Movie success offsets ad revenue slip for broadcasters like ZEE, Sun TV

Notwithstanding record revenues in certain media sectors like film exhibition in the July-September quarter (second quarter, or Q2), the operational performance of the broadcasting business remained subdued.

Zee Entertainment Enterprises and Sun TV are expected to experience a year-on-year (Y-o-Y) decline in advertising (ad) revenues during this period.

Conversely, box office (BO) collections are anticipated to exceed Rs 3,000 crore in the quarter, propelled by a series of successful movie releases.

“The broadcasting segment continues to face challenges, with the ad environment remaining muted due to reduced ad spends by consumer technology (tech) companies (edtech, fintech, foodtech, and e-commerce).

"We anticipate a rise in ad revenue in the second half of 2023-24 (FY24), driven by the festival season and the 2023 Cricket World Cup,” said research analysts Karan Taurani and Rounak Ray of Elara Securities (India).

In Q2FY24, Zee is expected to register a 2.5 to 3 per cent decrease in ad revenues, while Sun is likely to maintain a performance similar to the year-ago quarter.

According to IIFL Research, ad sentiment remained subdued as recent optimism did not translate into on-the-ground action.

Analysts Balaji Subramanian and Siddharth Zabak of the brokerage pointed out that while the first quarter witnessed a 16 per cent Y-o-Y growth in aggregate ad spends for IIFL’s fast-moving consumer goods coverage universe, this increase was primarily driven by the Indian Premier League (IPL), and general entertainment channels experienced weak ad revenue.

Furthermore, Y-o-Y comparisons for the September quarter will be skewed due to the delayed festival season.

The broadcasters’ subscription revenue is expected to moderate on a sequential basis due to the full impact of the New Tariff Order 3.0.

Both broadcasters are expected to report a subscription growth of 5-7 per cent compared to the year-ago quarter.

Despite challenges faced by the core business, there is a silver lining for the two broadcasting majors due to the success of two movies —Jailer and Gadar 2.

According to Nuvama Research, “Superstar Rajinikanth’s Jailer, produced by Sun Pictures, is enjoying a phenomenal run, breaking BO records, which will benefit its Q2FY24 numbers.”

The movie is expected to contribute Rs 200 crore to other operating revenues and increase margins by 130 basis points (bps) sequentially and 490 bps Y-o-Y.

In the April-June quarter, the company’s financials were boosted by IPL, generating an income of Rs 513 crore, with costs standing at Rs 228 crore.

Despite subdued ad revenues, Zee is expected to gain Rs 250 crore from Gadar 2, which was produced and distributed by Zee Studios.

Elara Research anticipates a 380-bp improvement in its operating profit margins sequentially due to the impact of Gadar 2, while compared to the year-ago quarter, a decrease of 300 bps is expected.

Looking ahead, Nuvama Research anticipates a steady increase in ad revenues and subscriptions for Sun.

The brokerage suggests that any value unlocking in its IPL team could be an additional trigger for the stock to rerate.

Prabhudas Lilladher Research, which has a ‘buy’ rating on the stock, believes that Zee offers a better risk/reward at current levels, given that the merger overhang is now resolved.

However, any further delays related to the merger, as well as the listing of the new entity and the ongoing case against the promoters at the Securities Appellate Tribunal, could have a bearing on the stock.

Both stocks have delivered impressive returns of 26-32 per cent over the past three months.

While there are multiple triggers, investors should wait for progress on the ad revenue growth front before considering these stocks.

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