Zee Entertainment- Investment in Sugarbox to create digital inroads

Zee hosted an investor call to discuss its recent investment in Sugarbox. Here
are the key highlights:
INR5.22b invested, but modalities yet to be disclosed
Management indicated the investment of INR5.22b in Sugarbox would be
modular over two to three years, comprising a mix of debt and equity, of which
INR3b would be put toward capex and the remainder to meet operational
requirements. Zee expect’s the investment to be margin accretive and show a
healthy internal rate of return (IRR). However, what remains unknown is the
additional stake it would fetch over and above the existing 80%, the specific
return targets, and other nuances of the deal. Management explained that this
investment would keep it ahead in terms of technology to improve Zee5’s
reach. However, given that this does not provide any exclusive rights, we think
a VC-/PE-driven investment could have helped save cash and still provided
similar benefits.
Key takeaways from management concall
 ZEE’s INR5.22b investment in Sugarbox would comprise a mix of debt and
equity over two to three years, of which INR3b would be invested in
capex and the rest in opex and royalties. Additional investment out of the
total requirement of INR12.2b would be fulfilled through internal accruals
and leasing assets.
 Sugarbox expects to achieve breakeven in four years and would start
generating EBITDA for Zee from year five. Management expects healthy
IRR over 10 years.
 Sugarbox has been awarded ~7,700 (rakes) rail tenders, 500 bus tenders,
the Hyderabad metro tender, the Chennai metro tender, a tender for Navi
Mumbai Municipal buses, and that for 6,000 stations.
 Sugarbox aims to reach 25m daily users and 300m monthly users by mid2022, spending 2.5b hours monthly on its platform; it plans to take a
share of revenue from the apps using the platform.
 Competitor risk is low as limited players operate in this space.
Furthermore, the company uses its own patented technology, for which it
has an exclusivity clause in all contracts (at least five years, and in most
cases, 10 years).
Valuation
The stock is trading at P/E and EV/EBITDA of 6.2x/3.3x, respectively, on FY22E,
which looks attractive, but given the weak ad environment and bloating
balance sheet and unrelated investments, the upside may be capped.