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Zee Ent : Slowing economy hurts ad revenue
Jan 30, 2012

Zee Entertainment has announced the results for the third quarter and nine month ended December 2011 (3QFY12). The company has reported 8.5% YoY de-growth in sales and 13% YoY fall in net profits. Here is our analysis of the results.

Performance summary
  • The company's topline registered a de-growth of 8.5% YoY during the quarter due to poor performance of advertising segment which de-grew by 10% YoY over the same quarter last year.
  • Operating margins however increased by almost 1.5% to 28.6% during the quarter. In the same quarter last year, these margins stood at 27.2%.
  • Other income increased by 46% YoY during the quarter as well as during the 9 month period ended December 2011.
  • Net income fell by 10% during the quarter. However, for the 9 months period, net profits were up by 14.5% YoY.

Financial performance snapshot
(Rs m) 3QFY11 3QFY12 Change 9MFY11 9MFY12 Change
Net sales 8,249 7,548 -8.5% 22,134 21,715 -1.9%
Expenditure 6,008 5,389 -10.3% 16,138 15,920 -1.4%
Operating profit (EBDITA) 2,241 2,160 -3.6% 5,997 5,796 -3.4%
EBDITA margin (%) 27.2% 28.6%   27.1% 26.7%  
Other income 232 340 46.3% 598 874 46.1%
Interest 24 182 668.8% 79 268 239.2%
Depreciation & amortisation 78 74 -4.6% 196 241 23.2%
Profit before tax 2,372 2,243 -5.4% 6,320 6,160 -2.5%
Exceptional items - -   328 -  
Tax 818 867 6.0% 2,329 1,882 -19.2%
Profit after tax before minority 1,555 1,376 -11.5% 3,663 4,277 16.8%
Share of minority (45) (17)   (83) (13)  
Profit after tax 1,600 1,393 -12.9% 3,746 4,290 14.5%
Net profit margin (%) 19.4% 18.5%   16.9% 19.8%  
No. of shares (m)         961.7  
Diluted earnings per share (Rs)*         6.4  
P/E (x)         18.7  
* On a trailing 12-months basis

Note: Operating revenues and expenditure for Q3 FY2012 are not comparable to those for Q3 FY2011 because of the change in accounting treatment of domestic subscription revenues. These revenues are now being reported net of expenses. This is because Media Pro, a joint venture, pays subscription revenues to ZEE net of expenses.

What has driven performance in 3QFY12?
  • Zee Entertainment's revenues fell by 8.5% during the quarter. This was largely due to a dismal performance from the advertising segment which de-grew by almost 10% in 3QFY12. Advertising contributes to more than 50% of the total revenues of Zee.
    Revenue Break up
    (% of sales) 3QFY11 3QFY12 Change 9MFY11 9MFY12 Change
    Advertising Revenue 4,398 3,955 -10.1% 12,288 11,692 -4.9%
    % sales 53.3% 52.4%   55.5% 53.8%  
    Subscription Revenue 2,818 3,262 15.7% 8,169 9,223 12.9%
    % sales 34.2% 43.2%   36.9% 42.5%  
    Other sales and services 1,033 332 -67.9% 1,677 800 -52.3%
    % sales 12.5% 4.4%   7.6% 3.7%  

  • Subscription revenue registered a growth of 16% during the quarter. For the 9 month period, subscriptions grew by 13% YoY.

  • Among the operating expenditure, while programming costs were down by 18% during the quarter, employee and selling costs were up by almost 6%. Overall, the operating expenditure was down by 10% for the quarter and by 1.4% for the 9 month period.

  • Other income grew by 46% YoY during this quarter while the interest costs were up by a whopping 669%. From an interest outgo of Rs 24 m in the same period last year, the outgo increased to Rs 182 m for 3QFY12.

  • The company's flagship channel Zee TV recorded average channel share of 16.5% and average weekly Gross Rating Points (GRPs) of 158. The number of Zee shows that featured in the top 100 went down from 17 in the previous quarter (2QFY12) to 15 in the current quarter.

What to expect?
At the current price of Rs 121, the stock is trading at a multiple of 12 times our estimated FY14 earnings. Digitization boost helped Zee register some growth in subscription revenues but advertising revenues were a big letdown. To make their business models more sustainable, the television companies are constantly trying to reduce their dependence on advertisements. But as of now, the share of advertisements for Zee is a substantial 50%. Thus any slowdown in the economy is likely to impact the revenues adversely. Also, the losses from sports business are expected to continue for some more time. We maintain our Sell view on the stock.

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