Sony India reported a revenue decline of 2 percent and PAT growth of 6 percent YoY, well ahead of Zee Entertainment, which posted a drop in revenue of 1 percent YoY and a PAT dip of 76 percent YoY in FY23.

In FY23, advertisement, subscription and total market share of the combined entity, Zee/Sony (subject to approvals) stood at 24 percent, 16 percent and 20 percent, respectively. Post merger, the Zee-Sony entity is expected to become the second-largest broadcaster in India in terms of market share.

Sony India’s advertisement revenue declined 5 percent YoY in FY23 to Rs. 33 billion, in line with our estimates, vs Zee’s ad revenue too fell 4 percent YoY to Rs. 41 billion on the back of 1) inflationary pressures, and 2) cut in ad spend by new age and commerce verticals. Subscription revenue for Zee remains flat YoY whereas Sony’s grew 15 percent YoY, as Sony outperformed Zee due to strength in the urban genre, sports properties, and OTT price hikes.

Sony’s PAT stood at Rs. 10,420 million, up 6 percent YoY, in FY23 with a PAT margin of 15.5 percent whereas Zee PAT stood at Rs. 2,514 million, down 76 percent YoY in FY23, with a PAT margin of 3 percent, as Zee faced pressure on 1)the content cost front 2) investments in digital and 3) some write offs.

Content cost of Sony has come off and PAT margin grew 110 bp YoY. In FY23, Sony and Zee’s ad revenue market share stood at 10.7 percent and 13.3 percent, respectively, whereas subscription revenue market share stood at 8 percent and 8.4 percent, respectively.

In terms of the total TV industry, Sony and Zee had a market share of 9.1 percent and 10.4 percent, respectively. Hence, the combined entity (subject to regulatory approvals) had an advertisement, subscription and total market share of 24.0 percent YoY, 16.4 percent YoY and 19.4 percent YoY in FY23 and is the second-largest entity in India in terms of market share after Disney Star India.

SonyLiv, the OTT platform of Sony India, currently has 33.3 million users and provides 40,000 hours of programming in eight different languages; its YouTube channel is the third-most subscribed channel in the world, with 156 million global subscribers.

Zee5, an OTT platform of Zee, had 112 million average monthly active users (MAU) and 11.3 million daily active users (DAU) in FY23 whereas Zee’s YouTube channel Zee Music has 134 million global subscribers currently. The merger would expand content creation as well as provide cost synergies, benefiting both firms. It is likely to go through this year, subject to regulatory approvals.

Further, Disney is looking for a strategic partner for its media business in India, which is another silver lining, as we believe Zee-Sony merged company’s (subject to regulatory approvals) key strategy would be to become the market leader post the merger.

However, in case of Disney realigning its strategy with a new partner, there may be cost-cutting measures, which, in turn, would make it easy for Zee-Sony merged entity to gain potential market share in the medium term. Thus, we believe in the event the merger goes through post approval, it would be a rerating trigger for the merged firm.

We value Zee’s core broadcasting business at 17x one year forward P/E, led by 1) merger synergy, 2) potential market share gains to displace Disney as the largest broadcaster and 3) better CG (corporate governance) initiatives – MNC-backed company.

Therefore, we arrive at a merged company potential market cap of Rs. 612 billion after incorporating the OTT business valuation (Zee and Sony) of Rs. 92 billion, which is at tepid 3.0x one year forward EV/sales and cash infusion of Rs. 120 billion by Sony. We arrive at a TP of Rs. 300 for Zee based on a 47 percent stake in the merged company. There could be further potential upside beyond our target price , led by 1) revenue synergy (assumed only cost synergy for now), and 2) scale-up or break-even on the digital & OTT businesses, which could increase digital business valuation.

The above-mentioned TV subscription (16 percent share) and TV revenue total market share (20 percent) includes MSO and DTH revenue, excluding which the TV subscription and total TV revenue market share of the combined entity is approx 40 percent & 30 percent respectively in FY23.

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