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Zee: Ready for takeoff?

Apr 30, 2002

With increasing competition from Star and Sony, Zee has been facing one of the toughest times. This is reflected from a flat revenue growth on a consolidated basis for the fourth quarter (down from a 10% growth recorded in 3QFY02). On a standalone basis Zee's revenues dropped by 12%. A 95% jump in earnings for the fourth quarter was contributed by a sharp improvement in operating margins, lower interest and depreciation cost.

Zee Telefilms (Consolidated)
Rs m) 4QFY01 4QFY02 Change FY01 FY02 Change
Sales 2,975 3,008 1.1% 9,763 10,612 8.7%
Other Income 217.1 235.1 8.3% 596.8 796.9 33.5%
Expenditure 2,419 2,098 -13.2% 7,266 7,392 1.7%
Operating Profit (EBDIT) 557 910 63.4% 2,498 3,220 28.9%
Operating Profit Margin (%) 18.7% 30.2%   25.6% 30.3%  
Interest 345.4 291.6 -15.6% 703.1 935.7 33.1%
Depreciation 76.4 53.4 -30.1% 179 195 8.9%
Profit before Tax 352 800 127.1% 2,212 2,886 30.5%
Tax 44.4 200.8 352.3% 468.9 869.5 85.4%
Profit after Tax/(Loss) 308 599 94.6% 1,743 2,017 15.7%
Net profit margin (%) 10.3% 19.9%   17.9% 19.0%  
No. of Shares (m) 412.5 412.5   412.5 412.5  
Diluted Earnings per share* 3.0 5.8   4.2 4.9  
P/E (at current price)   29.8     35.4  
*(annualised)            

To compensate the impact of sluggish advertisement revenues (8% decline in FY02), the company took several initiatives. These include converting its leading channels Zee TV and Zee News into pay mode with effect from June 2001. Consequently, its pay revenues recorded a growth of 225% in FY02 to Rs 987 m, accounting for 9% of total revenues. In the coming year, the company plans to focus on regional channels under the brand 'Alpha' to tap the full potential of the pay market. Total subscription fees of the company increased by 66% in FY02. Siticable registered a growth of over 40% in both revenues and operating profits during the year. In order to maintain the healthy growth in revenues in the coming year, the company started to provide Internet over cable in Bangalore and Mysore.

To strengthen its content business, it launched many new programmes on prime time on its flagship channel, Zee TV. Some of the new launches include Ramayana, Saanjhi and Jeena Isi Ka Naam Hai. During the beginning of fiscal 2003, Zee launched three major shows. The major among them was Khelo Number Khelo, a game show interlinked with Playwin games, India's first online lottery. Advertisement revenues of the company however, remained under pressure during the fourth quarter as TRP ratings have not shown any improvements. The management has given the guidance for weak advertisement revenues in FY03.

Zee's international business showed health growth of 11% in revenues. Its US and UK subsidiaries posted strong rise in operating margins while its African subsidiary revenues declined by 42%. In April 2002, the company has also started a separate encrypted broadcast beam for Zee TV in Middle East, Pakistan, Bangladesh and Nepal to strengthen its advertisement revenues and enhance pay revenues. The separate beam allows the company to tailor content to coincide with prime time in different markets.

Rs m) 4QFY01 4QFY02 Change FY01 FY02 Change
Sales 1,198 1,053 -12.1% 3,847 3,941 2.5%
Other Income 166.3 211.8 27.4% 511.1 765.9 49.9%
Expenditure 858 858 0.0% 2,484 2,669 7.4%
Operating Profit (EBDIT) 340 195 -42.7% 1,363 1,272 -6.6%
Operating Profit Margin (%) 28.4% 18.5%   35.4% 32.3%  
Interest 82.3 143.4 74.2% 211.4 590.3 179.2%
Depreciation 13.5 20.5 51.9% 42.7 70.1 64.2%
Profit before Tax 411 243 -40.8% 1,620 1,378 -14.9%
Tax -62.3 31.6 -150.7% 237.7 332.5 39.9%
Profit after Tax/(Loss) 473 211 -55.3% 1,382 1,045 -24.4%
Net profit margin (%) 39.5% 20.1%   35.9% 26.5%  
No. of Shares (m) 412.5 412.5   412.5 412.5  
Diluted Earnings per share* 4.6 2.0   3.3 2.5  
P/E (at current price)   84.4     68.3  
*(annualised)            

Among other new developments, the company has started uplinking some of its channels from India including Zee News and channels under the 'Alpha' brand. This will help the company in improving revenues and lowering of cost due to better operating efficiencies. Its operating margins have already shown a sharp rise to 30% during the fourth quarter from 19% in the comparable previous quarter. The margins are likely to rise further once the company implements corporate restructuring plans whereby it aims to reduce the number of subsidiaries from 23 to 12 by 3QFY03. Its acquisition of stake in ETC Network and Padmalaya Telefilms is yet to be completed and results of the same would be reflected only after the June quarter of FY03.

At current market price of Rs 173, Zee is trading at a P/E of 35x FY02 earnings. The Zee Network recorded a discouraging 16% growth in profits for FY02. The coming year is also likely to be challenging for the network as the new programmes launched by the channel is yet to make any impression. Its regional channels and international subsidiaries have however made a strong turnaround in the current year. The growth potential of subscription fees is also immense. The company's fortunes however, depend on advertisement revenues which still forms 60% of total revenues. Consequently, earnings growth in FY03 depends on whether the channel is able to bring an improvement in TRP ratings.


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