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Zee Ent.: Advertising makes a comeback
Apr 21, 2010

Zee Entertainment has announced its FY10 results. The company has reported a 1% YoY and 19% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Topline grows by 1% YoY during FY10. Advertising revenue grows by 1% YoY, while subscription revenue grows by 9% YoY. Revenue from syndication, film distribution and education sales declines by 32% YoY. For 4QFY10, advertising revenue grows a strong 54% YoY.
  • EBITDA margins improve to 28% in FY10, up from 25% in FY09 due to lower programming, operating and staff costs.
  • Other income declines by 22% YoY during the period.
  • Excluding exceptional items, bottomline grows by 19% YoY in FY10 on the back of higher operating margins and lower finance charges.
  • Regional entertainment channels of Zee News acquired with effect from January, 2010, considers the acquisition of 9X general entertainment channel.
  • Declares a special interim dividend of Rs 2 per share.


Consolidated financial snapshot
(Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
Net sales 5,138 6,493 26.4% 21,773 21,966 0.9%
Expenditure 3,936 4,657 18.3% 16,293 15,880 -2.5%
Operating profit (EBDITA 1,202 1,836 52.8% 5,480 6,087 11.1%
EBDITA margin (%) 23.4% 28.3%   25.2% 27.7%  
Other income 639 291 -54.5% 1,572 1,230 -21.7%
Finance charges 509 110 -78.3% 1,339 350 -73.8%
Depreciation 99 56 -43.4% 310 284 -8.4%
Profit before tax 1,233 1,961 59.1% 5,403 6,682 23.7%
Exceptional Item* 65 (11)   1,451 302  
Tax 330 662 100.8% 1,633 2,210 35.3%
Profit after tax/(loss) 968 1,288 33.1% 5,221 4,775 -8.5%
Net profit margin (%) 18.8% 19.8%   24.0% 21.7%  
No. of shares (m)         434.0  
Diluted earnings per share (Rs)         11.0  
Price to earnings ratio (x)         27.6  
* Excess provision for tax in earlier years written back

What has driven performance in FY10?
  • Zee Entertainment witnessed a 1% YoY growth in topline in FY10 despite a 32% YoY decline in revenue from syndication, film distribution and education sales. Advertising revenue grew by 1% YoY, while subscription revenue grew by 9% YoY. It may be noted that the numbers of 4QFY10 and FY10 include the results of the regional general entertainment channel business (R-GEC) acquired from Zee News. Like-to-like numbers were not available.

  • During 4QFY10, advertising revenues made a strong comeback with a 54% YoY growth. They were driven by higher channel shares across the network, a far improved macro environment and a continued preference of advertisers towards television. Subscription revenues from domestic DTH were Rs 683 m during 4QFY10, an increase of 79%YoY.

    Revenue break-up
    (Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
    Advertising Revenue (Net) 2,284 3,517 54.0% 10,593 10,680 0.8%
    % sales 44.5% 54.2%   48.6% 48.6%  
    Subscription Revenue 2,345 2,513 7.1% 9,038 9,824 8.7%
    % sales 45.6% 38.7%   41.5% 44.7%  
    Other Sales & Services 508 463 -8.9% 2,143 1,462 -31.8%
    % sales 9.9% 7.1%   9.8% 6.7%  

  • On the cost front, the company witnessed a 3% (as a percentage of sales) YoY decline in programming and operating cost during 4QFY10. Staff costs (as a percentage of sales) went up by 2% during the period due to an incentive payout to employees.

  • The company's flagship channel Zee TV, had an average weekly channel share of 20% and average weekly gross rating points (GRPs) of 265 during 4QFY10. It had on an average 19 of the top 50 and 30 of the top 100 weekly shows in the period.

  • Zee Entertainment plans to acquire 9X general entertainment channel business from INX Media. Details on the terms of the scheme, share swap ratio, appointed date are yet to be decided.

  • As on 31 March, 2010 Zee Entertainment has a gross debt of Rs 590 m and cash of Rs 5.8 bn.

What to expect?
Our expectation that advertising revenues will recover from the decline experienced during the early part of FY10 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 303, the stock is currently trading at 25 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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