Zee Telefilms has outperformed the Sensex by wide margins since the beginning of 2002. While the Sensex gained 14%, Zee’s stock price soared by 47% in a period of just two months. During this period, Zee initiated several restructuring measures, which infused positive buying interest in the stock.
The company entered into a joint venture with Turner International to manage marketing & distribution for a bouquet of channels of the two companies. The JV will also market third party channels in India and South Asia. In order to increase its presence in hindi music genres, Zee acquired a 57% stake in ETC Networks for Rs 250 m.
The company is also going through a transition phase with its decision to merge 11 subsidiaries. The subsidiaries, which are likely to be merged with the company, include E-Connect India, PATCO, Elzee, Kaveri Entertainment, Dakshin Media, Zee Multimedia Worldwide and its foreign subsidiaries in US, Hong Kong, Mauritius and South Africa. This exercise would help the company in better utilization of resources and simplicity in structure from the viewpoint of tax and accounting laws. The merger would be completed in the next 6-8 months. Reducing the number of subsidiaries would also aid Zee in attracting potential strategic investors.
In a move to improve its TRP ratings, the company plans to leverage on the online lottery show. It will launch a slew of programs woven around the lottery show timings and hopes to garner higher viewer ship out of the live telecast of the lottery draws. Zee is expected to air up to 16 draws a week during the prime time slot of 7 to 11 pm to attract viewers. Along with this, the channel aims to launch number of new programs including a celebrity show, comedy and game shows. The company is also exploring the options of sourcing content from some top rate production houses like Balaji Tele and New Delhi Television (NDTV). Even though, Zee’s strategies to improve its ratings look attractive, it depends on the success of the online lottery business, which is relatively new in India.
While on the one hand the company is facing tough conditions for its advertisement revenues, its subscription fees are growing at a strong rate. This revenue stream accounted for 41% of its total revenues in the first nine months of FY02. With a bouquet of 19 channels spread across different languages and segments, Zee is better positioned to generate higher pay revenues. However, the levy of service tax on cable operators could trim its subscription revenues in FY03.
On a consolidated basis, the stock is trading at a little over 30x FY02 projected earnings. The company’s valuation is more or less in line with the valuations of the software giant, Infosys, which is trading at a P/E of 33x FY02 projected earnings (Infy’s profits are expected to grow by 30% in FY03).
Zee’s earnings in the first nine-months of FY02 have declined by a marginal 1%. The company needs to grow its profits by at least 30% in FY03 to maintain similar kind of valuations. This looks difficult considering its current ratings. As per the latest TAM (Television Audience Measurement) data for February 10-16, 2002, Zee's rating is 5, compared with Sony’s 10 and Star’s 18. However, if it speeds up its restructuring efforts, cost savings would be higher which would help the company in maintaining operating margins of about 30%. This coupled with growing subscription fees is expected to fuel the company’s consolidated earnings by about 21% in FY03. Growth in advertisement revenues and consequently higher profit growth depends on the company’s ability to bring back its ratings.
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