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ZEEL: Mixed show - Views on News from Equitymaster
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ZEEL: Mixed show
Apr 23, 2007

Introduction to results
Zee Entertainment Enterprise (ZEEL) announced the results for the fourth quarter and full year ended March 2007. The numbers were indicative of a mixed performance as the topline for the said quarter reported a decline of 3.4% as compared to the same period last year. However, its operating profits and net profits for the quarter rose 25% YoY and 19% YoY respectively. The full year numbers for FY07 were also subdued as the topline showed a YoY decline of over 2%. However, the operating and net profits over the same period rose by 20% YoY and 3% YoY respectively during the same period.

Consolidated ZEEL financial performance
(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change
Net sales 3,966 3,844 -3.1% 14,771 14,412 -2.4%
Expenditure 3,205 2,893 -9.7% 12,117 11,224 -7.4%
Operating profit (EBIDTA) 762 951 24.9% 2,653 3,188 20.1%
Operating profit margin (%) 19.2% 24.8%   18.0% 22.1%  
Other income 125 177 40.8% 681 630 -7.5%
Depreciation 102 56 -45.1% 360 228 -36.7%
Interest 21 8 -59.0% 188 220 16.9%
Profit before tax 765 1,064 39.1% 2,787 3,370 20.9%
Tax 89 365 312.0% 547 964 76.3%
Minority interest (8) 95 -1339.0% 212 117 -44.7%
Profit after tax/ (loss) 669 795 18.8% 2,452 2,524 2.9%
Net profit margin (%) 16.9% 20.7%   16.6% 17.5%  
No. of shares (m)         434  
Diluted earnings per share (Rs)*         6  
P/E ratio (x)*         46  
*Trailing 12 months earnings

What is the company’s business?
Zee is India’s first privately owned TV channel covering nearly 30% of the country’s television homes. It reaches an estimated over 300 m people worldwide. Though the channel did not face competition in the initial years of its launch, it has been facing tough times in recent years owing to the competition from other channels like Star and Sony. With an effort at de-risking its existing business model, Zee has been spreading its wings internationally through its wholly owned subsidiaries, which would help it in increasing its subscription-based revenues.

The company recently underwent a restructuring exercise wherein Zee Telefilms (now ZEE Entertainment) was demerged into three entities effective December 18, 2006. As per the ‘Scheme of Arrangement’, the company demerged its cable distribution business into Wire & Wireless India Ltd. (WWIL) the regional and news broadcasting business into Zee News Ltd. (ZNL) and the DTH business into Dish TV.

What has driven performance in 4QFY07?
Core business drives growth: The growth of the company’s business during the fourth quarter of FY07 was mainly driven by the growth in its core business segment i.e. content and broadcasting. The segment is the major contributor to the company’s revenues, accounting for 98% of its total revenues. The segment saw 8% YoY growth during the quarter despite the Cricket World Cup and rising competitive pressures from its competitors. For the full year ended FY07, the segment registered a whopping 19% YoY growth. While the revenues from the education segment also clocked a robust performance, they did not have a significant impact on the overall profitability owing to their small share in the overall revenues of the company.

Segmental performance
Segment wise performance 4QFY06 4QFY07 Change FY06 FY07 Change
Content and broadcasting 3,456 3,748 8.4% 11,891 14,109 18.7%
As % of revenues from operations 87.1% 97.5%   80.5% 97.9%  
EBIDTA margins 17.5% 23.7%   20.9% 20.8%  
Access 618.1 -   2,927 -  
As % of revenues from operations 15.6% 0.0%   19.8% 0.0%  
EBIDTA margins 7.5% 0.0%   -5.5% 0.0%  
Film production/distribution - -   12 -  
As % of revenues from operations 0.0% 0.0%   0.1% 0.0%  
EBIDTA margins 0.0% 0.0%   -334.8% 0.0%  
Education 69.6 96.4 38.5% 163 302 85.9%
As % of revenues from operations 1.8% 2.5%   1.1% 2.1%  
EBIDTA margins 13.2% 7.8%   2.3% 6.8%  
Total revenue 4,144 3,844 -7.2% 14,992 14,412 -3.9%
Less: Inter segmental revenues 178 -   221 -  
Net revenues 3,966 3,844 -3.1% 14,771 14,412 -2.4%

Costs under control: Despite a negative growth in its topline both for the current quarter as also the full year, the company managed to grow its profits mainly on account of a reduction in its key cost areas. The program and operating costs that constituted over 40% of its revenues saw a reduction of 22% as compared to last year. While savings in these costs drove up operating profits for the quarter, the full year operating profits were driven up mainly on account of a broad based cost optimisation, particularly the selling expenses that were down 17% YoY.

Cost breakup
Expenditure 4QFY06 4QFY07 Change FY06 FY07 Change
Program and operating costs 2,099 1,632 -22.3% 7,591 7,353 -3.1%
As a % of revenues from operations 52.9% 42.4%   51.4% 51.0%  
Staff costs 259 292 12.7% 1,089 1,008 -7.4%
As a % of revenues from operations 6.5% 7.6%   7.4% 7.0%  
Selling and other expenses 847 969 14.4% 3,438 2,863 -16.7%
As a % of revenues from operations 21.4% 25.2%   23.3% 19.9%  
Total expenditures 3,205 2,893 -9.7% 12,118 11,225 -7.4%
As a % of revenues from operations 80.8% 75.3%   82.0% 77.9%  

Factors aiding bottomline: The drivers for the growth in the company’s’ bottomline for 4QFY07 were growth in other income, reduction in depreciation and finance charges. These boosted the company’s bottomline registering a 39% growth as compared to the corresponding quarter of FY06. While the bottomline for the full year also ended higher by 21% YoY, it was mainly attributable to the lower interest outgo.

Positive pointers: ZEEL has made consistent efforts over the past few quarters to drive up the share of the new viewers as also for the existing viewers. The company’s efforts are bearing fruit as is evident form the fact that the company maintained its ratings across time bands and averaged 211 gross rating points (GRPs) for the quarter. Also, its average channel share stood at 23% in the general entertainment category. For the quarter, ZEE Café’s market share surpassed that of Star World for 10 of last 13 weeks.

What to expect?
At the current market price of 267, the stock is trading at 46 times its trailing twelve months earnings. ZEEL has had a rather checkered quarter in 4QFY07 that saw a dip in its revenues and at the same time improved operating and net profit margins due to cost efficiencies. Competition from the sports channels (owing to cricket world cup season) and intense competitive activity from its peers impacted the company revenues to an extent. The concentrated efforts of the company at reaching out to new viewers as also capturing a larger viewership share when coupled with a growth in subscriber based revenues give us a sense of comfort with regard the future prospects of the company.

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