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Zee Ent.: Advt. suffers, subscription robust - Views on News from Equitymaster

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Zee Ent.: Advt. suffers, subscription robust
Apr 23, 2009

Performance summary
  • Topline increases by 18% YoY during FY09.
  • EBITDA margins decline to 25% in FY09.
  • Other income grows by 40% YoY during the fiscal.
  • Bottomline registers a growth of 25% YoY in FY09 on the back of lower tax, in spite of 9% decline at the PBT level.
  • Topline declines by 2% YoY and bottomline declines 7% YoY in 4QFY09.


Consolidated financial snapshot
(Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
Net sales 5,260 5,137 -2.3% 18,354 21,730 18.4%
Expenditure 3,957 3,936 -0.5% 12,931 16,398 26.8%
Operating profit (EBDITA) 1,303 1,202 -7.8% 5,423 5,332 -1.7%
EBDITA margin (%) 24.8% 23.4%   29.5% 24.5%  
Other income 435 639 46.8% 1,138 1,597 40.4%
Finance charges 184 509 176.0% 516 1,331 158.0%
Depreciation 54 99 84.9% 232 304 30.7%
Profit before tax 1,500 1,233 -17.8% 5,813 5,294 -8.9%
Exceptional Item* (26) -   (26) 26  
Tax 430 265 -38.5% 1,627 124 -92.4%
Profit after tax/(loss) 1,044 968 -7.3% 4,161 5,196 24.9%
Net profit margin (%) 19.9% 18.8%   22.7% 23.9%  
No. of shares (m)         434.0  
Diluted earnings per share (Rs)         12.0  
Price to earnings ratio (x)         9.9  
* Provision for diminution in value of investments

What has driven performance in FY09?
  • Zee Entertainment’s flagship channel, Zee TV had a 19% share in the Hindi general entertainment genre. It has 32 out of the top 100 programmes in the genre, and is the 2nd highest among its peers in this regard. Zee Cinema, the company’s Hindi movie channel, is the leader in its category with a 35% share. Zee Café, its English general entertainment channel has a 20% share in the genre. Ten Sports acquired the telecast rights to the Pakistan Cricket Board. The board will refund the payment for the cancelled Indo Pak series. For the movie making segment under Zee Entertainment Studios, the company has decided that going forward, it will move away from the studio model towards commissioning movies in order to save the fixed costs of around Rs 150 m per year.

  • The company witnessed a decline in advertisement revenues during the second half of the year due to lower adspend from the industry and lower ratings due to the cine workers’ strike and the Mumbai terrorist attacks. However, subscription revenues continue to be robust as more subscribers move from analogue cables to digital platforms.

    Revenue break-up
    (Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
    Advertising Revenue (Net) 2,466 2,284 -7.4% 9,307 10,618 14.1%
    % sales 46.9% 44.5%   50.7% 48.9%  
    Subscription Revenue 2,071 2,345 13.3% 7,436 9,014 21.2%
    % sales 39.4% 45.6%   40.5% 41.5%  
    Other Sales & Services 723 508 -29.7% 1,611 2,098 30.2%
    % sales 13.8% 9.9%   8.8% 9.7%  

  • Zee Entertainment is undergoing cost cutting measures. It is renegotiating programming cost and has laid off 350 to 400 people in the last 2 months. The company also expects a 10% to 12% growth in the FY10 bottomline on the back of such measures.

  • The company has provided mark to market derivative losses of Rs 103 m in 4QFY09 and a loss of Rs 444 m for FY09, expensed under finance charges.

  • Zee Entertainment has stalled its capex plans for the time being and is looking at an outlay of Rs 600 to 700 m per year as maintenance capex. The current cash balance is Rs 1.9 bn.

  • During the year, Zee Entertainment’s 100% subsidiary, Asia Today (ATL) had increased its holding in one of its subsidiaries, Asia Business Broadcasting (Mauritius), from 60% to 100% by an additional investment of US$ 56 m. Asia Business Broadcasting owns and operates Zee Studio, an English movie channel for the Indian market.

  • ATL also divested its entire 100% stake in Pan Asia Infrastructure during the year. Pan Asia was meant to create and manage Zee’s media infrastructure in the Middle East. However, due to the current downturn in the Middle East, the company has decided to exit non-core activities. Zee Entertainment made a profit of US$ 4.2 m from the transaction.

What to expect?
While the company has not given any guidance on the advertising front due its linkage with volatile macroeconomic environment, subscription numbers will continue 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.

At the current price of Rs 119, the stock is currently trading at 9.9 times its FY09 EPS (without excluding minority interest). As such, the valuation is attractive given the long operational track record of Zee Entertainment. We maintain our view on the company.

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