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Zee Entertainment: Subscriptions remain robust - Views on News from Equitymaster

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Zee Entertainment: Subscriptions remain robust

Jan 20, 2010

Performance summary
  • Topline declines by 3% YoY during 3QFY10. Advertising revenue grows by 1% YoY, while subscription revenue grows by 9% YoY. Revenue from syndication, film distribution and education sales declines by 73% YoY.
  • EBITDA margins improve to 29.6% in 3QFY10, up from 22% in 3QFY09 due to lower programming and operating cost.
  • Other income declines by 20% YoY during the quarter.
  • Excluding exceptional items, bottomline grows by 42% YoY in 3QFY10 on the back of higher operating margins and lower finance charges.
  • For 9mFY10, the topline declines by 7% YoY while the bottomline grows by 12% YoY excluding exceptional items.

Consolidated financial snapshot
(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Net sales 5,456 5,309 -2.7% 16,592 15,473 -6.7%
Expenditure 4,256 3,737 -12.2% 12,462 11,223 -9.9%
Operating profit (EBDITA) 1,200 1,573 31.0% 4,130 4,250 2.9%
EBDITA margin (%) 22.0% 29.6%   24.9% 27.5%  
Other income 401 323 -19.5% 959 940 -2.0%
Finance charges 386 65 -83.0% 823 240 -70.8%
Depreciation 84 76 -8.9% 205 228 11.6%
Profit before tax 1,132 1,754 54.9% 4,062 4,722 16.2%
Exceptional Item* 26 313   1,389 313  
Tax 318 603 89.4% 1,222 1,547 26.6%
Profit after tax/(loss) 840 1,464 74.4% 4,229 3,487 -17.5%
Net profit margin (%) 15.4% 27.6%   25.5% 22.5%  
No. of shares (m)         434.0  
Diluted earnings per share (Rs)**         10.3  
Price to earnings ratio (x)**         26.5  
* Excess provision for tax in earlier years written back
**On trailing twelve months earnings

What has driven performance in 3QFY10?
  • Zee Entertainment witnessed a 3% YoY decline in topline in 3QFY10 primarily on account of a 73% YoY decline in revenue from syndication, film distribution and education sales. Advertising revenue grew by 1% YoY, while subscription revenue grew by 9% YoY. Subscription revenues from domestic DTH were Rs 632 m during this quarter, an increase of 124% YoY over 3QFY09.

    Revenue break-up
    (Rs m) 3QFY09 3QFY10 Change
    Advertising Revenue (Net) 2,684 2,707 0.9%
    % sales 49.2% 51.0%  
    Subscription Revenue  2,274 2,467 8.5%
    % sales 41.7% 46.5%  
    Other Sales & Services 497 135 -72.8%
    % sales 9.1% 2.5%  

  • Zee Entertainment’s flagship entertainment channel Zee TV had a channel share of 20% in its genre during 3QFY10. It had an average 18 of the top 50 weekly shows and 29 of the top 100 weekly shows during the quarter. Colours had a 25% channel share, while Star Plus had a 20% share followed by Sony at 14%.

  • The company’s Hindi movies bouquet garnered a leading 33% genre viewership share this quarter. In the English entertainment category, Zee Café garnered 27% channel share for the quarter in its genre.

  • On the cost front, Zee Entertainment witnessed a 6% YoY decline (as a percentage of sales) in programming and operating cost during 3QFY10. Staff cost remained flat, while selling, administration and other expenses declined by 2% (both as a percentage of sales).

  • The company is set to acquire an additional 45% stake in its subsidiary Taj TV Mauritius and an additional 50% stake in its subsidiary Taj Television (India) for US$ 44 m. Taj TV operates Ten Sports. Zee Entertainment had acquired the initial 50% stake in Ten Sports in FY07 at an enterprise value of US$ 114 m. It may be noted that the company has also merged ETC and acquired the regional entertainment bouquet of Zee News during this fiscal.

What to expect?
Our expectation that advertising revenues will recover from the decline experienced during 1QFY10 has happened over the subsequent quarters. Going forward, we expect the advertising front to remain tightly linked to the volatile macroeconomic environment. However, we expect subscription numbers to remain strong. Over the long term, we believe that the TV broadcasting sector will continue to grow and that Zee will be able to capitalise on the same given its strong position in the sector.

However, the company tends to undertake frequent restructuring exercises, which makes the task of assessing shareholders’ wealth difficult. It creates unnecessary confusion in the mind of investors. The company will be well served by a little less chopping and changing.

At the current price of Rs 274, the stock is currently trading at 23 times its estimated FY12 earnings. At the current price, the stock does not provide the margin of safety we look for. As such we would advise against taking fresh positions in the stock.

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