Zee: Stay At Home Stock with a Stay Away From Promoter

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Let’s face it: If we hadn’t realised how ‘essential’ Netflix and other streaming services were to our lives before Covid-19, chances are they’ve become absolutely indispensable with never-ending stay at home orders now. Streaming is way, way up globally (+57% YoY in Q1 2020 according to one report), and has absolutely exploded in India where adoption is just getting started, bringing bold, script driven content to the most movie crazy audience in the world.

Many OTT platforms have also seen a minimum of 20% increase in its viewership (in India). The daily active users (DAU) of Amazon Prime Video increased by 83% from February 5 to March 29. Netflix also saw a spike of 102%.

With high bandwidth internet, low mobile data tariffs and access to the best smartphones and upcoming technologies, the urge to consume content on-the-go is growing faster than most content creators can keep up with. This has opened up an ever-rising opportunity for over-the-top (OTT) streaming players in India for both B2B and B2C segments.

Inc42

“In the current Covid situation, audiences are spending more time online and OTT platforms have almost doubled their viewership. This viewership trend is likely to continue at least for a few years. Hence, advertising on the services is likely to surge in the coming years as they increasingly become the choice for content consumption,”

Anita Nayyar, Head, Customer Strategy and Relationships, ZEE5 (from LiveMint article)

In many ways Netflix is an ideal Stay at Home stock, and predictably blew the lights out with earnings in Q1 2020. This got me looking for similar listed plays in India and amongst the smattering of traditional media companies (there’s no pure play listed OTT platform yet), Zee Entertainment was the only one that caught my eye.

Zee, for the uninitiated, is the crown jewel of Subhash Chandra’s Essel Group, and owns a constellation of TV channels globally, a leading music record label and a major film studio (Raees, Uri, Gully Boy). Zee launched their own streaming service Zee5 in 2018 to exclusively host their massive library and new original programming. I found some time this weekend to look at Zee through the lens of a successful platform like Netflix — and I’m pretty impressed! Take a look.

What’s not to like about Zee right? A highly profitable TV empire reaching 1.3 viewers daily, strong in-house movie and music production capabilities feeding a fast growing streaming offering, and a debt free balance sheet. Unfortunately, Zee is itself worthy of a movie on its yet-unfolding corporate saga that seen shareholder wealth plunge 80% from its 2018 peak and Subhash Chandra sell his shares after a series of mistimed and debt-fuelled bets in the wider Essel Group went wrong.

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Source: Finshots

Surprisingly, Zee’s operations have been largely unaffected (so far) amidst this turmoil and all-time low valuations made this worthy of some digging. My main findings are summarised below.

Cons

  • The principal overhang on Zee’s stock remains the unresolved promoter issue. While Subhash Chandra’s holding has fallen from 43% to less than 5%, he continues to remain on the board as a Non-Executive Director and his son Punit Goenka is still Zee’s MD and CEO. These residual shares are pledged to lenders to other Essel businesses and are the subject of a pitched courtroom battle with the lenders seeking to sell the shares to recover their dues. Zee’s continuity plan communicated to shareholders earlier this year was that Subhash Chandra would be elevated to Chairman Emeritus in the current fiscal while Punit would continue as CEO. Additional independent directors will be brought on board. This is not a tenable long term solution in my view as the company is being led by a promoter with very little skin in the game and an unclear exit strategy. The wider Essel Group remains highly stressed and Zee will need to credibly extricate itself from this group for markets to reward the stock again. While Indian promoters are notoriously hard to separate from their businesses, Subhash Chandra has demonstrated an intent to sell off assets to pare down debt and has avoided taking the bankruptcy route so far.
  • Zee is planning to invest 500 crores in its subsidiary SugarBox which provides offline access to content in public transport, rural areas, public places, hospitality and residential areas. The value and rationale for this investment is not clear yet. There is also pressure from receivables and large related party dues linked to promoter level issues which raises questions about capital allocation and governance.
  • Streaming is a hyper competitive and capital intensive business with Amazon, Hotstar (owned by Disney) and Netflix allocating huge content acquisition budgets to India. Reliance is currently a small player via Jio Cinema and Alt Balaji.
  • I briefly tested the Zee5 app for the iPhone; I found it to be very buggy and in need of a lot of work to match the Netflix and Prime Video experience. To be fair, when I pointed this out to the Zee5 CEO on Twitter, he responded quickly that a new iOS app is going to drop anytime now. iPhone is likely the lowest priority OS for Indian OTTs too.
  • While viewership on Zee’s properties have increased during the lockdown, Zee is still an ad-dependent business today and ad spends are expected to moderate meaningfully in FY21. The pivot to a subscription-led model started late and will be a long journey.
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Pros

  • The biggest asset for Zee is their massive content library. This catalogue holds significant value and is eminently monetizable. One can crudely imagine Zee5 as the Indian equivalent of Disney launching Disney+. There is no other player in India that comes close in depth and breath to Zee’s content library. Disney has clearly demonstrated the value of its IP when distributed via a competent tech platform. With Zee adding 25,000+ hours of fresh content every year, this catalogue will continue to grow in value.
  • Zee is now 95% owned by public investors and 90% owned by institutional investors (mainly foreign hedge funds). This places Zee near the top of the list of stocks by institutional ownership alongside FII favourites like HDFC, Axis, ICICI etc. This also potentially makes Zee a prime target for a strategic acquisition if the existing management structure continues to spook the market. Names like Amazon, Apple, Tencent, Alibaba, Sony, Airtel and Reliance did the rounds last year before Subhash Chandra ended up selling to financial investors. A hypothetical Reliance acquisition would see Zee’s content sent down Jio’s pipes to more than 400 million subscribers -— larger than Netflix and Amazon Prime combined. That an acquisition hasn’t taken place yet and a value destructive stalemate is allowed to proceed is surprising…. or maybe it isn’t.
  • Zee is strong in regional and children’s content which is a huge market that other platforms are not focused on. The Essel Group via Zee Learn also controls KidZee, Asia’s largest play school network, which provides the captive audience. My anecdotal experience from observing a few young parents is that they will sign up for absolutely anything to keep their kids engaged — and this was pre-lockdown!
  • Zee has built a strong team for Zee5 led by Tarun Katial. Tarun is one of the most competent media executives in India and was the force behind shows like KBC, Indian Idol, Fear Factor etc. Zee5 is apparently being run completely independently from the parent and operates as a startup. The team is also building a new self-serve ad suite for Zee5 and a hyper-shorts platform called HiPi to compete for the space created by TikTok’s ban last month.

“We call ourselves a start-up. We have taken away the frills of south Bombay, and of a lovely building that we have (Zee’s other companies continue to operate out of the building). This is a much tougher place to get to…but it has a strong start-up environment. Marol is the tech hub of Mumbai. (Being here) helps us and people are happy,” he says. Eight months after its official launch in February 2018, the entire team of ZEE5 moved out of Zee group’s headquarters at Lower Parel to WeWork, taking up an entire floor. A little over 400 people, including coders, creative writers and support staff, currently work out of this office space that has every element of a new age company.

Tarun Katial, CEO Zee5 (from LiveMint article)

  • As highlighted earlier, streaming platforms are seeing accelerated adoption in India amidst the ongoing pandemic. Zee is smartly bundling Zee5 with Airtel, Jio and others to acquire customers quickly.
  • Valuations are at an all-time low currently and disconnected from fundamentals. Zee is a net-debt free Stay at Home business with 25%+ ROCEs. While the stock might see some supply if lenders start selling promoter shares, I think a bottom has been established and it is unlikely to retest March lows.
  • Zee5 has a very long growth runway. A Netflix subscription is owned by 1 in 5 Americans – 70 million subscribers. Hotstar has 300 million MAUs in India of which 8 million are paying subscribers. Can Indian OTT platforms like Hotstar and Zee5 be owned by 1 in 50 Indians in the future – 25 million subscribers?
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Disclosure: I have no position in Zee Entertainment. There is plenty to chew on though and I will be keeping a close watch on this opportunity. This is not an investment recommendation. Please do your own research.

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Rajat
Currently building a dating app | Previously: Investments @ Asia Climate Partners | MSc. Finance from HKUST
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