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Zee Telefilms: Investing for growth - Views on News from Equitymaster

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Zee Telefilms: Investing for growth
Apr 28, 2006

Performance summary
Zee Telefilms (Zee), India’s leading broadcaster, announced its March quarter and full year results yesterday. While the topline has managed a decent growth for the quarter and the full year, the operating margins and consequently the profitability of the company have remained under pressure. This should be viewed in the backdrop of the fact that Zee is the midst of an investment phase, which has led to the company making some serious investments in its new businesses.

Consolidated snapshot…
(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Net Sales 3,600 3,966 10.2% 12,754 14,233 11.6%
Expenditure 2,374 3,206 35.0% 8,438 11,531 36.7%
Operating Profit (EBDITA) 1,226 761 -37.9% 4,316 2,702 -37.4%
EBITDA margin (%) 34.0% 19.2%   33.8% 19.0%  
Other income 196 125 -36.0% 556 642 15.4%
Interest 80 21 -74.3% 207 242 16.9%
Depreciation 95 102 6.9% 329 391 19.1%
Profit before tax 1,247 764 -38.7% 4,337 2,711 -37.5%
Extraordinary items (47) -   (140) 19  
Tax 274 89 -67.7% 1,023 516 -49.6%
Profit after Tax/(Loss) 926 676 -27.0% 3,174 2,214 -30.2%
Net profit margin (%) 25.7% 17.0%   24.9% 15.6%  
No. of Shares (m) 412.5 412.6   412.5 412.6  
Diluted earnings per share         5.4  
Price to earnings ratio (x)         47.5  

Company profile
Zee is India’s first private TV channel covering nearly 30% of Indian television homes. It reaches an estimated over 300 m people worldwide (including international viewership). 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. Also, venturing into production of films, selling its distribution rights and the DTH (Direct-To-Home) services should augur well for the company in the long-term.

What has driven performance in 4QFY06?
Topline holds: Advertisement and subscription are the two key components that drive Zee’s topline. These formed 49% and 44% of the company’s net sales respectively with the balance contributed by other sales and services, which include revenues from film production and distribution, education sales and sale of set top boxes. This segment grew by 45% YoY during the quarter, albeit on a small base (see table below).

Revenue break-up
  4QFY05 4QFY06 Change FY05 FY06 Change
Advertisement 1,751 1,956 11.7% 5,698 6,445 13.1%
Subscription 1,674 1,757 5.0% 6,533 7,002 7.2%
Other sales & services 175 253 44.5% 523 786 50.3%
Total 3,600 3,966 10.2% 12,754 14,233 11.6%

As far as the key growth drivers are concerned, while advertisements continued to register a robust growth rate of 12% YoY for the quarter (13% YoY for FY06), the growth in subscription revenues have been a tad below expectations. These have grown by 5% for the quarter and 7% for the full year. A further breakup of this revenue stream reveals that domestic subscription revenues during the quarter having been lower by 1% YoY while the international markets have increased by 9% YoY. However, for FY06, these have settled with 6% YoY and 8% YoY growth respectively. As at the end of FY06, international and domestic subscriptions have an equal share in the subscription revenues pie.

Margins remain under pressure: Zee’s operating margins continued to remain under pressure as the company has continued on its investment binge by making initial investments of Rs 525 m in its new ventures like Zee Telugu, Zee Sports, Zee Smile, etc, which have been expensed in the current quarter. These have put pressure on the company’s operating performance, which has fallen by 38% YoY during the quarter. For similar reasons i.e. initial investments of nearly Rs 1.5 bn into the new ventures, development and expansion of the same, and the consequent expensing of the costs, the company’s FY06 operating profit has taken a hit with this treading lower by 37% YoY.

Costs breakup
(as % of net sales) 4QFY05 4QFY06 FY05 FY06
Transmission & Prog. Costs 40.3% 52.9% 39.9% 51.7%
Staff Costs 6.8% 6.5% 6.7% 7.4%
Other expenses 18.9% 21.4% 19.5% 21.9%
Total 66.0% 80.8% 66.2% 81.0%

No respite for bottomline yet: The above developments finally were reflected in the 27% YoY drop in profits for the quarter and 30% decline in profits for the full year. As far as the other income, interest and depreciation costs for the full year is concerned, these increased by 15%, 17% and 19% respectively over FY05.

What to expect?
At Rs 255, the stock is trading at a price to earnings multiple of 47.5 times its FY06 earnings. We remain positive on the future prospects of the company considering the various initiatives that it has been taking over the past few quarters. The recent image/brand makeover by the company along with efforts to improve content quality seems to have started yielding positive results for the company. This can be gauged from the fact that Zee TV, the company’s flagship channel now occupies a comfortable second position in the general entertainment category and continues to gain market share, as per the company press release. Further, the company now has 0.9 m DTH subscribers, which augurs well for its subscription revenues. It must also be noted that the de-merger and the consequent listing of its various businesses is a move in the right direction by the company. We believe that Zee Telefilms is well placed to capitalise on the growth opportunities existent in the media sector over the next 2 to 3 years.

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