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Zee Ent : Advertising revenue leads the way
Jul 9, 2014

Zee Entertainment has announced the results for the fourth quarter of the financial year 2013-14 (4QFY14). The company has reported a 20.2% YoY growth in sales and a 21.1% YoY growth in profit after tax. Here is our detailed analysis of the results.

Performance summary
  • Zee's sales grew by 20.2% YoY in 4QFY14. The growth in sales was driven by a 21.5% YoY growth in advertising sales; while subscription revenues grew by a meager 2% YoY. Other sales and services, which include syndication sales (pertaining to sports channels), film distribution, play out & transmission services, commission on sales; which contributed 9.7% to the total sales, increased by 270% YoY.
  • The company managed to curtail its programming and operating costs. These decreased from 74.9% of total sales in 4QFY13 to 73.1% in 4QFY14. This restricted operating expenditure growth to 17.3%; which is lower than the sales growth. Consequently, operating profit increased by 28.6% YoY; resulting in a 1.8% increase in EBITDA margin from 25.1% to 26.9% in 4QFY14.
  • Other income for 4QFY14 decreased by 71.1% YoY. This, along with significantly higher depreciation and interest costs dampened the gains made due to the operating margin expansion. Thus growth in profit after tax was restricted to 21.1% YoY during the quarter.
  • The company has declared a dividend of Rs 2 per share for the year FY14, implying a dividend yield of 0.7%.
Financial performance snapshot
(Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
Net sales 9,643 11,588 20.2% 36,996 44,217 19.5%
Expenditure 7,220 8,472 17.3% 27,453 32,174 17.2%
Operating profit (EBDITA) 2,423 3,116 28.6% 9,543 12,043 26.2%
EBDITA margin (%) 25.1% 26.9% 1.8% 25.8% 27.2%  
Other income 538 155 -71.1% 1,461 1,807 23.7%
Interest 28 70 147.2% 86 158 84.6%
Depreciation & amortisation 115 189 65.1% 399 501 25.7%
Profit before tax 2,818 3,012 6.9% 10,519 13,190 25.4%
Exceptional items - -   - -  
Tax 1,014 850 -16.2% 3,338 4,291 28.5%
Profit after tax before minority 1,804 2,162 19.9% 7,182 8,900 23.9%
Minority interest (2) (12)   (24) (19)  
Share of profit & loss of associate (10) 2   (10) 2  
Profit after tax 1,796 2,176 21.1% 7,196 8,921 24.0%
Net profit margin (%) 18.6% 18.8%   19.4% 20.2%  
No. of shares (m)         960  
Basic reported earnings per share (Rs)         9.3  
P/E (x)*         31.0  
*on a trailing twelve month basis

What has driven performance in 4QFY14 and FY14?
  • Zee's sales growth during 4QFY14 was driven by a higher advertising sales growth of 21.5% YoY, which as per the company is a strong outperformance as compared to the industry during the same period. The growth in subscription, however, was lower at just 2%.

  • Geography wise, domestic subscription revenues stood at Rs 3,344 m during the quarter, and international subscription at Rs 1,292 m.

  • Zee reported a robust growth in operating profits of 28.6% YoY during the quarter. Operating margin thus improved from 25.1% in last year's corresponding quarter to 26.9% in 4QFY14. Profit after tax was up by 21.1% YoY during the quarter.

  • The company's flagship channel; ZEE TV had a share of 17.1% in the Hindi General Entertainment Channels (GEC) space during the quarter. Within that, the channel's market share was even better in the prime time band with a market share of 19.3%.

  • ZEE's performance in FY14 was equally satisfying with 19.5% YoY sales growth. For the full year FY14, subscription revenue grew at a better pace of 11% YoY; while advertising revenue grew by 21.2% YoY.

  • Operating profit grew by 26.2% YoY; resulting in 1.4% YoY increase in margin to 27.2% in FY14. Consequently, net profit grew by 24% YoY.

    Revenue Break up
    (% of sales) 4QFY13 4QFY14 Change FY13 FY14 Change
    Advertising Revenue 4,792 5,824 21.5% 19,639 23,801 21.2%
    % sales 49.7% 50.3%   53.1% 53.8%  
    Subscription Revenue 4,546 4,635 2.0% 16,234 18,022 11.0%
    % sales 47.1% 40.0%   43.9% 40.8%  
    Other sales and services 305 1,129 270.0% 1,123 2,394 113.2%
    % sales 3.2% 9.7%   3.0% 5.4%  
What to expect?
Zee Entertainment has maintained its position as of one of the leading GECs since years. Advertising growth during this quarter was what drove the top line; and also seems to have outperformed industry growth. Despite some delays, the roll out of digitization is a positive development for the company and will provide it with new growth opportunities. While it will lead to fragmentation of audiences, the company is also looking at this as an opportunity to create new products for specific segments. It also sees advertising revenues grow in healthy double digits over the next many years. The company continues to invest in its sports business with a medium to long term perspective. While it expects the losses in the sports business to continue for some more time, it hopes to see an improved performance in the longer term.

At the current price of Rs 288, the stock is trading at 24.5 times our estimated FY16 earnings. The SOTP based FY16E target price for ZEE comes out to be Rs 213. We would recommend investors not to buy the stock at current levels.

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