43 62 30 Zee TV, & TV, Zee Cinema, & Pictures 52 (9.0)
Star base pack 16 49 75 35 Star Plus, Star Bharat, Star Gold, Star Sports 56 (7.0)
First Hindi, Star Sports 2, Star Sports 3
Sony base pack 8 44 79 44 Sony Entertainment, Sony Sab, TEN3 57 (13.0)
Viacom base 17 25 32 22 Colors, Colors Rishtey, MTV, The History 31 (6.0)
pack channel
Total 66 161 248 35 196
Note: Mar 20 RIO Star has reduced the base bouquet price by Rs10. Source: Companies, CLSA
Figure 38
New tariff regime has Comparison of current subscriber out-go versus pre-NTO
increased cost of TV (Rs/month)
350
subscriptions
300
Subscribers have to pay
15-20% more to get
masic package of top 250
four broadcasters 130
200
150 291
241
100
161
50
0
Average Content cost Capacity charge Subscriber outgo in new Pre-NTO
regime
Note: All costs are ex-GST and SD channel feeds. Capacity charge is of Tata Sky. Source: Companies, CLSA

Ahead of final verdict on NTO had been implemented after much chaos and prolonged litigation, with
NTO 2.0, top broadcasters migration driven by TRAI directing distributors to move undecided subscribers to
have released new pricing ‘best fit plan’ and broadcasters offering 30-50% discounts on bouquets. On
effective 1 December 21
implementation NTO‘s rise in content and distribution cost had made all-in-one
bouquets expensive, thus subscribers are still opting for bouquets, albeit with
limited pay channel choices which still boosted subscription revenues for top
broadcasters. TRAI’s NTO 2 was likely triggered by over 20% increase in cost of pay
TV subscriptions and that even now ~85% of subscribers continue to opt for
“bouquets” and amongst distributors DTH gained versus cable with competitive
bouquets. Now ahead of final verdict on NTO 2 top broadcasters have released new
pricing to meet the 1 December 21 deadline by TRAI although the implementation
of same has been delayed to April 22.
Figure 39
NTO 2.0 will see an Bouquet discounts offered by broadcasters pre and post NTO 2 pricing
increase in cost for
subscribers 250 (Rs/month) Sum of Price of individual channels in bouquet
Current Price of bouquet
Similar Bouquet in NTO 2.0 (incl individual channels)
214
210
198
200
177
157
150
135
110
100
100
85 85
72
50
50
0
Zee All in one pack Hindi Star Hindi HD Colors Wala Hindi Happy India All Platinum
HD Premium Family Plus HD HD
Note: Typical full bouquets. Source: Company, CLSA
MRP of popular channels A chart in Figure 39 of broadcaster’s new NTO 2 pricing versus current shows that
has been kept higher than maximum retail price (MRP) of popular channels has been kept higher than the old
the cap and hence will not cap of Rs 19. Zee has kept MRP of its top channels like Zee TV, Zee Telugu, and Zee
be part of the bouquet
Kannada at Rs22 each while Zee Marathi and Zee Bangla have an MRP of Rs 25 and
accordingly, these channels will not be available in bouquets. Zee has also created
26 SD and HD bouquets namely Zee Family Pack SD/HD and Zee Prime Pack
SD/HD across English, Hindi, Marathi, Bangla, Tamil, Telugu, Kannada, and
Malayalam,Hence even if NTO 2 is implemented, subscriptions will still grow for top
broadcasters like Zee with strong channels although realignment of bouquets will
hit tail channels and there could be delays and disruptions during implementation.

ZEE5 is best placed with content edge

ZEE5 is among the top five Meanwhile amid TV subscriptions and OTT ramp-up, given that Zee owns vast
OTTs libraries of local content and has a better sense of viewership trends, it is well
placed to create relevant and content that can be monetised on OTT as well besides
TV. Already ZEE5’s differentiator versus competing OTT’s is unmatched content of
100,000 hours in 12 languages, 3,500 largely exclusive movies and 100 movie
digital premieres. ZEE5 also has amongst the largest original content libraries,
mainly for youth with 90+ shows.
Figure 40
ZEE5’s differentiator is its Zee’s OTT model

unmatched content
Source: Company
ZEE5 follows freemium Also ZEE5 is seeing an encouraging response post pricing change to Rs499/year
model with premium which is compelling versus competing OTT’s. ZEE5 follows freemium model with
content accessible behind a premium content accessible behind a paywall at a price of ~Rs42/monthly. Premium
paywall
content will remain pay but ZEE5 is also monetising rising digital viewership with
ad revenues. However given content investments on ZEE5, margins/profitability
will strongly depend on how Zee monetises the OTT. ZEE5 has also been expanding
its presence outside India over the past year, and it has recently launched services
in the US, one of the largest market for South Asian population outside India.
Figure 41
ZEE5 is price competitively Subscription rates for leading OTT’s

at Rs499/ year Rs
ZEE5 - 3 months plan 299
ZEE5 - 12 months plan 499
Sun NXT - 30 days 50
Netflix - monthly 199
YouTube - monthly 139
Amazon Prime Video - 3 months 329
Amazon Prime Video - yearly 999
Disney Hotstar (Premium) - monthly 299
Disney Hotstar (Premium) - yearly 1,499
SonyLIV (Premium) - monthly 299
SonyLIV (Premium) - yearly 999
ALTBalaji - 3 months 100
Voot - monthly 99
Voot - yearly 399
Source: Companies, CLSA

Figure 42 Figure 43
ZEE5 MAU ZEE5 revenue and Ebitda

100 (m) 93 12 (Rsbn)
Revenue Ebitda 9.7
90 10
80 7.4
80 73
8
5.0
70 66 6 4.2
4
60 55
2
50
40 0
40
(2)
30 (4)
20 (6)
(4.0)
(5.4)
10 (8) (6.7)
(7.4)
0 (10)
1QFY21 2QFY21 3QFY21 4QFY21 1QFY22 2QFY22 FY21 FY22CL FY23CL FY24CL
Source: Company, CLSA Source: Company, CLSA
Over the next few years, With India’s TV penetration still low at ~70%, ZEE5’s digital ramp-up is parallel with
ZEE5 will start contributing TV and in medium term is unlikely to affect the core broadcasting business. Zee’s
materially to revenues distribution of content through ZEE5 is not only providing broadcaster with an
addition revenue stream to monetise content, it will also over time reduce Zee’s
reliance on distributors particularly cable operators, which could help them gain a
higher share of TV subscription revenue. Over the next couple of years, ZEE5 will
start contributing materially to broadcasters’ revenues. Given ZEE5 ramp-up and
that the MAU have increased 70%YoY to 93m and that digital video market
(advertising + subscription) could potentially grow to US$3.2bn by FY24CL our
ZEE5 revenue forecasts of Rs9.7bn/ US$130m may well be conservative. We
forecast Zee (TV and ZEE5) subscription revenues to grow from Rs32bn to Rs37bn
by FY24CL. If ZEE5 performance surprises on the upside against our 32% Cagr in
revenues to Rs9.7bn by FY24CL it will boost Zee growth and profitability. If ZEE5
Ebitda loss is lower by 10% it will lift Zee’s FY24CL EPS by over 1%.
Figure 44
We forecast Zee’s Zee subscription revenue forecast (including ZEE5)

aggregate (TV and ZEE5) 40 (Rsbn) 37
subscription revenues to 35
grow from Rs32bn to 35 32
33
Rs37bn by FY24CL 29
30
25 23 23
20
20
15
10
0
FY17 FY18 FY19 FY20 FY21 FY22CL FY23CL FY24CL
Figure 45
A 10% lower ZEE5 Ebitda Zee’s FY24CL EPS sensitivity to ZEE5

loss will lift Zee’s FY24CL (%) Change in ZEE5 Ebitda loss
EPS by 1.3% (10%) (5%) Base 5% 10%
EPS change (1.3) (0.7) 0.0 0.7 1.3
Source: CLSA

Section 3: Big upsides on likely Zee-Sony merger Zee Entertainment - BUY
Big upsides on likely Zee-Sony merger

Upon completion of the Zee’s nonbinding term sheet with Sony Pictures Networks India (Sony India)
merger, Sony will hold 51% provides an exclusive period for a potential merger till 21 December 2021. Sony’s
of the merged entity infusion of US$1.6bn as part of the deal and other merger terms are favourable to
Zee shareholders. Besides, with Zee’s promoters agreeing not to compete with the
merged co, Sony parent will transfer 2% of its shares to Zee’s promoters, and thus
the promoters’ family will continue to own about 4% of Zee. Upon completion of
the merger, Sony will have 51% ownership of the merged entity, and Sony will
appoint majority of directors to the board, while Zee’s Punit Goenka will remain
managing director and CEO for five years. Merged Zee-Sony will become bigger
than sector leader Star and could have about 10% on revenue synergies alone. We
estimate that the merged company (merged co)’s FY24 revenue could reach
US$2.5bn and profits could jump 2.5x to US$680m.
Zee-Sony merged entity can Sony’s parent company is in pole position with US$79bn revenues in FY21 and US$154bn
benefit from Sony’s current market capitalisation. Sony parent’s entertainment assets include music (ranked
international presence among global top two), TV production (global top five), cable networks with large emerging
market exposure, motion pictures (global top five) and one of the largest game platforms.
The Zee-Sony merged co can benefit from Sony’s international presence and have higher
chance to partner with global players. Zee’s proposed merger with Sony will require several
approvals from regulatory bodies and from 75% of Zee’s voting shareholders. Zee is
currently in litigation with an 18% minority shareholder which poses risks to the merger.
Also, final deal terms will need clarification on the non-compete clause, as well as a
pathway for the promoters to raise stake from 4% to 20% in the merged co.
Favourable Zee-Sony merger deal terms

Potential merger to Zee and Sony have signed an exclusive, non-binding, 90-day term sheet ending 21
combine all operations, December 2021 for a potential merger to combine all operations, including: linear
including linear TV TV networks, digital assets, production operations and programme libraries, to
networks, digital assets, create the largest media and entertainment company in India. In the proposed
production operations and merger, if calculated based on existing estimated equity values of Zee and Sony, the
programme libraries
indicative merger ratio would have been 61.25% in favour of Zee; higher than Zee’s
58-54% share of revenues and profits in the merged co (details in Figure 46); but
with the planned infusion of US$1.6bn cash by Sony, the resulting merger ratio is
likely to be 47.07% of the merged co to be held by Zee shareholders, and the
balance 52.93% to be owned by Sony.
Figure 46
On existing equity value Zee Entertainment and Sony India proposed merger terms
basis, indicative merger US$m
ratio would have been Market cap of Zee on merger announcement date 3,319
61.25% for Zee Without cash infusion Zee's indicative merger ratio (%) 61.25
Implied equity value of Sony India 2,100
With Sony’s infusion of Cash infusion by Sony India 1,575
US$1.6bn, the merger ratio Implied value of Sony India post-cash infusion 3,675
is likely to be 47.07% of the Equity value of Zee 3,319
merged co to be held by Zee Value of combined entity 6,994
shareholders and balance Sony India shareholding in the combined entity (%) 53
52.93% by Sony Zee shareholding in the combined entity (%) 47
Note: Zee equity value as of 21 September 2021. Source: CLSA
Figure 47
Zee’s has 58-54% share of Comparison of key financials of Zee and Sony India (FY20)
revenues and profit in the FY20 (Rsm) Zee Sony India Zee + Sony India Zee share (%)
merged co Revenues 81,299 59,076 140,375 58
Ebitda 16,345¹ 13,714 30,060 54
PAT (Normalised) 10,705 8,955 19,660 54
¹ FY20 Ebitda is after deducting Rs6bn of exceptional costs. Source: Zee, Ministry of Corporate Affairs, CLSA

Figure 48 Figure 49
Zee and Sony India revenues Zee and Sony India Ebitda
90 (Rsbn) 30 (Rsbn)
Zee Sony 79
81 Zee Sony
26
80
67
25
70 64 65 63 21
58 59 19
60 20
50 16
50 15
14
40 15
40
30 10 8 8
7
6
20
5
10
0 0
FY16 FY17 FY18 FY19 FY20 FY16 FY17 FY18 FY19 FY20
Source: Zee, Ministry of Corporate Affairs, CLSA Source: Zee, Ministry of Corporate Affairs, CLSA
Sony will appoint majority Post-merger, Sony will appoint majority directors on the board while Zee’s Punit
directors on the board while Goenka will remain the merged co’s managing director and CEO for five years. Also,
Zee’s Punit Goenka will with Zee promoters agreeing not to compete with the merged co on terms to be agreed
continue as MD/CEO for by both parties, Sony India’s parent will transfer 2% of its own stake in the merged co
five years to the promoters, keeping 51%, so that Subash Chandra will continue to own about 4%
of the merged co. Sony will not only allow Zee’s promoters to maintain their holding in
the merged entity at 4%, but will also allow Zee’s promoters to increase holding from
4% to up to 20%, subject to the laws. Zee’s board has provided in-principle approval
for the merger, subject to due diligence, which is ongoing, agreement execution and
requisite approvals, including that from shareholders.
Sector leadership after merger

The merger will create the If the Zee-Sony merger is sealed, the combined operations will create the largest
largest media and media and entertainment company in India. India’s TV-broadcasting market is quite
entertainment company fragmented, but Zee owns the nation’s No.2 TV network by viewership share and
in India ad revenue which has a multi-genre presence through its 49-channel portfolio,
including national and regional-language channels for general entertainment and
movies. Sony has 26 channels with presence in entertainment, movies and sports.
Zee and Sony’s networks constitute the largest number of genres and will be the
key drivers for future advertising and subscription revenues.
Figure 50 Figure 51
Zee channel portfolio Sony channel portfolio
Source: Company Source: Company

Zee-Sony merged company On merger with leading channels combined taking up top spots across the biggest
will have 33% market share genres the network position will get stronger Zee Sony merged company will have 33%
ahead of current leader Star market share (Zee 21%, Sony 12%) in the India TV viewership ahead of current leader
Star 29%. Even in financial terms as detailed in Figure 53, the merger will not only be
near Rs140bn (US$2bn) in revenues, comparable to sector leader but will also be highly
profitable with over Rs30bn (US$400m) in Ebitda and Rs20bn (US$266m) in profits pre
any synergies versus sector leader Star which is incurring losses.
Figure 52
Zee-Sony merged company TV networks market share

will have 33% market share (%)
40 Jul-Sep 20 Apr-Jun 21 Jul-Sep 21
35 33
29 29
30
25 24
21
19
20
15
15 13 13 12 12
12
10
0
Star Zee TV18 Ent Sony
Source: BARC, CLSA
Figure 53
Zee-Sony merged co will Comparison of key financials of proposed merged co (Zee + Sony India) with Star TV
have close to Rs140bn FY20 (Rsm) Zee + Sony India STAR
(US$2bn) in revenues Revenues 140,375 143,375
Ebitda 30,060 (4,154)
PAT (Normalised) 19,660 (4,889)
Source: Zee, Ministry of Corporate Affairs, CLSA
Zee-Sony’s combined solid content portfolio

Hindi and regional general In India’s TV-broadcasting market among the wide array of genres, Hindi and
entertainment channels regional general entertainment channels (GEC) remains the flagship genre
remains the flagship genre dominating nearly 50% of the market and are key driver channels for broadcasters.
Also GEC share is more than double that of the next category, Hindi movies. Zee
and Sony channels have done well across genres, maintaining strong ratings.
Figure 54
General Entertainment Viewership share across genres

Channels dominate with Genre Share in percentage
50% viewership share General Entertainment Channel (Hindi & Regional) 49.8
Movies 23.8
News 10.4
Music and youth 5.0
Kids 7.4
Sports 1.9
Others 1.6
Total 100.0
Source: FICCI, E&Y (2020 report), CLSA

In Hindi GEC, Zee-Sony Zee and Sony’s flagship entertainment channels, Zee TV, and Sony have done well
combined will have 60%. in the core Hindi GEC segment as detailed in Figure 57 and combined will have 60%
higher viewership share higher viewership share versus sector leader Star. Zee and Sony have also been able
versus Star
to capture a similar strong market share in movies genre as detailed in Figure 58
and combined will control over 50% viewership which will be over 2.5x of Star.
Zee is large in regional- Besides as detailed in Figure 55 Zee in particular is large in regional-language GEC
language GEC offerings with nine channels versus two for Sony. Hence combined Zee-Sony
dominance in entertainment and movies channels will make the merged co even
more compelling to advertisers and will help support Zee-Sony merged advertising
and subscription revenues.
Figure 55 Figure 56
Zee’s network viewership share Sony’s network viewership share

25 (% impressions) Hindi GEC Hindi Movies Regional Others 15 (% impressions) Hindi GEC Hindi Movies Regional Others
21 13 13
21 21 12
- 12
- - 1
20 18
12 1
2
0 1
1
- 0
2 1
2
2
15 13 12 9 2
13
11
10 6
9
9 9 8
3 3
3
2
5 3
5 5 5 5
0 0
Jun 21 Jul 21 Aug 21 Sep 21 Jun 21 Jul 21 Aug 21 Sep 21
Source: BARC, CLSA Source: BARC, CLSA
Figure 57 Figure 58
Hindi GEC viewership share (September 2021) Hindi Movies viewership share (September 2021)
Others
8%
Zee
17%
Others Zee
TV18 35%
27%
19%
TV18
Star
0%
Sony 28% Sony
28% 18% Star
20%
Source: BARC, CLSA Source: BARC, CLSA
Digital is improving sports monetisation

Sports in India is an Sports in India is an oligopoly between Sony and Star. Zee had sold its sports
oligopoly between broadcasting operation in Sep-17 to Sony which now has 10 sports channels as part
Sony and Star of its bouquet of channels. Sports business profitability has been a challenge with
India’s low TV channels subscription rates and Arpu which especially make
monetisation of sports content a challenge. Also sports content costs spike
especially when there is an India team cricket series due to high licensing costs.

Sony has a wide bouquet of Sony currently holds rights for cricket matches that are played in four cricketing
sports rights nations besides domestic T-20 tournaments in three counties. Apart from these Sony
also has a wide bouquet of sports rights, including, soccer leagues (including UEFA
Champions League & UEFA Europa League), tennis (Australian Open & Laver Cup) and
World Wrestling Entertainment (WWE). Among these, WWE is quite popular among
younger demographics and boosts stickiness for Sony’s sports channels.
Figure 59
Sports viewership largely Sports channels viewership

depends on cricket matches 80 (%) Jul-21 Aug-21 Sep-21
74 73 71
70
60
50
40
27
30 26 25
20
10
2 1
0
0
Star Sony DD Sports/ Eurosport
Note: Sony telecasted the England versus India series in Jul/Aug-21. Star telecasted the Indian Premier League (IPL) in
Sep-21. Source: BARC, CLSA
Sports content will India’s rising digitisation on TV with channel wise subscription revenues and OTT
increasingly be structurally ramp-ups will mean that sports content will increasingly be structurally better
better monetised monetised. In OTT Zee with own platform ZEE5 is one of the largest with 93m
MAUs, while Sony has been growing SonyLiv. Hence sports channels as part of
overall network salience and digital strategy would actually be a long-term positive.
Besides that Zee Sony merged will start with zero debt and over US$1.8bn cash
could increase participation in sports content, ie, may bid for the India domestic
cricket rights, including the Indian Premier League (IPL).
Figure 60
IPL is India’s most-watched IPL broadcasting (TV & Digital) rights

sports event and attracts Entity Years Rsbn
over 50% of total TV Sony Pictures Networks and World Sport Group 2008-2017 82
adspend on sports STAR India 2018-2022 163
Source: CLSA
Although sports accounts for 10-12% of TV ad-spend (pre-Covid) in India, Indian

Premier League (IPL) is India’s most-watched sports event and now forms over 50%
of total TV adspend on sports. The rights for IPL are currently with Star and are a
big boost especially for leading OTT Disney+ Hotstar, but they are expiring and will
be up for rebidding in the coming months for the FY23 IPL season.
Leverage of Sony’s global presence

Zee-Sony merged co can If Zee Sony merger is sealed merged co will also gain from parent Sony’s pole
benefit from Sony’s large position with its whole package of entertainment assets including music (within
international presence global top 2), TV production (global top 5), cable networks (large emerging market
exposure), motion pictures (global top 5) and gaming (largest game platform). Sony
leverages these strengths to partner with global players for cross-platform
monetisation and marketing. Zee Sony merged co can benefit from Sony’s large
international presence and also leverage to partner with global players for content.

Figure 61 Figure 62
Sony entertainment sales breakdown (FY3/20CL) Sony entertainment OP breakdown (FY3/20CL)

Media Games Television Media Games
Networks (hardware) Productions Networks (hardware)
Television
6% 9% 6% 4% 2%
Productions Motion
8% Pictures
6%
Motion Visual Media
Pictures Games
and Platform (software)
13% Games
7% 33%
(software)
Visual Media 29% Music
and Platform Publishing
6% 8%
Music
Publishing Games Recorded Games
4% Recorded Games (network Music (network
Games
Music (others) services) 17% services)
(others)
12% 4% 9% 16%
1%
Figure 63
Sony Group’s FY21 Sony Group revenue and Ebitda

revenues was US$79bn, 12,000 (¥bn) Revenue Ebitda
Ebitda was US$12bn 10,620 10,800
9,870
10,000 8,999
8,260
8,000
6,000
4,000
1,642 1,751
2,000 1,262 1,363 1,488
0
FY20 FY21 FY22CL FY23CL FY24CL
Zee-Sony will have Sony has an independent status as a producer of scale with almost no digital
momentum for content IP distribution exposure in pictures and music and large international presence, makes
creation and monetisation it a compelling partner for global established players and new entrants looking to
of old and new IPs get access for premium exclusive content and hence present a huge opportunity for
Sony group to monetise its extensive premium IP. This leads to increase momentum
for content IP creation and monetisation of old and new IP. This will be an
opportunity for Zee Sony merged co to leverage besides benefiting from Sony’s own
differentiated technology assets including imaging, sound, communications and
AR/VR to also support top creators.
Synergistic with Sony’s content leadership

Sony Pictures Television is Sony’s Sony Pictures Television (SPT) is the industry leader in scripted format
the industry leader in adaptations around the world. Sony produces, licenses and broadcasts some of the
scripted format adaptations world’s most recognisable entertainment content, giving Sony one of the strongest
TV portfolios in the industry. Sony’s ground-breaking scripted series include
Breaking Bad, The Blacklist, Days of Our Lives, The Young and the Restless, S.W.A.T,
Shark Tank, Better Call Saul, The Goldbergs, and The Crown among others. Sony is also
careful about managing risk with highly stable profitable game shows such as
Jeopardy and Wheel of Fortune. Apart from broadcast networks, Sony also actively
works with the key streaming providers including Netflix, Hulu Amazon, Apple,
Google (YouTube) and Charter.

Figure 64
High content exposure for Breakdown of content and distribution for major studios (2019)
Sony in pictures (%) Distribution Content Others
100
90
80
70
60
50
40
30
20
10
0
Disney NBCUniversal ViacomCBS Warner Bros. Sony
Note: the major studios also ‘develop content’ for their own linear cable networks and DTC channels (and partly for
others) which is included in the distribution revenues given lack of available details. Source: Companies, CLSA
About 60% of SPT’s 127 SPT has a sizable presence in overseas market, with about 60% of its 127 shows
shows are international being international properties and it operates 24 wholly-owned or joint venture
properties production companies in 12 countries, along with linear and digital channels
around the world and three are US-based. Zee Sony merged co can benefit from
Sony’s large international presence leveraging to partner with global players for
their own content.
India leads Sony’s emerging markets business

Sony’s media network has Sony has a strong, mostly emerging markets, media-networks business. The key
76 channels in over 100 assets in media networks include Indian network channels, GSN, getTV, AXN,
countries with almost 1bn Animax, and Crackle. Sony’s media network has 76 channels in over 100 countries,
subscribers
with almost 1bn subscribers around the world that have access to Sony’s
programming. Sony had an early focus on international networks. Sony Pictures was
an early entrant into Latin America TV market as well as India TV market in 1995.
Hence, Sony’s merger with Zee is likely part of bigger plan of market leadership.
Figure 65
Sony parent media networks sales exposure by geography (FY3/20CL)
Asia Pacafic
ex India
10%
na
25%
India
Europe 45%
10%
Latin America
10%
Source: CLSA

Connecting data with best ideas
Company cashflow
Operating profit and cashflow
Op profit Op cashflow While Zee has strong positive operating cashflow, its
30,000 (Rsm) cash conversion dipped in FY19-20, driven by expansion
of working capital in each of the two years, as Zee
25,000 continued to invest in content and OTT platform ZEE5,
despite advertising revenue fall with Covid-19 disruption.
However, FY21 operating cashflow of Rs15.5bn was at
20,000
86% of Ebitda, and free cashflow was Rs13.4bn as
working capital expansion peaked. We expect
15,000 investment in content to continue in FY22, and project
the firm’s cash conversion ratio to be between 41-56%
10,000 over FY22-24CL.
5,000
0
2019A 2020A 2021A 22CL 23CL 24CL
Net profit, capex and free cashflow

Free cashflow Net profit Capex Free cashflow for Zee remains closely linked to its
25,000 (Rsm) operating cashflow, as the business has low capex
requirements. Zee is in the broadcasting business, and
20,000
capital spending tends to be concentrated largely on
business expansion, such as corporate and regional
offices, equipment and studios, where we see limited
15,000
investment needs. As such, FCF should largely trend
along with operating and net-profit growth.
10,000
5,000
(5,000)
2019A 2020A 2021A 22CL 23CL 24CL
Net cash per share

40 (Rs) Zee continues to be in a strong net cash position with
Rs16.2bn as of September 2021. With high FCF
35 generation over the forecast period (FY22-24), we do not
see any issue for the company on the capital-structure
30
front. Zee’s core business has low capex requirements of
less than 10% of Ebitda. We therefore expect its cash
25
balance to strengthen, reaching Rs44bn by FY24CL.
20
15
10
0
2019A 2020A 2021A 22CL 23CL 24CL
deepti.chaturvedi@clsa.com 3 December 2021

Environmental, social & corporate governance (ESG)

CLSA ESG score Environmental & social (E&S)
Zee’s corporate governance score has declined since the The media and entertainment sector and Zee's broadcasting
promoter pledging crisis in 2019, and cash generation has business is essentially less-polluting. Nevertheless, the
shrunk since then with working capital expansions, including company has included a social responsibility message in its
increases in receivables from group companies. annual report and websites. Zee has rolled out its corporate
Nevertheless, cash generation jumped in FY21 resulting in social responsibility (CSR) policy with women empowerment
higher net cash. Apart from dividends, Zee has also and protection, preservation of arts, crafts, culture, national
returned excess cash to shareholders over the last eight heritage and monuments, as well as disaster relief and
years, through a Rs21bn redeemable preference share recovery. Overall, we find its performance on the E&S front
purchase programme which ends in FY22. Zee stands out in to be average among Indian companies.
the media sector in terms of profitability and disclosure
standard. It provides detailed earnings releases and has
started making public quarterly balance sheet from
1QFY21.
Board composition Conclusion
Zee's board currently consists of seven members, including While the promoters of the company, Subhash Chandra and
six independent directors and the chairman. Only one his family, have several businesses, Zee is the primary listed
director is from the owner group and he is the managing entity and the main asset among them. The promoter’s
director and CEO. The number of independent directors has shareholding in Zee has dropped to 4% after the share
risen and the board has stayed 50% independent over the pledging crisis in 2019, and the company is now run by the
last few years. Zee is in litigation with its top shareholder board of directors. Zee remains cash generative, and pays
who is seeking to hold an EGM and remove the managing dividends regularly. Overall, we see the interests of the
director and CEO of the owner group from Zee's board. The promoters aligned with those of the minorities. Currently,
audit committee has four members. Three of them are Zee has 57% foreign institutional investor (FII) holding.
independent and the fourth member is the chairman of Zee.
Score versus country average

30 (ppts)
20
10
(10)
(20)
(30)
(40)
Discipline Transparency Independence Responsibility Fairness E&S Wtd ESG score
Criteria Score (%) Country avg (%) Country rank Sector avg (%) Sector rank
Discipline 83 62 3 56 7
Transparency 95 86 35 70 7
Independence 50 47 59 44 16
Responsibility 47 62 64 79 17
Fairness 55 92 157 69 27
E&S 71 69 70 65 7
Wtd ESG score 66 70 101/177 64 21/37
3 December 2021 deepti.chaturvedi@clsa.com

Zee-Sony merged entity will Zee Sony merged company will have 33% market share (Zee 21%, Sony 12%) in the
have US$2bn in annual India TV viewership ahead of current leader Star (29%). The new entity will have
revenue and US$0.4bn ~US$2bn in annual revenue and US$0.4bn Ebitda (Sony existing sales of US$0.8bn
Ebitda
and Ebitda of US$0.19bn). Zee apart from being No 2 network is particularly strong
presence in regional TV market (nine channels versus only two for Sony) and in
digital, Zee’s OTT ZEE5 is one of largest with 93m MAUs.
Figure 66
Sony’s statement on merger Sony Group Corporation statement on merger with Zee
with Zee
Sony Pictures Networks India announces Signing of Exclusive Non-Binding Term Sheet
with respect to a Merger of Sony Pictures Networks India and Zee Entertainment
Enterprises Ltd
Sony Group Corporation
September 22, 2021, - Sony Pictures Networks India (“SPNI”), a wholly-owned subsidiary
of Sony Group Corporation, announced today that it has signed an exclusive, non-binding
Term Sheet with respect to a proposed merger of SPNI and Zee Entertainment Enterprises
Ltd., a publicly listed Indian media and content company.
Sony Pictures Networks India (SPNI) and Zee Entertainment Enterprises Ltd. (ZEEL) today
announced that they have entered into an exclusive, non-binding Term Sheet to combine
both companies’ linear networks, digital assets, production operations and program
libraries. The non-binding Term Sheet provides an exclusive negotiation period of 90 days
during which ZEEL and SPNI will conduct mutual diligence and negotiate definitive, binding
agreements. The combined company would be a publicly listed company in India and be
better positioned to lead the consumer transition from traditional pay TV into the digital
future.
The merger of ZEEL and SPNI would bring together two leading Indian media network
businesses, benefitting consumers throughout India across content genres, from film to
sports. The combined company is expected to benefit all stakeholders given strong
synergies between ZEEL and SPNI.
Under the terms of the non-binding Term Sheet, Sony Pictures Entertainment, the parent
company of SPNI, would invest growth capital so that SPNI has a cash balance of
approximately USD $1.575 billion at closing for use to enhance the combined company’s
digital platforms across technology and content, ability to bid for broadcasting rights in the
fast-growing sports landscape and pursue other growth opportunities. Sony Pictures
Entertainment would hold a majority stake in the combined company. Current ZEEL
Managing Director & CEO Punit Goenka is to lead the combined company. The combined
company’s board of directors would include directors nominated by Sony Group and result
in Sony Group having the right to nominate the majority of the board members.
It is anticipated that a final transaction would be subject to completion of customary due

diligence, negotiation and execution of definitive binding agreements, and required
corporate, regulatory and third party approvals, including ZEEL shareholder vote.
Source: Sony Group Corporation
Sony’s global leadership in music

Sony is a global leader in Sony is a global leader in music market with No.1 share in music publishing and
music market with No.2 share in recorded music market. Sony publishing group which includes ATV
copyrights for over 4.5m
and EMI owns copyrights for over 4.5m songs. Sony music operates in over 60
songs
countries which includes a roaster of broad array of international and local artists.
Zee Sony merged co can leverage from parent company leadership and improve
monetisation. Zee music company’s Youtube channel is the third most subscribed
Indian channel and second most subscribed music channel.

Figure 67 Figure 68
Global recording music - market share (2018) Global music publishing - market share (2018)
Sony
Universal 26%
Independent
30%
labels Independents
33% 42%
Universal
BMG Sony 20%
Warner
0% 21%
EMI 16% Warner
0% BMG 12%
0% EMI
0%
Source: CLSA, companies, Music & Copyright Source: CLSA, companies, Music & Copyright
Sony Pictures in top-5 globally

Sony Pictures’ Motion Sony Pictures’ Motion Picture Group is among the leading film producers in the USA
Picture Group is among the with over 10% market share of more-than US$10bn market. Sony is among the top
leading film producers in 5 studios globally including Disney, Universal, Warner Bros., and Fox (now owned
the USA by Disney). Sony had about 12% market share in 2019 in international box office.
Sony has a library of over 3,500 films including 12 Best Picture Academy Award
winners and owns key franchises including Spider-Man, Jumanji, James Bond, Bad
Boys, Peter Rabbit, Resident Evil, Men In Black, Hotel Transylvania, Ghostbusters as well
as Sony’s Marvel Universe of over 900 Spider-Man-related characters. Motion
Pictures group has a robust local-language business with distribution offices in 21
countries around the world. Zee-Sony merged co can leverage from parent
company’s global leadership and fuel own movies business. Already Zee Studios has
established itself as one of India’s leading movie production studios, with plans to
ramp-up its movie production slate to 30-40 movies annually.
Figure 69 Figure 70
Entertainment revenue split (FY3/20CL) Entertainment OP split (FY3/20CL)
Pictures
Pictures 16%
26%
Game & Game &
Network Network
Services Music Services
Music 52% 31% 53%
22%
Sony’s leading game platform

Sony’s PlayStation platform Zee Sony merged company can also benefit from new opportunity in India gaming
is a leading console game led by Sony’s edge. Sony’s PlayStation platform is a leading console game
ecosystem ecosystem and network platform globally with well over 100m MAUs. In its 7th year
since launch, Sony has sold about 109m PS4 units - outselling its closest rival Xbox
console sales by 2:1 in current generation. Sony leads in the tethered VR headset
with sales of over 5m since the launch of PlayStation VR in 2016. Sony’s paid multi-
player online platform has surpassed 38.4m subscribers, which largely reflects the
core gamers. Sony also leads in cloud game streaming market globally with its PS

NOW service, which already has over 1m subscribers. In mobile games, Sony
presence is limited but has seen tremendous success with one key title, Fate/Grand
Order (FGO) - the mobile game released by Sony Music’s subsidiary Aniplex which
has remained in top 10 since the launch in 2015. The franchise which has massive
following in Asia was still the highest grossing mobile game of 2019 globally.
Figure 71
Fate/Grand Order was the Global mobile app rankings: consumer spend (2019)
highest-grossing mobile Game Developer
game of 2019 globally Fate/Frand Order Sony
Honour of Kings Tencent
Candy Crush Saga Activision Blizzard
Monster Strike Mixi
Pokemon Go Niantic
Lineage M Ncsoft
Fantasy Westward Journey NetEase
Clash of Clans Supercell
PUBG Mobile Tencent
Dragon Ball Z Dokkan battle Bandai Namco
Source: CLSA, App Annie
Sony dominates in the Unlike pictures and music, Sony is actively involved in content distribution in games,
console game ecosystem along with content creation. While the independent status in music and pictures
and network platform puts Sony at an advantage, it is its platform ownership (distribution network) that
globally with over 100m helps in the games market. Unlike relatively low entry barriers for video and music
MAU’s platforms, the core gaming platforms have fairly high level of barriers and displacing
the incumbents is very difficult and Sony dominates in the console game ecosystem
and network platform globally with over 100m MAUs.
This is due to high switching costs for core gamers, gamers brand loyalty and
existing online community of friends for socialisation and collaboration, platform
maker’s huge investments and long experience to cultivate players’ loyalty and
platform makers’ solid relationships with third party developers, who already have
high marginal profitability (over 80%). That said, the technology will gradually
enable the shift to cloud game streaming in long-term.
India gaming is an attractive Interestingly, in India gaming is an attractive new growth opportunity given the
new growth opportunity ideal demographics and interactive experience and socialising platform ideal for
monetisation and marketing. Gaming in India is akin to OTT opportunity which Zee
and Sony are already capitalising on.
Figure 72 Figure 73
Population mix: India, China and the USA Gaming revenue in India by device type
100 (%) 4.0 (US$bn)
PC Console Mobile
3.5
90 3.5
35
80
49 3.0 2.7
70 64
60 2.5
Others 2.0
50 30 Millennials 2.0 3.1
1.5
40 Gen Z
25 1.5 1.2
2.3
30 0.9 1.7
25 1.0 0.7 1.2
20 35
0.5 0.8
0.6
10
26 0.5 0.3 0.4
11 0.2 0.2 0.2 0.3 0.3 0.3 0.3
0.2
0 0.0 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1
India China USA CY16 CY17 CY18 CY19 CY20 CY21E CY22E CY23E
Source: Frost & Sullivan, Nazara Tech DRHP Source: Euromonitor, Nazara Tech DRHP

Zee Sony merger will enhance growth

Zee’s CEO has already Zee Sony merger and leverage of enhanced (movies, content, music,) as well as new
noted the merger may have opportunities (gaming) from Sony parent will add to merged co business long-term
6-10% synergies in revenue growth prospects. Meanwhile Zee CEO has already noted that merger may have 6-
10% synergies in revenue alone with greatest scope in order of advertising,
subscription and international in addition to cost synergies. In our analysis in Figure
74 we assume mainly revenue synergies and combine the Zee Sony operations. Our
analysis shows that by FY24 merged co revenues may well be over US$2.5bn,
Ebitda near US$1bn and combined profits could jump 2.5x to US$680m.
Figure 74
Zee-Sony India: Combined P&L details

(Rsm) Zee Sony Combined Combined Combined - A Combined - B
(FY20) (FY20) (FY20) (FY24) (with 6% synergies) (with 10% synergies)
Revenues 81,299 59,076 140,375 175,427 185,584 192,356
Advertisement 46,811 28,956 75,766 93,751 99,376 103,126
Subscription 28,874 25,695 54,569 70,463 74,691 77,509
Digital and licensing income 4,097 4,097 5,070 5,374 5,576
Others 5,614 328 5,943 6,144 6,144 6,144
Expenses 64,953 45,362 110,315 124,185 124,185 124,185
Programming 38,285 32,684 70,969 86,846 86,846 86,846
S&D expenses 8,612 5,410 14,022 13,526 13,526 13,526
Employee expenses 7,805 4,644 12,449 14,642 14,642 14,642
Others 10,251 2,623 12,874 9,172 9,172 9,172
Ebitda 16,345 13,714 30,060 51,242 61,399 68,170
Ebitda margin 20% 23% 21% 29% 33% 35%
Depreciation 2,706 2,459 5,166 5,524 5,524 5,524
Ebit 13,639 11,255 24,894 45,718 55,875 62,646
Ebit margin 17% 19% 18% 26% 30% 33%
Other income 2,836 535 3,372 4,744 4,744 4,799
Interest cost 1,449 311 1,760 81 81 81
Exceptionals 5,445 5,445
PBT 9,582 11,479 21,061 50,380 60,537 67,309
Tax 4,317 2,524 6,841 12,656 15,255 16,962
PAT 5,265 8,955 14,220 37,724 45,282 50,347
PAT pre exceptional 10,710 8,955 19,665 37,724 45,282 50,347
EPS (Rs) 11.1 nm 9.6 18.5 22.2 24.7
Source: CLSA
Merged co will be zero debt Also in Figure 75, we show key balance sheet comparisons of Zee Sony show Zee’s
and start with cash of FY20 working capital had increased by 66 days to 258 days of revenues led by 39%
US$1.8bn rise in content inventories following the acquisition of movie rights, launch of new
channels and ZEE5 ramp-up. However Sony working capital was lower at 139 days.
While comparison of debt and cash of Zee and Sony show both were net cash. Zee
had net cash of Rs9.9bn and Sony had 7.8bn of net cash. On likely Zee Sony merger
and Sony’s US$1.6bn cash infusion merged co will be zero debt and start with cash
of ~US$1.8bn which will be a boost for huge opportunity to invest in linear, online,
movies and sports businesses.
Figure 75
Both Zee and Sony are in Zee and Sony India key balance sheet comparison
net cash position FY20 (Rsm) Zee Sony
Gross Debt 526 0
Cash 10,396 7,754
Net debt (9,870) (7,754)
Net working capital 57,518 22,480
NWC days of sales 258 139
Source: Companies, Ministry of Corporate Affairs, CLSA

Zee Sony merger deal will need multiple approvals

Proposed merger with Sony Zee’s proposed merger with Sony will require several approvals including regulatory
will require approval of 75% such as from Securities and Exchange Board of India (SEBI), National Company Law
of Zee’s voting shareholders Tribunal (NCLT) among others and also approval of 75% of Zee’s voting
shareholders. Meanwhile Zee is in litigation with large minority shareholder which
carries associated risks. The event and timeline relating to merger announcement
and litigation are detailed in Figure 76.
While likely there will not be significant deviation from current proposed merger
terms the deal includes in the merger Sony parent will allocate 2% equity from its
53% ownership in merged co to Zee founding family in lieu of a non-compete
clause. Also Zee Sony merger terms may provide a pathway for the Zee promoters
to raise stake from 4% to up to 20% subject to various regulatory requirements. The
final merger deal terms will need clarity on the non-compete as well the pathway
for promoters to raise stake.
Figure 76
Timeline of events: Zee’s ongoing litigation with large minority shareholder

Date/ Month Comments
13th Sep 2021 Zee informs that large minority shareholder has requisitioned for an EGM asking for resignation of directors and inclusion
of six additional directors besides removal of CEO & MD Mr Punit Goenka from the board.
13th Sep 2021 Two independent directors resign from the board of Zee.
22 nd Sep 2021 Zee board provided an in-principle approval for merger between Sony India and Zee. Zee announces a non-binding Term Sheet
which provides an exclusive negotiation period of 90 days for the proposed merger.
29th Sep 2021 Large minority shareholder approaches NCLT against Zee for failing to announce a date for the EGM.
30 Sep 2021
th
NCLT begins hearing the case on request of the large minority shareholder.
1 st Oct 2021 Zee board inform the large minority shareholder that it cannot hold the EGM due to multiple legal Infirmities with respect
to the requisition notice.
2 nd Oct 2021 Zee moves Bombay High Court against large minority shareholder’s demand for EGM.
7 th Oct 2021 Zee appeals in NCLAT and asks for stay on all proceedings. NCLAT orders that Zee should be given reasonable time to
reply to large minority shareholder's plea to hold the EGM, NCLT gives Zee two weeks to reply to the plea.
11th Oct 2021 Large minority shareholder writes an open letter to Zee shareholders.
12/13 th Oct 2021 Zee board discloses a letter by CEO & MD Mr Punit Goenka highlighting various events which transpired between
representatives of the large minority shareholder and him including another proposed deal. Large minority shareholder
releases a statement rejecting claims made by Mr Punit Goenka relating to events. Indian group discloses large
shareholder assisted in holding discussion with Mr Punit Goenka on a proposed transaction in which MD & CEO was to
continue but deal did not proceed further.
26th Oct 2021 Bombay High Court order grants an injunction to Zee against the large minority shareholder's call for EGM.
29th Oct 2021 Large minority shareholder appeals the Bombay High Court decision and division bench at Bombay High Court adjourns
the hearing which is currently ongoing.
Source: CLSA

Section 4: Highly favourable risk reward Zee Entertainment - BUY
Highly favourable risk reward

We forecast Zee’s ad Zee is entering a cycle of strong growth, led by advertising revenues.
revenue to deliver a 16% Unprecedented Covid-19 disruption had caused 7-20% YoY decline in Zee’s
Cagr over FY21-24 advertising revenues in FY20/21. Nevertheless, with strong economic recovery,
Zee’s 1HFY22 advertising revenue was up 52% YoY, and we expect advertising
revenue to deliver a 16% Cagr over FY21-24CL, and profit and cash both to double
by FY24CL. We believe Zee’s strong growth, cash-flows, payout to shareholders
and better governance will sustain the stock’s PE multiple. In our base case, Zee’s
On likely Zee-Sony merger Rs415 target price is based on 18x PE on Dec 23CL earnings, factoring in a 33%
company market cap could discount for risks of delays to the Zee-Sony merger. If the merger is sealed, the
reach US$11bn stock’s valuation will likely go back to historical highs of 30x PE, implying 105%
potential upside, and the merged co’s market cap could reach US$11bn, and even
US$19bn in our blue-sky optimistic scenario.
Proposed merger with Sony Zee’s proposed merger with Sony will require several approvals including regulatory
will require several and that of 75% of Zee’s voting shareholders. Meanwhile, Zee is in litigation with a
approvals; also of 75% of large minority shareholder which poses some risks to the merger. Also, although it
Zee’s voting shareholders is likely there will not be significant deviation from the proposed merger terms, the
parties still need to finalise the non-compete clause and the pathway for Zee’s
promoters to raise stake from 4% to 20%. If the merger is put off, our valuation
would fall to Rs250 as in the rainy-day scenario.
Advertising to drive strong growth

Zee is entering a cycle of With sharp economic recovery, Zee is entering a cycle of strong growth, led by
strong growth again, led by advertising revenue which contributed more than 60% of the company’s total
advertising revenue revenue pre-Covid. Covid-19 disruption has seen Zee experience an unprecedented
7-20% YoY decline in advertising revenue in FY20/21. However, in 1HFY22, Zee’s
advertising revenue jumped 52% YoY, and going ahead, we expect advertising
revenue to deliver a 16% Cagr over FY21-24 (details in Figure 77). In the pre-Covid
years of FY15-19, Zee had achieved growth of 4% higher than the industry, and
now, led by strong economic recovery and strong growth in advertising income, we
expect the firm to generate revenue that is higher than its pre-Covid levels in
FY23CL. While we forecast a 15% Cagr for TV advertising growth for the sector, we
expect Zee, with improving network viewership, to deliver an even higher ad
revenue Cagr of 16% over FY21-24CL.
Figure 77
Revenue breakdown
(Rsm) FY19 FY20 FY21 FY22CL FY23CL FY24CL FY21-24 Cagr (%)
Advertising 50,367 46,811 37,488 46,743 52,132 57,922 16
(% YoY) 20 (7) (20) 25 12 11
Domestic subscription 19,233 25,623 29,137 31,048 32,808 35,164 6
(% YoY) 17 33 14 7 6 7
International subscription 3,872 3,251 3,293 2,303 2,210 2,120 (14)
(% YoY) (1) (16) 1 (30) (4) (4)
Movies/ Events & Others 5,867 5,614 7,381¹ 2,903 4,639 5,805 (8)
Total revenue 79,339 81,299 77,299 82,997 91,788 101,011 9
¹ FY21 Others includes revenue from one-off content syndication deal of Rs5,512m. Source: Company, CLSA
Domestic subscription We forecast Zee domestic subscription revenue growth to remain subdued at 6%
revenue to deliver 6% Cagr Cagr with ongoing litigation and risk of disruption during NTO 2 implementation
over FY21-24CL from April 22 (Figure 77). Although we forecast shrinkage in international
subscriptions with consolidation of operations, we believe Zee should still see a 9%
Cagr in consolidated revenue over FY21-24CL. The company’s FY21 other revenues
included Rs5.5bn from a one-off content syndication deal, and we expect a pick-up
in its events and movies revenue in FY23/24CL with the fading of pandemic in India.

Profits to double over three years

Ebitda Cagr of 18% over In Figure 78, we detail our Zee revenue, costs and profit forecasts. Led by revenue
FY21-24CL growth, Zee’s Ebitda is set to deliver an 18% Cagr over FY21-24CL, versus the -5%
Cagr seen over FY18-21. This entails a margin improvement of 6ppt over the next
three years. There are two drivers of margin improvement. The base year of FY21
saw the negative impact of Covid-19 on advertising revenue, but the company
continued its strategy to invest in content for linear TV and especially ZEE5. We
expect such investment in content to reach its peak in FY22, but the year will also
see core advertising and local subscription revenues build up, including the ramp-up
of ZEE5’s revenue.
Figure 78
Detailed P&L
FY19 FY20 FY21 FY22CL FY23CL FY24CL
Ad-Revenues 50,367 46,811 37,488 46,743 52,132 57,922
% growth 19.8 (7.1) (19.9) 24.7 11.5 11.1
Domestic subscriptions 19,233 25,623 29,137 31,048 32,808 35,164
International subscription 3,872 3,251 3,293 2,303 2,210 2,120
Total pay revenues 23,105 28,874 32,430 33,351 35,017 37,284
Movies/ Events & Others 5,867 5,614 7,381 2,903 4,639 5,805
Total Revenues 79,339 81,299 77,299 82,997 91,788 101,010
% growth 18.7 2.5 (4.9) 7.4 10.6 10.0
Costs
Programming cost 28,651 36,068 34,629 35,372 38,365 43,227
% of revenues 36 44 45 43 42 43
Personnel cost 7,249 7,805 8,183 8,503 8,835 9,180
Transmission cost 2,107 2,217 2,876 3,106 3,355 3,623
Administrative & other expenses 6,282 10,251 5,919 6,320 6,780 7,303
Selling and distribution expenses 9,411 8,612 7,791 7,979 8,110 8,307
Costs 53,700 64,953 59,398 61,279 65,444 71,640
% growth 16.5 21.0 (8.6) 3.2 6.8 9.5
Ebitda 25,639 16,345 17,901 21,718 26,344 29,371
Ebitda Margin (%) 32.3 20.1 23.2 26.2 28.7 29.1
% growth 23.5 (36.2) 9.5 21.3 21.3 11.5
Interest (1,304) (1,449) (571) (476) (93) (67)
Depreciation (2,347) (2,706) (2,649) (2,760) (2,854) (2,894)
Other Income 2,340 2,836 1,104 1,947 3,175 3,869
PBT 24,327 15,027 15,785 20,430 26,572 30,278
Tax (8,673) (4,317) (4,625) (5,142) (6,688) (7,621)
Tax Rate (%) 35.7 25.2 25.2 25.2 25.2 25.2
Minority interest 23 (5) 69 73 116 122
Normalised PAT 15,677 10,705 11,229 15,360 20,000 22,779
Exceptional Items (7) (5,440) (3,229)
Reported earnings available to 15,671 5,265 8,000 15,360 20,000 22,779
common equity shareholders
Normalised earnings available to 15,677 10,705 11,229 15,360 20,000 22,779
common equity shareholders
EPS to equity shareholders 16.32 5.48 8.33 15.99 20.82 23.71
Content costs to rise at 8% Also overall, we expect programming costs to stay high at 43% of revenue over
Cagr over FY21-24CL FY22-24, versus an average of 42% over FY19-21, but we forecast total costs to
rise at 6% Cagr over FY21-24. This factors in continued investments in content and
marketing as management intends to improve content quality, add programme
hours and add new channels to improve Zee’s network market share and visibility
of ZEE5. The non-programming costs are where we expect scale benefits and cost
controls to show. Part of this reflects the higher advertising and marketing
expenditure for ZEE5 in FY22CL. Also, it partly reflects the faster growth in wider-
margin subscription revenue, which is better monetisation of its existing network.

Figure 79
We forecast total costs to Costs to revenue ratio and Ebitda margin

rise at a 6% Cagr over (x) Programming costs / Revenue (%)
0.50 35
FY21-24 Non programming costs / Revenue
0.45 Ebitda margin (RHS)
0.45
0.44 30
0.43 0.43
0.42
25
0.40
0.36 20
0.36
0.35
0.32
0.32 0.31 15
0.30
0.30 0.28
10
0.25 5
0.20 0
Improving cashflow and rising net cash

Net cash of Rs16bn Zee’s balance sheet has no debt and a net cash balance of Rs16.2bn (Rs17/share)
on balance sheet as of 1HFY22. Its core business has low capex requirement of less than 10% of
Ebitda. With low capex and increasing cash conversion, we expect Zee’s cash
balance to strengthen to Rs44bn (Rs46/share) by FY24CL.
Figure 80
We forecast Zee’s cash Cash balance

balance to strengthen to (Rsbn)
50
Rs44bn by FY24CL
44
45
40
35
30
30
25 22
20
19
20
15
10
10
0
FY21 operating cashflow of FY19-20 saw a dip in Zee’s cash conversion ratio to 5-15% of Ebitda, driven by
Rs15.5bn was at 86% of expansion in working capital of Rs17bn in each of the two years, as Zee continued to
Ebitda invest in new content. Also, Covid-19 has caused Zee’s FY21 Ebitda to decline 20%
YoY (net of FY20 exceptional and FY21 one-time syndication deal), versus reported
10% YoY growth with 12% YoY fall in revenues (reported decline 5%) in FY21.
However, FY21 operating cashflow of Rs15.5bn was at 86% of Ebitda and free
cashflow was Rs13.4bn also as working capital expansion peaked. While investments
in content have continued in FY22, we project the cash conversion ratio to be
between 41-56% over FY22-24CL.

Figure 81
In FY20, Zee reported Details of exceptional items in FY20

Rs6bn of exceptional items Amount (Rsm) Particulars
above Ebitda and R5.4bn Above Ebitda
below Ebitda
2,598 Operating cost includes one-time accelerated amortisation of inventory of Rs2,598m.
3,433 Administrative cost includes a one-time provision of Rs.3,433m for the balances
related to ad, subscription and other assets where recovery has become doubtful on
account of Covid-led uncertainty. Including Rs1,179m from credit loss by related
party.
6,031 Total exceptional items
Below Ebitda
2,843 Exceptional items includes goodwill write-off of Rs 1,137m pertaining to digital
publishing business and impairment of loan of Rs1,706m.
2,597 Fair value through P&L includes loss in overseas investments in accordance with IND
AS 113 to reflect the movement in fair value of the investments as on 31 March.
5,440 Total exceptional items
Figure 82
Net working capital Net working capital trend

expanded to 281 days (Rsbn) (days)
70 Net working capital NWC (RHS) 300
with lower revenue
60 250
50
200
40
150
30
100
20
10 50
0 0
Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18 Mar 19 Mar 20 Mar 21
Figure 83
Cash conversion ratio to Ebitda and cash conversion ratio

be between 41-56% (% Ebitda)
60 56
over FY22-24CL 56
50
50
41
40
30
20 15
10 5
0
Note: FY21 OpCF adjusted for Rs5.5bn received from content syndication deal. Source: Company, CLSA

Figure 84
Last tranche of preference Summary cashflow statement

shares redemption (Rsm) FY19 FY20 FY21 FY22CL FY23CL FY24CL
will be in FY22 PBT 24,327 15,027 15,785 20,430 26,572 30,278
Add: Depreciation 2,347 2,706 2,649 2,760 2,854 2,894
Less: Net other income (1,035) (1,388) (534) (1,471) (3,082) (3,802)
Tax paid (9,299) (3,114) (5,011) (5,142) (6,688) (7,621)
Working capital change (17,151) (16,758) 809 (7,365) (6,108) (4,930)
Others 2,163 6,026 1,778 (285) (299) (314)
Cash flow from operations 1,352 2,499 15,477 8,926 13,249 16,505
Capex (2,823) (1,818) (2,060) (2,235) (2,347) (2,464)
Other income 1,004 1,362 266 1,947 3,175 3,869
Others 10,482 4,344 (3,268) (446) (469) (492)
Cash flow from investments 8,663 3,888 (5,062) (734) 360 913
Dividend paid (4,734) (5,227) (1,118) (2,692) (4,323) (4,323)
Others (4,930) (5,308) (4,341) (4,305) 189 228
Cash flow from financing (9,664) (10,535) (5,459) (6,997) (4,134) (4,095)
Net change in cash 351 (4,148) 4,956 1,195 9,475 13,324
Opening cash 9,978 10,329 6,181 11,137 12,332 21,807
Closing cash 10,329 6,181 11,137 12,332 21,807 35,130
Cash on balance sheet 9,677 5,529 10,485 11,679 21,155 34,479
Cash equivalents 12,086 4,867 8,386 8,786 9,186 9,586
Total cash 21,763 10,396 18,870 20,465 30,340 44,064
Return ratios to rise again

ROE set for expansion Zee’s ROE decreased from 19% in FY19 to 11.6%% in FY21 on a combination of
lower margins with revenue fall in FY21 (lower asset turnover) following Covid-19
disruption. Over the last few years, Zee has invested heavily in ramping up ZEE5
which management believes can become a leading OTT platform in India. As
revenue growth returns and the investment phase in ZEE5 peaks, ROE should rise.
We expect the ratio to rise from FY22 as Zee’s revenue recovers and margin
expands. We project a 480bp ROE expansion over FY22-24CL to 16.4%. Strong
business cashflow and a net-cash balance sheet are important positives for the company.
Figure 85
We forecast 480bp ROE analysis

expansion over FY19 FY20 FY21 FY22CL FY23CL FY24CL
FY22-24 to 16.4% Ebit Margin (%) 29.4 16.8 19.7 22.8 25.6 26.2
Asset Turnover (x) 0.7 0.7 0.6 0.6 0.6 0.6
Financial Leverage (x) 1.4 1.4 1.3 1.2 1.2 1.2
Interest Burden (x) 1.0 1.1 1.0 1.1 1.1 1.1
Tax Burden (x) 0.6 0.7 0.7 0.7 0.7 0.7
Return on Equity 19.0 11.7 11.6 14.3 16.4 16.4
Source: CLSA
Net cash of Rs16bn Zee’s balance sheet has no debt and a net cash balance of Rs16.2bn as of 1HFY22.
on balance sheet With low capex and increasing cash conversion we expect Zee’s cash balance to
strengthen to Rs44bn by FY24CL. However, with growth in revenue, we expect
receivables to grow to Rs28bn by FY24CL although at 100 days of revenues these
will remain well below industry norms. Also, Zee will continue to invest in content
inventories, mainly led by movie rights acquisitions, and this is expected to reach
Rs67bn by FY24CL (from Rs56bn in 1HFY22).

Figure 86
Balance sheet
(Rsm) Mar 19 Mar-20 Mar-21 Mar22CL Mar23CL Mar24CL
Net worth 89,239 93,439 100,945 113,904 129,581 148,037
Share Capital 961 961 961 961 961 961
Reserves & Surplus 88,279 92,479 99,985 112,943 128,620 147,077
Preference capital 11,113 5,950 3,832 - - -
Minority interest 143 110 129 202 318 440
Borrowings 20 526 195 195 195 195
Current Liability 28,814 20,970 19,935 19,853 21,456 23,299
Creditors 14,897 16,803 13,982 14,019 15,240 16,683
Other current liabilities 12,467 2,640 4,244 4,559 4,891 5,238
Provision 1,451 1,526 1,709 1,275 1,325 1,377
Total liabilities & equity 129,330 120,995 125,036 134,155 151,551 171,971
Fixed assets 7,342 8,281 7,588 7,463 6,956 6,525
CWIP 1,561 832 755 355 355 355
Goodwill 5,252 4,070 3,804 3,804 3,804 3,804
Investments 13,858 5,860 8,925 9,371 9,840 10,332
Inventories 38,505 53,475 54,030 58,145 63,067 66,913
Debtors 18,274 20,847 19,452 22,739 25,147 27,674
Cash 9,677 5,529 10,485 11,679 21,155 34,479
Loans and advances 34,861 22,102 19,998 20,598 21,228 21,890
Total Assets 129,330 120,995 125,036 134,154 151,551 171,971
Return of cash to shareholders

Cash payout is likely to rise Zee’s redeemable preference shares (RPS) redemption will end in FY22. Back in
after the RPS repayment is 2013, the firm implemented a long-term programme to return about Rs26bn of cash
complete in FY22
to its shareholders over the following eight years. The same was done via a RPS
offering when in February 2014, the then shareholders were issued 21 RPS of Rs1
face value each, carrying a 6% preference dividend. Zee had committed to buy out
the RPS in a staggered manner by the end of the eighth year of their issuance which
is FY22. Besides, Zee’s equity dividend payout continues and the cash payout is
likely to rise after RPS repayment is complete in FY22.
Figure 87
Redeemable preference Shareholder payouts

share redemptions will end (Rsbn)
12
in FY22
Equity dividend Preference dividend Share buybacks Preference buyback
10
0
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22CL
FY23CL
FY24CL
Note: Dividends are based on the year they were paid out and include dividend tax paid by Zee. The buyback amount
is based on what was actually incurred during the year. Source: Company, CLSA

Corporate governance in focus

Zee’s corporate governance From 1QFY21, Zee has started providing quarterly balance sheet and publicly
remains in focus declared new policies on investments and treasury. Prior to the above, there had
been a decline in CLSA’s corporate governance (CG) scoring for Zee due to concerns
over disclosure and conflict-of-interest issues involving board members and top
management with respect to payment delays and write-offs from group entities.
These had followed Zee’s unprecedented promoter share pledging crisis in 2019,
wherein promoters/Essel Group repaid loans with multiple stake sales to investors
in Zee and Figure 88 details promoter’s shareholding came down from 42% to 4%.
The promoter share pledging crisis turned out to be of a larger extent than
expected, as in October 2019, the promoter made a new disclosure that a 10.7%
stake held through Essel Media Ventures was also indirectly charged to VTB Bank.
This encumbrance was created in September 2017, but was disclosed only in later
months due to the change in definition of pledges by the regulator Securities and
Exchange Board of India (SEBI).
Figure 88
Zee’s promoter’s ownership Promoter’s shareholding in and pledged shares of Zee

has come down from 42% Promoter holding (LHS) % stake in Zee pledged (LHS)
to 4%.
Reported promoter holding pledged Effective promoter holding pledged
50 (% stake in Zee) (%) 100

45
40 42
80
35 10.7
38
10.7
36
10.7
30 60
25
25 25
20 23 22 40
21
15
10 20
5
5 1 4
0
0 0
Dec 18 Mar 19 Jun 19 Sep 19 Dec 19 Sep 21
Source: Zee, Bombay Stock Exchange (BSE), CLSA
A dip in Zee’s cash Thereafter, Zee saw a dip in cash conversion ratio to 5-15% of Ebitda in FY19-20,
conversion ratio to 5-15% especially led by working capital expansions which included increase in
in FY19-20 receivables from group company Dish TV, which are now down by 50% to
Rs3.7bn. In FY20, Zee also reported Rs6bn of exceptional items above Ebitda and
R5.4bn below Ebitda. However, thereafter, Zee’s cash conversion jumped in FY21
(as detailed in Figure 83). Focus is still on corporate governance as Zee is in
litigation with a large minority shareholder.
The promoter share pledging crisis, fall in cash conversion, write-offs and
litigations with large minority shareholder will keep Zee’s corporate governance
in focus. However, upon completion of the Zee-Sony merger, Sony will appoint
majority of the directors and Punit Goenka will continue to be managing director
and CEO for five years.

Rs415 target price implies 23% upside

We base our Zee is currently trading at 16x one-year forward PE, representing a 40% discount
Rs415 target on 18x Dec to its 5-year average valuation. Over the last two years, Zee’s share price has been
23CL earnings impacted by the promoter share pledging crisis, followed by the Covid-19
disruption and a fall in cash conversion, resulting in lower valuation multiples. Zee’s
strong growth ahead and proposed merger with Sony are significant positives, and
we expect the proposed Zee-Sony merger to drive a rerating for the stock.
Given our projected 16% advertising revenue Cagr over FY21-24CL, which should
help double profits and cash by FY24CL, we expect Zee to trade at 18x one-year
forward PE even if there is reasonable delay to the Zee-Sony merger, which will
likely take six months given the due process and requirement of multiple approvals.
Our Zee’s Rs415 target, is based on 18x PE on Dec 23CL earnings and implies 23%
upside, factoring in a 33% discount versus five-year average multiple for the risk of
delays to the merger. Our base case PE assumes a 13% higher multiple than current
stock valuation, as higher (33%) rerating has been underway since Zee’s growth
resumed in 4QFY21. We believe if the merger is sealed, Zee’s valuation will likely
return to the historical highs of c.30x PE, implying Rs690.
Figure 89 Figure 90
Zee’s 12M FWD PE Zee’s PE bands

45 (x) 900 (Rs)
max 43.91x
40 800
+1sd 38.34x
35 700
sdu 35.64x
30 600
avg 27.37x
25 500 avg 27.37x
20 400
sdd 18.43x
-1sd 16.39x
15 300
10 200
min 9.5x
5 100
Nov 16 Nov 17 Nov 18 Nov 19 Nov 20 Nov 21 Nov 16 Nov 17 Nov 18 Nov 19 Nov 20 Nov 21
Figure 91
Zee’s PE - Bloomberg consensus
Source: Bloomberg

Our target multiple is at a Our 18x PE multiple for Zee is still at ~70% discount to the 56x average for India’s
discount to the average for fast-moving-consumer-goods (FMCG) firms. We compare Zee with these names
Indian FMCG firms . . . because the FMCG sector has companies with comparable profiles in terms of
cash generation, ROE and Indian-consumer-linked growth. We forecast Zee’s
earnings would grow at 27% Cagr over FY21-24CL, higher than the 22% for the
FMCG sector.
Figure 92
FMCG firms are trading at FMCG valuations

over 56x FY23PE Mkt cap CMP EPS growth (%) PE (x) ROE (%)
(US$bn) (Rs) FY21-24CL 22CL 23CL 24CL 23CL
Consumer staples
Hindustan Unilever 73.4 2,345 15.8 61.1 50.0 44.2 22.0
ITC 36.4 221.95 12.2 18.0 16.2 14.9 27.0
Nestle 24.8 19,389 16.0 82.7 67.3 57.5 134.6
Dabur 13.6 576 12.8 55.4 47.9 41.9 23.8
Britannia 11.4 3,535 9.1 52.7 41.1 35.2 80.9
GCPL 12.8 938 15.2 54.3 45.1 38.5 19.4
Marico 9.0 525 13.9 54.0 45.4 39.6 41.5
Colgate 5.2 1,429 7.2 38.2 34.6 31.5 101.0
Emami 3.0 514 9.6 31.7 30.8 27.1 42.3
Discretionary
Asian Paints 40.1 3,138 19.7 101.5 71.6 55.9 28.6
Titan 27.9 2,360 44.5 102.5 81.9 68.6 25.0
Pidilite 14.9 2,204 20.3 84.7 63.3 57.4 27.3
Jubilant Food 6.5 3,701 53.3 96.7 74.6 58.0 31.2
Varun Bev 5.1 891 52.1 53.2 34.3 26.6 25.6
ABFRL 3.3 261 nm (102.2) 126.1 46.2 6.8
Westlife 1.1 545 nm 177.9 69.8 53.4 20.6
Sector average 21.6 60.2 56.3 43.5
Zee 4.3 337 26.6¹ 21.1 16.2 14.2 16.4
¹ Adjusted for exceptionals in FY21 base. Source: CLSA
Zee likely to sustain Our media sector coverage universe includes Nazara Tech which is in esports and
higher PE premium than mobile gaming, and PVR and Inox Leisure which are multiplexes companies. While our
the media sector entire media coverage universe is poised for strong growth ahead, Zee is our top sector
pick with most favourable risk reward, as we not only see Zee sustaining but also
potentially expanding valuation multiples. Meanwhile, within the media space,
distribution company Dish TV’s valuation is tough to gauge in context of their promoter
share pledging crisis (Dish TV has its own promoter share pledging crisis and is part of
Essel group). While valuations of print companies Jagran and DB Corp will remain
constrained by the inherent risks of rising digital media taking share from print
companies and earnings volatility due to potential raw-material price swings.
Figure 93
India media sector growth and valuations

Company Reco MCap CMP TP Earnings growth (%) PE (x) EV/Ebitda (x) Div yield (%)
(US$m) (Rs) (Rs) FY22CL FY23CL FY22CL FY23CL FY23CL FY22CL
Zee BUY 4,311 337 415 37 30 21.1 16.2 11.1 1.3
Sun TV BUY 2,751 524 700 5 12 12.9 11.5 5.4 3.4
Jagran BUY 217 62 87 116 42 9.0 6.3 1.2 3.2
DB Corp BUY 215 92 147 44 54 8.8 5.7 3.0 8.7
Inox BUY 622 381 538 nm nm nm 707.0 12.2 0.0
PVR BUY 1,098 1,353 1,965 nm nm nm 587.7 11.5 0.0
Dish TV O-PF 429 17 19 nm 49 26.6 17.8 3.3 0.0
Nazara SELL 917 2,257 1,404 332 123 125.9 56.4 37.0 0.0
Source: CLSA

Prefer Zee over Sun, rating both BUY

Zee’s closest comparable is In our media sector coverage, Zee’s closest comparable is Sun TV, although the
Sun TV latter is a regional player. Advertising revenue of Zee was at Rs 37.5bn, 3.5x of Sun
TV’s revenue even in the pandemic year of FY21, versus 2.6x of Sun’s revenue five
years ago. Besides, Sun TV’s advertising revenue fell 7ppt more than Zee’s during
the pandemic in FY21. Looking ahead, Zee and Sun TV will be beneficiaries of strong
rebound in advertising revenue of 16% Cagr, but we only expect Zee’s FY23CL
advertising revenue to surpass the pre-Covid peak. Also, Zee’s subscriptions are 2x
larger than Sun TV, however, we project Sun TV’s subscription to deliver a 7% Cagr
over FY21/24CL, higher than Zee’s subscription Cagr of 6%, although both
companies are hit by TRAI’s NTO2. We expect a higher Cagr for Sun TV’s
subscription because of its larger subscription base.
Figure 94
Advertising revenue of Zee Advertising revenue growth: Zee versus Sun TV

even in FY21 were 3.5x of Ad revenue (FY12=100)
400 Sun TV Zee
Sun TV
350
300
250
200
150
100
FY12 FY14 FY16 FY18 FY20 FY22CL FY24CL
Source: Sun TV, Zee, CLSA
Figure 95
Zee’s consolidated revenues Sun TV and Zee FY21 revenues

are 2.4x of Sun TV (Rsbn)
90 Advertising Subscription IPL Others
77
80
7
70
60
32
50
40
32
30 1
3
20 37 17
10
11
0
Zee Sun TV
Note: IPL = Indian Premier League. Source: Companies, CLSA
Both Zee and Sun TV are Meanwhile, Zee and Sun TV are both ramping up their own OTT platforms: ZEE5
set for success in TV and and Sun NXT. India is seeing explosive growth in OTT service and media buyers are
OTT businesses increasingly choosing TV and OTT. Both Zee and Sun TV are set for success in TV
and OTT with content edge and both have strong content franchises, net cash

balance sheets and compelling stock valuations at 12-16x FY23CL PE, 30-40%
discount to last five-years average. While we rate Sun TV a BUY too, our top sector
pick is Zee, for its higher growth potential and with the potential Zee-Sony merger
which could be a significant rerating catalyst.
Figure 96 Figure 97
Zee current shareholding Sun TV current shareholding

Promoters
4%
Mutual funds Foreign
7% Portfolio Others
Investors 14%
Others 8%
23% Mutual funds
3%
Insurance
Promoters
Companies Foreign
75%
9% Portfolio
Investors
57%
Source: BSE, CLSA Source: BSE, CLSA
We prefer Zee over Sun TV With the return of Dravida Munnetra Kazhagam (DMK), ie, a political party, in Tamil
Nadu, Sun TV faces improved business conditions. Also, its promoter family Maran
owns 75% in Sun TV which contrast with the mere 4% promoter holding in Zee. Zee
has highest free float in CLSA coverage and is currently in the midst of potential
merger deal with Sony. Considering Sun’s lower ad growth, we project 10% earnings
Cagr, versus a 27% Cagr for Zee. Also driving our preference on Zee is that Sun TV
now trades at 20% discount to Zee on PE, versus 40% discount in the last five years.
Figure 98
Stock valuations are Sun TV versus Zee: 1-year forward PE valuation range
compelling at 12-16 (x)
45
FY23CL PE, a 30-40% Zee PE
discount to last five-years 40 Zee 5Y avg PE
average Sun TV PE
35 Sun TV 5Y avg PE
30
27.4
25
20
17.2
15
10
5
Nov 16 Nov 17 Nov 18 Nov 19 Nov 20 Nov 21
Source: CLSA
Zee’s stock DCF value of Rs444

DCF suggests Rs444/share We also use DCF model to cross-check our long-term valuation for Zee. We expect
the company to achieve an 18% Ebitda Cagr over FY21-24, and 12% over FY25-30;
we estimate incremental capex of Rs22bn (Rs2.8bn/year). We derive our 11.75%
WACC using a risk-free rate of 6.25% (same as India’s 10-year government-bond yield),
a 5.5% equity-risk premium and 1.0x fundamental beta. A 4.5% terminal-growth rate
(same as India’s CPI inflation) in our FY30 base case gives us a value of Rs444/share.
Zee’s valuation is highly sensitive to the discount rate and terminal growth.

Figure 99
Expect Ebitda Cagr of 18% Zee long-term growth assumptions

over FY21-24CL (Rsm) FY21 FY24CL FY30CL FY21-24 FY25-30
Cagr (%) Cagr (%)
Ad revenue 37,488 57,922 107,968 16 11
Domestic sub 29,137 35,164 52,919 6 7
Total revenue 77,299 101,010 176,342 9 10
Ebitda 17,901 29,371 59,066 18 12
Ebitda margin (%) 23.2 29.1 33.5
Figure 100
To get to our Dec-23 value, Annual discounted cashflow

we discount cashflow from (Rsm) 4QFY23CL FY24CL FY25CL FY26CL FY27CL FY28CL FY29CL FY30CL
4QFY23 to FY30 Ebit x (1-tax rate) 4,988 22,707 26,426 30,565 35,060 40,067 45,782 52,204
Depreciation 714 2,894 3,050 3,187 3,320 3,447 3,567 3,680
Chg in working capital (1,527) (4,930) (6,435) (7,731) (8,550) (7,668) (8,273) (8,913)
Capital expenditure (587) (2,464) (2,587) (2,717) (2,852) (2,995) (3,145) (3,302)
Free Cash Flows 3,588 18,207 20,453 23,305 26,978 32,851 37,931 43,669
Discounted FCF 3,490 15,846 15,930 16,242 16,825 18,334 18,943 19,515
Source: CLSA
Key DCF assumptions

Ebit growth rate of 23% We forecast Zee’s Ebit growth rate of 23% over FY22-24 to taper to 15% over
over FY22-24 to taper to FY25-30, as we forecast advertising revenue growth to align closer to the nominal
15% post-FY24 GDP growth rate over the longer term besides margin expansion to near peak in
FY24CL. While making the transition to a lower advertising revenue growth rate,
we continue to assume lower margin expansion, continued capex deployment and
working capital expansions. Our DCF is based on a WACC of 11.75%. Figure 103
shows our WACC calculation.
Figure 101
Explicit timeline to FY30, DCF valuation

4.5% terminal growth NPV of cash flows (Rsm) 125,125
Terminal value (Rsm) 281,291
Enterprise value (Rsm) 406,417
Net debt (Rsm) (19,871)
Equity value (Rsm) 426,288
Number of shares (m) 961
Equity value/share (Rs) 444
WACC (%) 11.75
Terminal growth (%) 4.50
Source: CLSA
Figure 102
A 4.5% terminal-growth DCF valuation sensitivity to discount rate and terminal growth rate
rate (same as India’s CPI Terminal growth rate (%)
inflation) in our FY30 base 3.5% 4.0% 4.5% 5.0% 5.5%
case gives us a value of
10.75% 466 490 519 552 592
Rs444/share
11.25% 434 455 478 506 539
WACC
11.75% 406 424 444 467 494

12.25% 381 396 414 433 456
12.75% 359 372 387 404 423
Source: CLSA

Figure 103
WACC of 11.75% Detailed WACC calculation

Risk free rate = 6.25% Assumption Rate Comment
Beta = 1.0x Cost of equity (Ke) (%) 11.75
Cost of debt (Kd) (%) 10.00 Estimated gross cost of debt
Tax rate (%) 25.20 Effective tax rate of 25.2%
Rf (%) 6.25 Government of India 10-year bond
Beta 1
Market risk premium (%) 5.50 For Indian markets
Debt/capital (%) 0
Equity/capital (%) 100
WACC (%) 11.75
Source: CLSA
On Zee Sony merger likely valuation rerating

Long-term growth Besides Zee’s strong growth ahead as the potential Zee Sony merger is sealed, we
trends attractive believe stock’s PE multiple is likely to rerate and go back to historical levels of
c.30x. Our stock’s base case valuation framework, is currently based on Zee’s
profits alone and using the same and the Zee-Sony’s potential merger ratio
suggests, merged co market cap could well be ~US$11bn. This is based on our
base-case valuation of ~US$5.3bn standalone entity and Zee shareholders holding
47% in the proposed merged entity.
In a blue sky scenario of Zee Sony merger and the stock’s valuation rerating the
merged co market cap could even reach US$19bn. Our analysis in Figure 74 of
merged co financials mainly assumes revenue synergies of the combined Zee Sony
operations which highlights combined profits could jump 2.5x to US$680m with
higher EPS of Rs25 for the combined entity. However in a pessimistic case of the
Zee-Sony merger being put off and Zee’s stock valuation slumping back to pre-Sony
merger deal announcement and valuations seen amid the Covid-19 second wave, it
could fall to Rs250.
Figure 104
Merged company market Zee valuation scenarios

cap could well be over Base-case Blue-sky Rainy-day/
US$11bn Pessimistic
Zee standalone EPS Dec-23 (Rs/share) 23.0 23.0 20.8¹
PE multiple (x) 18 30 12
Calculated share price (Rs) 415 690 250
Implied Zee market cap (US$bn) 5.3 8.8 3.2
Implied merged co market cap (US$ bn) 11.3 18.8
Zee’s EPS FY22CL (Rs) 16.0
Zee’s EPS FY24CL (Rs) 23.7
PE multiple FY22CL (at current stock price) 21
PE multiple FY24CL (at current stock price) 14
¹ Pessimistic case uses a Mar-23 EPS as event could unfold in Dec-21. Source: CLSA
Risks to our view

Ad-revenue growth is Macro risks for advertising. Our assumption for industry-wide advertising growth picking
subject to macro risks up is based on a broader economic recovery continuing post-Covid 19. Our economists
forecast India’s GDP to grow between 10%-15% over FY22-24. We estimate a 1ppt
slower rebound leads to a near-1ppt reduction in Zee’s network ad-revenue growth, and
FY23/24CL profit after tax would be 2% below our current estimate.

NTO 2 litigation could delay NTO 2 litigation and disruption. Ongoing NTO 2 litigation and implementation
growth delays to April 2022 has already curtained broadcasters subscription revenue
growth. Also implementation across the country remains a challenge and could
continue to drag Zee’s subscription revenue growth. Ahead of final verdict on NTO
2 top broadcasters have released new pricing which was supposed to be effective
1 December 21 (details of Zee pricing are shown in Figure 105. However, regulator
has recently delayed implementation to April 22. Even under NTO 2, subscriptions
will still grow for top broadcasters with strong channels but realignment of
bouquets will hit tail channels and also there could be delays and disruptions during
implementation. A 1ppt reduction in Zee’s subscription revenue growth, and
FY23/24CL profit after tax would be some 1% below our current estimate.
Figure 105
Ahead of final verdict on Zee’s bouquets pricing under NTO 2

NTO 2, Zee has released Bouquet name No of channels Rate (Rs)
new pricing which was Zee Family Pack Hindi SD 25 27
supposed to be effective Zee Prime Pack English SD 2 15
1 December 21 Zee Prime Pack Odia SD 11 3
Zee Prime Pack Marathi SD 6 6
Zee Family Pack Marathi SD 20 30
Zee Prime Pack Bangla SD 4 4
Zee Family Pack Bangla SD 18 27
Zee Prime Pack Tamil SD 7 12
Zee Family Pack Tamil SD 9 24
Zee Prime Pack Telugu SD 6 5
Zee Family Pack Telugu SD 8 17
Zee Prime Pack Kannada SD 6 5
Zee Family Pack Kannada SD 8 17
Zee Prime Pack Malayalam SD 6 6
Zee Family Pack Malayalam SD 8 18
Zee Family Pack Hindi HD 26 48
Zee Prime Pack English HD 4 25
Zee Family Pack Bangla HD 19 48
Zee Prime Pack Marathi HD 6 12
Zee Family Pack Marathi HD 21 52
Zee Prime Pack Tamil HD 6 12
Zee Family Pack Tamil HD 9 35
Zee Prime Pack Kannada HD 6 12
Zee Family Pack Kannada HD 9 35
Zee Prime Pack Malayalam HD 6 12
Zee Family Pack Malayalam HD 9 35
Source: Company, CLSA (Link to pricing)
Ongoing litigations with Risks to potential Zee-Sony merger. Zee’s proposed merger with Sony will require
leading shareholder may approvals from regulatory bodies such as from the Securities and Exchange Board of
delay or cause hurdles to India (SEBI) and National Company Law Tribunal (NCLT) among others, as well as
merger with Sony
approval of 75% of Zee’s voting shareholders. Zee is in litigation with large minority
shareholder which carries associated risks. In the case of Zee-Sony merger being put
off, valuation could fall to Rs250.
Also while likely there will not be significant deviation from current proposed
merger terms the deal includes in the merger Sony parent will allocate 2% equity
from its 53% ownership in merged co to Zee founding family in lieu of a non-
compete clause. Also Zee Sony merger terms may provide a pathway for the Zee
promoters to raise stake from 4% to up to 20% subject to various regulatory
requirements. The final deal terms will need clarity on the non-compete as well the
pathway for promoters to raise stake.

Figure 106
Large minority shareholder Zee’s shareholding

holds 18% in Zee
Promoters
4% Mutual funds
7%
Others Large minority

23% shareholder
18%
Insurance
Companies
8%
Foreign Portfolio
Investors
40%
Source: BSE, CLSA
Figure 107
Earnings and balance-sheet risk scores (lower the better)

Score Comments
Earnings-quality flags
Capex indiscipline 0
Cash burn 0
Rising non-core or intangibles 0
Rising working capital 1 High content inventories are caused by
continued investments in TV & OTT. This is not a
concern because higher movie rights acquisitions
are being written off over the next five years.
Poor cash conversion 0
Earnings-quality risk score (EQRS) 1/5
Balance-sheet-quality flags
Cash burn 0
Excessive leverage 0
Frequent fundraising 0
Liquidity concerns 0
Operational stress 1 This is due to low capex but high working capital,
and is not a concern as revenue growth is seeing
a strong rebound.
Balance-sheet-quality risk score (BQRS) 1/5
Source: CLSA
Valuation details
We derive our target price by applying an 18x PE multiple to our one-year forward
earnings estimate, factoring in a 33% discount for risks of delays to the merger. In
our view, earnings growth, cash-flow conversion improvement and Sony merger
deal will be key to rerating.
Investment risks
Zee operates in a highly competitive TV broadcasting space; hence, continued
popularity as reflected in good TV ratings is important. A pickup in advertising
growth rate depends on a broader economic upturn along with network
performance versus competitors. Prolonged extension of Covid-19 could hinder
economic and advertising-revenue growth. Content investment in movies and
digital should spur revenue growth, but a faster-than-expected rise in content costs
could hinder earnings. Also Zee’s proposed merger with Sony will require several
approvals including regulatory and from 75% of Zee’s voting shareholders. Zee is in
litigation with large minority shareholder which carries associated risks.

Appendices Zee Entertainment - BUY
Appendix 1: Detailed financials

Profit & Loss (Rsm)
Year to 31 March 2018A 2019A 2020A 2021A 2022CL 2023CL 2024CL
Revenue 66,857 79,339 81,299 77,299 82,997 91,788 101,010
Cogs (ex-D&A) 0 0 0 0 0 0 0
Gross Profit (ex-D&A) 66,857 79,339 81,299 77,299 82,997 91,788 101,010
Research & development costs 0 0 0 0 0 0 0
Selling & marketing expenses - - - - - - -
Other SG&A (46,096) (53,700) (64,953) (59,398) (61,279) (65,444) (71,640)
Other Op Expenses ex-D&A - - 0 - - - 0
Op Ebitda 20,760 25,639 16,345 17,901 21,718 26,344 29,371
Depreciation/amortisation (1,821) (2,347) (2,706) (2,649) (2,760) (2,854) (2,894)
Op Ebit 18,940 23,292 13,639 15,252 18,958 23,490 26,476
Interest income 2,795 2,340 2,836 1,104 1,947 3,175 3,869
Interest expense (1,448) (1,304) (1,449) (571) (476) (93) (67)
Net interest inc/(exp) 1,347 1,035 1,388 534 1,471 3,082 3,802
Associates/investments - - - - - - -
Forex/other income - - - - - - -
Asset sales/other cash items - - - - - - -
Provisions/other non-cash items - - - - - - -
Asset revaluation/Exceptional items - - - - - - -
Profit before tax 20,286 24,327 15,027 15,785 20,430 26,572 30,278
Taxation (8,409) (8,673) (4,317) (4,625) (5,142) (6,688) (7,621)
Profit after tax 11,877 15,654 10,710 11,160 15,287 19,884 22,657
Preference dividends 0 0 0 0 0 0 0
Profit for period 11,877 15,654 10,710 11,160 15,287 19,884 22,657
Minority interest 25 23 (5) 69 73 116 122
Net profit 11,903 15,677 10,705 11,229 15,360 20,000 22,779
Extraordinaries/others 2,888 (7) (5,440) (3,229) 0 0 0
Profit avail to ordinary shares 14,790 15,671 5,265 8,000 15,360 20,000 22,779
Dividends (3,342) (4,034) (346) (2,402) (4,323) (4,323) (4,323)
Retained profit 11,448 11,636 4,919 5,599 11,037 15,677 18,457
Adjusted profit 11,903 15,677 10,705 11,229 15,360 20,000 22,779
EPS (Rs) 12.4 16.3 11.1 11.7 16.0 20.8 23.7
Adj EPS [pre excep] (Rs) 12.4 16.3 11.1 11.7 16.0 20.8 23.7
Core EPS (Rs) 12.4 16.3 11.1 11.7 16.0 20.8 23.7
DPS (Rs) 2.9 3.5 0.3 2.5 4.5 4.5 4.5
Profit & loss ratios

Growth (%)
Revenue growth (% YoY) 3.9 18.7 2.5 (4.9) 7.4 10.6 10.0
Ebitda growth (% YoY) 7.7 23.5 (36.2) 9.5 21.3 21.3 11.5
Ebit growth (% YoY) 4.5 23.0 (41.4) 11.8 24.3 23.9 12.7
Net profit growth (%) (2.3) 31.7 (31.7) 4.9 36.8 30.2 13.9
EPS growth (% YoY) (2.3) 31.7 (31.7) 4.9 36.8 30.2 13.9
Adj EPS growth (% YoY) (2.3) 31.7 (31.7) 4.9 36.8 30.2 13.9
DPS growth (% YoY) 16.0 20.7 (91.4) 733.3 80.0 0.0 0.0
Core EPS growth (% YoY) (2.3) 31.7 (31.7) 4.9 36.8 30.2 13.9
Margins (%)
Gross margin (%) 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Ebitda margin (%) 31.1 32.3 20.1 23.2 26.2 28.7 29.1
Ebit margin (%) 28.3 29.4 16.8 19.7 22.8 25.6 26.2
Net profit margin (%) 17.8 19.8 13.2 14.5 18.5 21.8 22.6
Core profit margin 17.8 19.8 13.2 14.5 18.5 21.8 22.6
Op cashflow margin 8.1 1.6 3.0 20.0 10.5 14.3 16.3
Returns (%)
ROE (%) 16.7 19.0 11.7 11.6 14.3 16.4 16.4
ROA (%) 10.6 12.8 7.8 8.6 10.8 12.1 12.1
ROIC (%) 20.9 22.2 11.7 12.4 15.9 18.3 19.5
ROCE (%) 31.0 33.3 17.4 17.6 20.9 24.0 25.6
Other key ratios (%)
Effective tax rate (%) 41.5 35.7 28.7 29.3 25.2 25.2 25.2
Ebitda/net int exp (x) - - - - - - -
Exceptional or extraord. inc/PBT (%) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Dividend payout (%) 23.4 21.4 2.7 21.4 28.1 21.6 19.0

Balance sheet (Rsm)

Cash & equivalents 9,345 9,677 5,529 10,485 11,679 21,155 34,479
Accounts receivable 15,365 18,274 20,847 19,452 22,739 25,147 27,674
Inventories 26,278 38,505 53,475 54,030 58,145 63,067 66,913
Other current assets 6,763 10,825 15,674 14,070 14,670 15,300 15,962
Current assets 57,751 77,281 95,525 98,036 107,233 124,668 145,027
Fixed assets 8,658 8,903 9,112 8,343 7,818 7,310 6,880
Investments 23,615 13,858 5,860 8,925 9,371 9,840 10,332
Goodwill 5,467 5,252 4,070 3,804 3,804 3,804 3,804
Other intangible assets 0 0 0 0 0 0 0
Other non-current assets 12,010 20,695 8,264 7,994 7,994 7,994 7,994
Total assets 107,502 125,988 122,831 127,102 136,220 153,617 174,037
Short term loans/OD - - - - - - -
Accounts payable 11,497 14,897 16,803 13,982 14,019 15,240 16,683
Accrued expenses - - - - - - -
Taxes payable 0 0 0 0 0 0 0
Other current liabs 4,992 10,576 6,003 8,019 7,901 8,282 8,681
Current liabilities 16,488 25,472 22,806 22,000 21,919 23,522 25,365
Long-term debt/leases/other 9 20 526 195 195 195 195
Convertible bonds 0 0 0 0 0 0 0
Provisions/other LT liabs 0 0 0 0 0 0 0
Total liabilities 16,497 25,493 23,332 22,196 22,115 23,717 25,560
Share capital 960 961 961 961 961 961 961
Retained earnings 74,657 88,279 92,479 99,985 112,943 128,620 147,077
Reserves/others 0 0 0 0 0 0 -
Shareholder funds 75,617 89,239 93,439 100,945 113,904 129,581 148,037
Minorities/other equity 15,387 11,256 6,060 3,961 202 318 440
Total equity 91,004 100,495 99,499 104,907 114,106 129,899 148,477
Total liabs & equity 107,502 125,988 122,831 127,102 136,221 153,616 174,037
Total debt 9 20 526 195 195 195 195
Net debt (9,336) (9,657) (5,003) (10,289) (11,484) (20,959) (34,283)
Adjusted EV 304,601 309,299 317,482 307,144 302,144 292,316 278,622
BVPS (Rs) 78.7 92.9 97.3 105.1 118.6 134.9 154.1
Balance sheet ratios

Key ratios
Current ratio (x) 3.5 3.0 4.2 4.5 4.9 5.3 5.7
Growth in total assets (% YoY) 5.5 17.2 (2.5) 3.5 7.2 12.8 13.3
Growth in capital employed (% YoY) 32.7 0.7 22.9 0.5 9.2 6.7 5.2
Net debt to operating cashflow (x) - - - - - - -
Gross debt to operating cashflow (x) 0.0 0.0 0.2 0.0 0.0 0.0 0.0
Gross debt to Ebitda (x) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Net debt/Ebitda (x) - - - - - - -
Gearing
Net debt/equity (%) (10.3) (9.6) (5.0) (9.8) (10.1) (16.1) (23.1)
Gross debt/equity (%) 0.0 0.0 0.5 0.2 0.2 0.2 0.1
Interest cover (x) 15.0 19.7 11.4 28.7 44.0 286.4 454.0
Debt cover (x) 604.8 63.6 4.6 79.0 44.8 67.4 84.2
Net cash per share (Rs) 9.7 10.1 5.2 10.7 12.0 21.8 35.7
Working capital analysis
Inventory days - - - - - - -
Debtor days 75.8 77.4 87.8 95.1 92.8 95.2 95.4
Creditor days - - - - - - -
Working capital/Sales (%) 47.7 53.1 82.6 84.8 88.7 87.1 84.3
Capital employed analysis
Sales/Capital employed (%) 96.0 113.1 94.3 89.2 87.7 90.9 95.1
EV/Capital employed (%) 437.3 440.9 368.2 354.6 319.3 289.6 262.4
Working capital/Capital employed (%) 45.8 60.1 77.9 75.7 77.8 79.2 80.2
Fixed capital/Capital employed (%) 12.4 12.7 10.6 9.6 8.3 7.2 6.5
Other ratios (%)
PB (x) 4.3 3.6 3.5 3.2 2.8 2.5 2.2
EV/Ebitda (x) 14.7 12.1 19.4 17.2 13.9 11.1 9.5
EV/OCF (x) 56.0 238.3 130.5 19.9 34.6 22.2 16.9
EV/FCF (x) 106.8 (202.8) 516.7 23.0 46.4 27.0 19.9
EV/Sales (x) 4.6 3.9 3.9 4.0 3.6 3.2 2.8
Capex/depreciation (%) 142.2 120.3 67.2 77.8 81.0 82.2 85.1

Cashflow (Rsm)
Operating profit 18,940 23,292 13,639 15,252 18,958 23,490 26,476
Operating adjustments - - - - - - -
Depreciation/amortisation 1,821 2,347 2,706 2,649 2,760 2,854 2,894
Working capital changes (8,550) (17,151) (16,758) 809 (7,365) (6,108) (4,930)
Interest paid / other financial expenses (101) (54) (67) (43) (185) (93) (67)
Tax paid (8,295) (9,299) (3,114) (5,011) (5,142) (6,688) (7,621)
Other non-cash operating items 1,629 2,163 6,026 1,778 (285) (299) (314)
Net operating cashflow 5,443 1,298 2,432 15,434 8,741 13,156 16,438
Capital expenditure (2,590) (2,823) (1,818) (2,060) (2,235) (2,347) (2,464)
Free cashflow 2,853 (1,525) 614 13,374 6,506 10,809 13,974
Acq/inv/disposals (171) (10) (15) (213) (446) (469) (492)
Int, invt & associate div (7,736) 11,496 5,721 (2,789) 1,947 3,175 3,869
Net investing cashflow (10,497) 8,663 3,888 (5,062) (734) 360 913
Increase in loans (2,937) 15 (12) 4 - - -
Dividends (3,834) (4,734) (5,227) (1,118) (2,692) (4,323) (4,323)
Net equity raised/others (4,030) (4,891) (5,229) (4,302) (4,120) 282 295
Net financing cashflow (10,801) (9,610) (10,468) (5,416) (6,812) (4,041) (4,028)
Incr/(decr) in net cash (15,855) 351 (4,148) 4,956 1,195 9,475 13,324
Exch rate movements 84 (19) 0 0 0 0 0
Opening cash 25,116 9,345 9,677 5,529 10,485 11,679 21,155
Closing cash 9,345 9,677 5,529 10,485 11,680 21,154 34,478
OCF PS (Rs) 5.7 1.4 2.5 16.1 9.1 13.7 17.1
FCF PS (Rs) 3.0 (1.6) 0.6 13.9 6.8 11.3 14.5
Cashflow ratio analysis

Growth (%)
Op cashflow growth (% YoY) (25.8) (76.2) 87.4 534.5 (43.4) 50.5 25.0
FCF growth (% YoY) (37.5) (153.5) - 2,076.8 (51.4) 66.1 29.3
Capex growth (%) (6.4) 9.0 (35.6) 13.3 8.5 5.0 5.0
Other key ratios (%)
Capex/sales (%) 3.9 3.6 2.2 2.7 2.7 2.6 2.4
Capex/op cashflow (%) 47.6 217.5 74.7 13.3 25.6 17.8 15.0
Operating cashflow payout ratio (%) 51.2 259.0 11.8 15.6 49.5 32.9 26.3
Cashflow payout ratio (%) 61.4 310.8 14.2 15.6 49.5 32.9 26.3
Free cashflow payout ratio (%) 117.1 - 56.3 18.0 66.4 40.0 30.9
DuPont analysis
Ebit margin (%) 28.3 29.4 16.8 19.7 22.8 25.6 26.2
Asset turnover (x) 0.6 0.7 0.7 0.6 0.6 0.6 0.6
Interest burden (x) 1.1 1.0 1.1 1.0 1.1 1.1 1.1
Tax burden (x) 0.6 0.6 0.7 0.7 0.7 0.7 0.7
Return on assets (%) 10.6 12.8 7.8 8.6 10.8 12.1 12.1
Leverage (x) 1.2 1.2 1.2 1.2 1.2 1.2 1.2
ROE (%) 16.7 19.0 11.7 11.6 14.3 16.4 16.4
EVA® analysis
Ebit adj for tax 11,089 14,988 9,721 10,783 14,186 17,577 19,812
Average invested capital 53,138 67,517 82,809 87,164 89,471 96,175 101,481
ROIC (%) 20.9 22.2 11.7 12.4 15.9 18.3 19.5
Cost of equity (%) 14.0 14.0 14.0 14.0 14.0 14.0 14.0
Cost of debt (adj for tax) 6.4 7.1 7.8 7.8 8.2 8.2 8.2
Weighted average cost of capital (%) 12.5 12.6 12.8 12.8 12.8 12.8 12.8
EVA/IC (%) 8.4 9.6 (1.0) (0.4) 3.0 5.4 6.7
EVA (Rsm) 4,453 6,470 (852) (335) 2,693 5,222 6,776

Appendix 2: Risk scores - EQRS/BQRS calculations

Flag FY0 FY-1 FY-2 FY-3
Earnings Quality Risk Factors
Capex indiscipline 0
Capex > net PPE change 0 0 (1) 1 (2)
3Y (Capex - sales cagr) 0 (17.3)
Cash burn 0
Negative operating cashflow 0 15,434 2,432 1,298 5,443
Negative FCF 0 13,374 614 (1,525) 2,853
Rising non-core or intangibles 0
Intangibles 0 3.0 3.3 4.2 5.1
Non-operating income
Rising working capital 1
AR days 1 95.1 87.8 77.4 75.8
Inventory days
Poor cash conversion 0
Depreciation (% of net PPE) 0 34.9 32.7 32.0 23.5
Accruals: (net inc - OP CF) % of sales 0 (5.4) 10.2 18.1 9.7
Balance Sheet Quality Factors
Cash burn 0
Negative operating cashflow 0 15,434 2,432 1,298 5,443
Negative FCF 0 13,374 614 (1,525) 2,853
Excessive leverage 0
Leverage (high and rising) 0 1.3 1.3 1.4 1.4
Net debt to equity (high and rising) 0 (10.2) (5.4) (10.8) (12.3)
Frequent fundraising 0
Equity dilution 0 (3.84) (4.89) (4.87) (4.43)
Debt-funded dividends and buybacks 0 0 0 0 (37)
Liquidity concerns 0
Debt-servicing cover (low and falling)
Cash ratio (low and falling) 0 0.48 0.24 0.38 0.57
Operational stress 1
AR + inventory days (rising) 1 95 88 77 76
ROE (low and falling) 0 11.6 11.7 19.0 16.7
Definitions of the factors we use to calculate final risk score

Definition Criteria
Earnings quality risk score (EQRS)
Capex > net PPE change Capex - change in net PPE - depreciation expense Positive number for the past three years
3Y (Capex - sales Cagr) Last three-year capex versus sales Cagr Three-year capex Cagr exceeds sales Cagr by over 5ppts
Negative operating cashflow Operating cashflow Negative operating cashflow (last year)
Negative FCF Operating cashflow - capex Negative FCF for the past two years
Intangibles (rising) Intangible assets as a % of net PPE At a four-year peak
Non-op income (rising) Non-operating income as a % of sales At a four-year peak
AR days (rising) Accounts receivable * 365 / sales At a four-year peak
Inventory days (rising) Inventory * 365 / cost of goods sold At a four-year peak
Depreciation rate (falling) Depreciation as a % of net PPE At a four-year trough
Accruals (% of sales) (Net income - operating cashflow) / sales Positive ratio for the past two years
Balance sheet quality risk score (BQRS)

Negative operating cashflow Operating cashflow Negative operating cashflow (last year)
Negative FCF Operating cashflow - capex Negative FCF for the past two years
Leverage (high and rising) Total assets to equity Current leverage > 2x and at a four-year peak
NDE (high and rising) Net debt-to-equity Current NDE > 40% and at a four-year peak
Equity dilution New equity issued as a % of total equity New equity issuance for each of past three years >5%
Debt-funded dividends & buybacks Debt issuance * 100 / (dividends + buybacks) Current (dividend + buyback) payout more than 25% and
funded entirely by debt for the past three years
Debt-servicing cover (low & falling) Ebitda / (short-term debt + interest expense) Current debt-servicing cover <1x and at a 4-year trough
Cash ratio (low and falling) Cash and equivalents / current liabilities Current cash ratio < 0.5x and at a four-year trough
AR + inventory days (rising) (Accounts receivable * 365 / sales) + At a four-year peak
(Inventory * 365 / cost of goods sold)
ROE (low and falling) Net income as a % of shareholder equity Current ROE less than 15% and at a four-year trough
Source: CLSA. Click here for definitions of the factors we use in calculating risk scores.

Appendix 3: What the charts say

There are three features to Zee Entertainment weekly with 40-week WMA
note. The first is the break
above downtrend resistance
drawn off the 2018 highs.
The second feature was
September’s breakout from
the 2020-21 trading range
which had formed between
Rs166.80-173.50 and
Rs234.95-238.20. This
breakout supported an
upside target of Rs320-325.
The final feature is the
divergence between price
and momentum, which has
formed between the
September and November
highs, that is an indication
the stock’s uptrend is
mature and vulnerable to a
reversal. The combination
of the stock meeting and
exceeding the upside target
of Rs320-325 with signs of
slowing upside momentum
makes it a take profit
candidate in anticipation of
a correction or
consolidation pattern
unfolding in the
coming weeks Source: CLSA
These views are based on technical analysis and may or may not be in agreement with the ‘fundamental’ view.
For further information please contact

Laurence Balanco, Analyst, Asian Technical Research
Tel: +61 2 8571 4253 email: laurence.balanco@clsa.com
Jonathan Estrada, Analyst, Asian Technical Research
Tel: +63 2 860 4011 email: jonathan.estrada@clsa.com
Price Action
Global technical research
For more technical analysis from Laurence Balanco,
check out his regular Price Action notes.
The purpose of Price Action is to provide a framework

and to outline general cycles and structures - from a
technical perspective - that drive equity, commodities,
currencies and debt markets.
Please contact your CLSA representative for details.

Important disclosures Zee Entertainment - BUY
Important notices
Companies mentioned
Activision (N-R)
Aditya Birla F&R (ABFRL IN - RS255.1 - BUY)
Airtel Xstream (N-R)
Airtel Xstream (N-R)
Alphabet (N-R)
Alt Balaji (N-R)
ALTBalaji (N-R)
Amazon (N-R)
Amazon Prime Video (N-R)
Animax (N-R)
Aniplex (N-R)
Apple (N-R)
Asian Paints (APNT IS - RS3,143.7 - O-PF)
AXN (N-R)
Bandai Namco (N-R)
Bharti Airtel (BHARTI IS - RS728.2 - BUY)
BMG (N-R)
Britannia Industries (BRIT IS - RS3,545.5 - O-PF)
Byju (N-R)
Charter (N-R)
Colgate India (CLGT IB - RS1,439.1 - O-PF)
ComScore (N-R)
Crackle (N-R)
Dabur (DABUR IS - RS595.0 - O-PF)
DB Corp (DBCL IB - RS91.6 - BUY)
DD Sports (N-R)
Dentsu (4324 JP - ¥3,610 - O-PF)
Dentsu Aegis Network (N-R)
Dish TV (DITV IB - RS17.0 - O-PF)
Dish TVAirtel Xstream (N-R)
Disney (N-R)
Disney+ Hotstar (N-R)
Emami (HMN IS - RS527.0 - O-PF)
Ernst & Young (N-R)
Eros Now (N-R)
Essel Group (N-R)
Essel Media Ventures (N-R)
Eurosport (N-R)
Facebook (N-R)
Fox (N-R)
Game Show Network (N-R)
Godrej Consumer (GCPL IB - RS924.0 - O-PF)
Google (N-R)
GroupM (N-R)
Hindustan Unilever (HUVR IB - RS2,318.4 - O-PF)
Hoichoi (N-R)
Hulu (N-R)
Hungama (N-R)
Inox Leisure (INOL IS - RS400.2 - BUY)
ITC (ITC IB - RS221.3 - BUY)
Jagran (JAGP IB - RS61.4 - BUY)

Jio Cinema (N-R)

JioTV (N-R)
Jubilant Food (JUBI IN - RS3,651.8 - O-PF)
Lionsgate (N-R)
Magna Global (N-R)
Magna International (N-R)
Marico (MRCO IB - RS539.2 - U-PF)
Meta Platforms Inc (N-R)
Mixi (N-R)
Muvi (N-R)
MX Player (N-R)
Nazara Tech (NAZARA IS - RS2,241.5 - SELL)
NBC Universal (N-R)
Ncsoft (N-R)
Nestle India (NEST IB - RS19,159.1 - O-PF)
NetEase (NTES US - US$107.73 - BUY)
Netflix (N-R)
PayTM (N-R)
Pidilite (PIDI IS - RS2,205.8 - SELL)
PVR (PVRL IS - RS1,371.6 - BUY)
Sony Group (6758 JP - ¥13,825 - BUY)
Sony India Pvt Ltd (N-R)
Sony Pictures (N-R)
Sony Pictures Entertainment Motion Picture Group (N-R)
Sony Pictures Networks India (N-R)
Sony Pictures Television (N-R)
SonyLiv (N-R)
Star TV (N-R)
Sun NxT (N-R)
Sun TV (SUNTV IB - RS521.2 - BUY)
Supercell (N-R)
Tencent (700 HK - HK$459.40 - BUY)
Titan (TTAN IB - RS2,374.9 - SELL)
TV18 (N-R)
Ultra (N-R)
Universal Entertainment (6425 JP - ¥2,284 - O-PF)
Varun Beverages (VBL IN - RS893.2 - BUY)
Viacom (N-R)
ViacomCBS (N-R)
Vodafone (N-R)
Vodafone Movies & TV (N-R)
Voot (N-R)
VTB Bank (N-R)
Walt Disney (N-R)
Warner Bros (N-R)
Warner Music (N-R)
Westlife (WLDL IN - RS547.5 - O-PF)
YouTube (N-R)
YuppTV (N-R)
Zee Entertainment (Z IB - RS337.00 - BUY)
Zee Studio (N-R)
Zee5 (N-R)
Zomato (ZOMATO IN - RS152.6 - BUY)

Analyst certification
The analyst(s) of this report hereby certify that the views expressed in this research report accurately reflect my/our
own personal views about the securities and/or the issuers and that no part of my/our compensation was, is, or will
be directly or indirectly related to the specific recommendation or views contained in this research report.
Important disclosures
Recommendation history of Zee Entertainment Enterprises Ltd Z IB
Deepti Chaturvedi BUY O-PF
Other analysts U-PF SELL
Stock price (Rs)
600 No coverage N-R
500
400
300
200
Jan 19 May 19 Sep 19 Jan 20 May 20 Sep 20 Jan 21 May 21 Sep 21
Date Rec Target Date Rec Target

12 Nov 2021 BUY 415.00 21 Nov 2019 BUY 390.00
22 Sep 2021 BUY 400.00 18 Oct 2019 BUY 320.00
12 Jan 2021 BUY 306.00 07 Oct 2019 BUY 290.00
19 Sep 2020 BUY 280.00 26 Sep 2019 BUY 450.00
09 Jul 2020 BUY 255.00 02 Jul 2019 BUY 515.00
30 Apr 2020 BUY 275.00 28 May 2019 BUY 535.00
18 Mar 2020 BUY 295.00 05 Apr 2019 BUY 580.00
07 Jan 2020 BUY 360.00
Source: CLSA
CLSA (“CLSA”) in this report refers to CLSA Limited, CLSA Americas, http://www.clsa.com/member/research_disclosures/ for details.)
LLC, CLSA Australia Pty Ltd, CLSA India Private Limited, PT CLSA The analysts included herein hereby confirm that they have not
Sekuritas Indonesia, CLSA Securities Japan Co., Ltd., CLSA Securities been placed under any undue influence, intervention or pressure by
Korea Ltd., CLSA Securities Malaysia Sdn. Bhd., CLSA Philippines, Inc, any person/s in compiling this research report. In addition, the
CLSA Singapore Pte Ltd, CLSA Securities (Thailand) Limited, CLSA analysts attest that they were not in possession of any material, non-
(UK), CLSA Europe B.V. and/or their respective affiliates. CLST public information regarding the subject company that has securities
(“CLST”) in this report refers to CL Securities Taiwan Co., Ltd. listed in the relevant jurisdiction(s) at the time of publication of this
The policies of CLSA and CLST are to only publish research that is report. Save from the disclosure below (if any), the analyst(s) is/are
impartial, independent, clear, fair, and not misleading. Regulations or not aware of any material conflict of interest.
market practice of some jurisdictions/markets prescribe certain As analyst(s) of this report, I/we hereby certify that the views
disclosures to be made for certain actual, potential or perceived expressed in this research report accurately reflect my/our own
conflicts of interests relating to a research report as below. This personal views about the securities and/or the issuers and that no
research disclosure should be read in conjunction with the research part of my/our compensation was, is, or will be directly or indirectly
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Key to CLSA/CLSA Americas/CLST investment rankings: BUY: Total stock return (including dividends) expected to exceed 20%; O-PF (aka ACCUMULATE): Total
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Zee Entertainment BUY (Prime Time Play) 20211203

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Zee Entertainment BUY (Prime Time Play) 20211203

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Zee Entertainment

Deepti Chaturvedi Prime time play

Strong advertising upcycle ahead

Highly favourable risk reward

What’s the angle? Zee Entertainment - Rs337.00 - BUY

Bands (from the top): max, +1sd, avg, -1sd, min

2 deepti.chaturvedi@clsa.com 3 December 2021

Why BUY Zee Entertainment

Zee valuation scenarios

Strong advertising upcycle

Zee’s network viewership is improving

Explosive growth in video OTT

3 December 2021 deepti.chaturvedi@clsa.com 3

Digital video content available in India Ad revenue mix in India by medium

Source: CLSA Source: FICCI, CLSA

Set up for success in digital with ZEE5

Revenue models of key OTT players in India ZEE5 MAU

Source: CLSA Source: Company, CLSA

Sector leadership after Zee-Sony merger

TV network market share Sony entertainment sales break-up (FY3/20CL)

Source: BARC, CLSA Source: CLSA

4 deepti.chaturvedi@clsa.com 3 December 2021

Profit & Loss (Rsm)

3 December 2021 deepti.chaturvedi@clsa.com 5

Strong advertising upcycle ahead

Covid-19 set lowest base for advertising spending

Adspend/GDP growth India’s total adspend to nominal GDP

6 deepti.chaturvedi@clsa.com 3 December 2021

Economic recovery drives adspend rebound

TV high ad share amid rising digital

We expect TV adspend to TV advertising revenue in India

Source: FICCI, KPMG, CLSA

3 December 2021 deepti.chaturvedi@clsa.com 7

TV home reach TV Individual reach

200 197 860

Ad revenue in India by medium Ad revenue share in India by medium

1,000 (Rsbn) (% of revenue) Digital Out of home Radio Print TV

OTT will drive digital ad share ahead of TV

8 deepti.chaturvedi@clsa.com 3 December 2021

Zee’s TV network viewership back to pre-Covid levels

Network share for Zee is Viewership breakdown by broadcaster

Source: BARC India data across leading channels/ genres, CLSA

3 December 2021 deepti.chaturvedi@clsa.com 9

Zee’s viewership gains in Zee’s network viewership breakdown by channel

Zee’s play on advertising upcycle upturn

Zee delivered 17% Cagr in Zee’s advertising revenue growth

A 5% increase in the Zee’s FY24CL EPS sensitivity

10 deepti.chaturvedi@clsa.com 3 December 2021

Explosive OTT growth and for ZEE5

Digital media: Second highest reach

India smartphone user base Broadband connections in India

3 December 2021 deepti.chaturvedi@clsa.com 11

Digital gaining advertising share from print

The rise of digital has limited impact on TV

We expect TV’s adspend Adspend by medium

Source: FICCI, Magna Global, CLSA

12 deepti.chaturvedi@clsa.com 3 December 2021

Digital media has hurt Comparison of ad-spend mix across countries

Explosive growth in video OTT

India has more than 30 Availability of digital video content

Telco led OTT

3 December 2021 deepti.chaturvedi@clsa.com 13

Source: CLSA Source: CLSA

Source: CLSA Source: CLSA