In a recent analysis, CLSA has expressed a bullish outlook on Zee Entertainment, predicting that its stock could potentially double within the next 12 to 24 months. The international brokerage firm notes that the company’s share price has reached an all-time low of 8x price-to-earnings ratio, largely due to a decline triggered by the cancellation of its merger with Sony in January 2024, resulting in a staggering 55% drop since then.

Advertising Revenue as a Growth Catalyst

CLSA believes that a resurgence in advertising revenue will play a crucial role in reshaping Zee’s stock valuation. As the second-largest television network in India, Zee is making significant strides in expanding its OTT platform, ZEE5. The company has improved its EBITDA margin by 9 percentage points, and impressively, it carries no debt while holding ₹1,700 crore in cash reserves. Even with conservative estimates of 6% year-over-year advertising growth, CLSA anticipates that Zee could achieve 22-33% CAGR in EBITDA and PAT by FY26-27. This expectation is grounded in the fact that Zee’s market cap-to-sales ratio of 1x remains 60-80% lower than its competitors, such as the Reliance Disney joint venture and Sun TV.

Zee’s Strong Market Position

Zee holds a formidable position as India’s No. 2 TV network while actively enhancing its ZEE5 streaming service. Despite the rapid growth of digital media, television continues to dominate with a reach of 900 million compared to digital platforms. CLSA highlights that the market has consolidated, particularly after the Reliance-Disney Star JV. They also point out that TV advertising expenditure remains below pre-COVID levels, primarily due to the impact of FMCG companies, which dominate the sector. Nevertheless, CLSA forecasts a 12% year-over-year growth in advertising specifically for Zee in FY26/27, despite an overall expectation of single-digit growth in TV ad spending.

Financial Health and Margin Expansion

One of the standout factors in CLSA’s favorable assessment is Zee’s robust financial health, showcased by its zero debt and substantial cash reserves of ₹1,700 crore. The company’s EBITDA margin has seen a significant recovery, increasing to 16% from a low of Q4 FY23, with expectations of further expansion to 22% by FY27. This improvement is attributed to a 60% reduction in losses from its OTT service, which peaked at ₹340 crore in Q1 FY24.

Attractive Risk-Reward Profile

Given Zee’s strategic position in the media landscape and its improving profitability metrics, CLSA suggests that the recent stock decline is an overreaction. By comparing Zee’s valuation to its peers, it becomes evident that after the $8.5 billion deal involving Reliance Disney Star, Zee is trading at a 60-80% discount compared to the valuation multiples of 2.6-5.3x seen for its competitors like Sun TV.

In conclusion, CLSA’s optimistic outlook underscores Zee Entertainment’s potential for recovery, driven by advertising growth, financial stability, and a strategic market position. For investors, this represents a compelling opportunity to consider, especially as the media landscape continues to evolve.