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Zee Entertainment: Hits a rough patch - Views on News from Equitymaster

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Zee Entertainment: Hits a rough patch

Jan 22, 2009

Performance summary
  • Topline increases by 5% YoY during 3QFY09.
  • EBITDA margins decline to 22% in 3QFY09.
  • Other income grows by 69% YoY during the quarter.
  • Bottomline registers a decline of 26% YoY in 3QFY09 owing to a decline in operating margins and increased finance charges.
  • Bottomline, excluding incremental other income of around Rs 160 m and exceptional item, declines by 42% YoY in 3QFY09.
  • Topline grows by 27% YoY and bottomline (excluding incremental other income and exceptional items) declines 8% YoY in 9mFY09.

Consolidated financial snapshot
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Net sales 5,182 5,456 5.3% 13,084 16,592 26.8%
Expenditure 3,613 4,256 17.8% 8,998 12,462 38.5%
Operating profit (EBDITA) 1,569 1,200 -23.5% 4,086 4,130 1.1%
EBDITA margin (%) 30.3% 22.0% 31.2% 24.9%
Other income 238 401 68.9% 675 959 42.0%
Finance charges 167 386 130.8% 370 823 122.3%
Depreciation 47 84 79.3% 169 205 21.4%
Profit before tax 1,592 1,132 -28.9% 4,223 4,062 -3.8%
Exceptional Item** - 26 - 1,389
Tax 458 318 -30.5% 1,304 1,222 -6.3%
Profit after tax/(loss) 1,135 840 -26.0% 2,918 4,229 44.9%
Net profit margin (%) 21.9% 15.4% 22.3% 25.5%
No. of shares (m) 434.0
Diluted earnings per share (Rs)* 12.6
Price to earnings ratio (x)* 7.7
*On trailing twelve months earnings ** Includes tax refund and reversal of diminution in investments

What has driven performance in 3QFY09?
  • Consolidated financials of Zee Entertainment include the results of Taj TV, ETC Networks and Zee Turner Limited.

  • Zee TVís ratings for 3QFY09 were adversely affected by the cine employees strike. The macro economic slowdown led to poor festival season spends by advertisers. Excluding the strike period, the channel delivered 201 weekly GRPs on an average during the quarter and attained a channel share of 18% in the Hindi General Entertainment Channel (GEC) genre. Zee TV had a weekly average of 15 out of the top 50 programs and 31 out of the top 100 programs. Zee Cinema continues to lead the Hindi cinema genre with 34% channel share in the quarter. During the quarter, the company initiated a major deactivation drive to enforce recovery of dues from cable operators. This impacted the sequential growth of domestic cable subscription revenues in the quarter. As a result, the company witnessed 2% growth in its advertising revenue and 17% growth in subscription revenue.

    Revenue break-up
    (Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
    Advertising Revenue (Net) 2,638 2,684 1.7% 6,877 8,334 21.2%
    % sales 50.9% 49.2% 52.6% 50.2%
    Subscription Revenue 1,950 2,274 16.6% 5,255 6,669 26.9%
    % sales 37.6% 41.7% 40.2% 40.2%
    Other Sales & Services 594 497 -16.3% 952 1,590 67.1%
    % sales 11.5% 9.1% 7.3% 9.6%

  • The operating margins were largely impacted due to higher carriage fees paid to cable operators. As a result selling and other expenses increased from 14.5% (as a % of sales) to 21.8%.

  • As per the management, other income includes interest on loan given to group companies. As the figure is not available, we have assumed the incremental amount to the tune of Rs 160 m in 3QFY09 as exceptional.

  • Finance charges include losses arising from foreign exchange derivates to the tune of Rs 116 m for 3QFY09 and Rs 340 for 9mFY09.

  • Zee Entertainment had received a refund of tax from the Income Tax department in 2QFY09. Though disputed by IT department in the appeal, the company had written back the excess tax provision of Rs 792 m. For 9mFY09, Rs 1,364 m has been written back. We have treated the sum as an exceptional item.

What to expect?
The company has revised its full-year FY09 outlook downwards to 15% YoY for advertising and 23% YoY for subscription revenues. 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 companyís practice of accounting for interest on loans to group companies, write back of diminution in investments and tax refund does not represent the companyís true earning power. Hence, we have adjusted the EPS downwards. As such, at the current price of Rs 98, the stock is currently trading at 10.8 times its trailing 12 months EPS (adjusted). We shall soon update our earnings forecast.

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