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Zee: Steadfast progress - Views on News from Equitymaster
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  • Apr 28, 2003

    Zee: Steadfast progress

    Zee Telefilms, the country's largest private sector media major, has posted a 17% rise in net profit and a 11% increase in revenues for the full year ended March 2003. Despite a sharp fall in other revenues i.e. education and the like, the robustness in subscription receipts has benefited the company significantly.

    Zee Telefilms (Consolidated)
    (Rs m) 4QFY02 4QFY03 Change FY02 FY03 Change
    Sales 3,158 3,685 16.7% 10,762 11,993 11.4%
    Other Income 230 238 3.5% 792 773 -2.4%
    Expenditure 2,426 2,488 2.5% 7,720 8,158 5.7%
    Operating Profit (EBDIT) 732 1,197 63.5% 3,042 3,836 26.1%
    Operating Profit Margin (%) 23.2% 32.5%   28.3% 32.0%  
    Interest 164 155 -5.3% 808 764 -5.4%
    Depreciation 74 95 29.8% 215 303 41.0%
    Profit before Tax 725 1,185 63.4% 2,812 3,541 26.0%
    Extraordinary items - (386) - - (386) -
    Tax 197 259 31.8% 866 885 2.2%
    Profit after Tax/(Loss) 528 539 2.1% 1,946 2,270 16.7%
    Net profit margin (%) 16.7% 14.6%   18.1% 18.9%  
    No. of Shares (m) 412.5 412.5   412.5 412.5  
    Diluted Earnings per share (Rs)* 5.1 5.2   4.7 5.5  
    P/E (x)         12.7  

    Zee TV is largely dependent on advertising and subscription based revenues for growth (98% of consolidated topline in FY03). Revenue growth in 4QFY03 is on the higher side compared to last three quarters in FY03. Just to put things in perspective, consolidated revenue growth in 1QFY03, 2QFY03 and 3QFY03 was 7%, 11% and 10% respectively. The fillip in March quarter topline not only came from a 76% rise in access revenues but also from the rise in broadcasting revenues. That said, this includes revenues from Padmalaya Telefilms that was merged into the company in September 2002 and ETC Networks. As expected, income from advertising fell by 16% in 4QFY03 (down 5% in FY03) in light of the cricket world cup that was broadcasted by Sony TV.

    Consolidated revenue mix…
    (Rs m) 4QFY02 4QFY03 Change FY02 FY03 Change
    Content & broadcasting 2,712 3,207 18.3% 9,220 10,373 12.5%
    PBIT margin (%) 29.0% 35.1%   33.6% 35.6%  
    Access 319 563 76.3% 1,303 1,823 39.9%
    PBIT margin (%) -30.7% -15.1%   -9.1% -4.6%  
    Education 34 51 49.9% 274 163 -40.3%
    PBIT margin (%) -169.1% 112.3%   -64.7% -47.8%  
    Others 237 2 -99.3% 237 38 -84.2%
    PBIT margin (%) 11.4% 106.3%   11.4% 6.6%  
    Total 3,303 3,823 15.7% 11,034 12,397 12.4%
    PBIT margin (%) 19.9% 28.8%   25.6% 28.5%  

    Operating margins have also shown a marked improvement during 4QFY03 and FY03, as Zee TV continued to reap benefits from higher subscription based income. Overall subscription revenues, including domestic and international businesses, registered an increase of 54% in 4QFY03. Incremental revenues tend to add directly to the company's profitability. This was further augmented by the hike in charges by Zee Turner in January 2003. Moreover, Zee has reduced its workforce by 350 in FY03, which has resulted in employee related costs falling from 9% of total expenses in 4QFY02 to 8% in the recent quarter.

    Though consolidated interest costs fell by 5% in FY03, higher charges towards depreciation and extraordinary items pertaining to write off of previous years have lowered growth in consolidated net profits. Excluding the impact of the same, net profit growth is actually at 37% in FY03.

    The stock is currently trading at Rs 70 implying a P/E multiple of 12.7x FY03 earnings (12x FY04E earnings). While the results are in line with 'The Quantum View' estimates for FY03, we expect weakness in advertising revenues to continue in FY04 as well. This is not only because of the slowdown in the economy that has forced major players like Colgate and Hindustan Lever to curtail adspend, but also due to the fact that Zee is yet to get its act right on the programming front. But the company expects advertising revenues to grow at 12%-15% over the next three years.

    On the subscriptions front, it is a well-known fact that the deadline for the implementation of the conditional access based regime (CAS) for the four metros has been finalised as July 14th. We expect this transition to benefit over the long run. As against just 10% of subscription revenues, broadcaster will then have a larger chunk of monthly cable subscriptions post the CAS. Zee has announced its pay bouquet cost at Rs 55 in the CAS environment. The pay bouquet would comprise 15 channels including 11 channels of Zee, two channels of Turner (CNN, Cartoon Network), CNBC and Reality TV channel. Overall, we have factored in a conservative growth in advertisement revenues and a strong growth in access charges. Amidst positives, higher debtor days (155 in FY03), large sums due from the promoter group and poor track record increases the risk profile of the stock from a retail investor's perspective.



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