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Zee Entertainment: Advertising sinks - Views on News from Equitymaster

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Zee Entertainment: Advertising sinks
Jul 16, 2009

Performance summary
  • Topline declines by 12% YoY during 1QFY10 due to a 29% decline in advertising revenue.
  • EBITDA margins decline to 24.6% in 1QFY10, down from 26.6% in 1QFY09 due to higher programming and operating cost.
  • Other income grows by 17% YoY during the quarter.
  • Bottomline plummets 43% YoY in 1QFY10 on the back of lower operating margins, and tax write back in the corresponding quarter last year.


Consolidated financial snapshot
(Rs m) 1QFY09 1QFY10 Change
Net sales 5,420 4,759 -12.2%
Expenditure 3,978 3,589 -9.8%
Operating profit (EBDITA) 1,442 1,170 -18.8%
EBDITA margin (%) 26.6% 24.6%
Other income 278 325 16.9%
Finance charges 214 91 -57.4%
Depreciation 55 75 35.6%
Profit before tax 1,450 1,329 -8.4%
Exceptional Item* 574 -
Tax 417 416 -0.3%
Profit after tax/(loss) 1,607 913 -43.2%
Net profit margin (%) 29.7% 19.2%
No. of shares (m) 434.0
Diluted earnings per share (Rs)** 10.4
Price to earnings ratio (x)** 17.1
* Excess provision for tax in earlier years written back
**On trailing twelve months earnings

What has driven performance in 1QFY10?
  • Zee Entertainment’s topline for 1QFY10 was lower by 12% due to a 29% decline in advertising revenues. However, subscription revenues increased by 12% as compared to the corresponding period last fiscal. Subscription revenues from domestic DTH in 1QFY10 increased by 88% over 1QFY09.

    Revenue break-up
    (Rs m) 1QFY09 1QFY10 Change
    Advertising Revenue (Net) 2,798 1,980 -29.3%
    % sales 51.6% 41.6%
    Subscription Revenue 2,150 2,410 12.1%
    % sales 39.7% 50.6%
    Other Sales & Services 471 370 -21.5%
    % sales 8.7% 7.8%

  • Advertising revenues suffered on account of a weak macro environment. The company also felt the impact of two major sports events taking away advertising revenues from entertainment channels and the intense competition within the Hindi entertainment space. Moreover, in 1QFY09, the company had booked significant advertising revenues from its Bollywood awards event Zee Cine Awards. The event was not held this year.

  • Zee Entertainment’s flagship Hindi general entertainment channel (GEC) Zee TV took the top spot in the last week of June 2009. It attained a channel share of 21% among GECs. Programmes like Choti Bahu, Dance India Dance and Agle Janam Mohe Bitiya Hi Kijo did well. During 1QFY10, the company launched 2 new fiction shows - Pavitra Risshta and Aap Ki Antra.

  • Zee Cinema captured over 35% channel share in the Hindi movie genre during 1QFY10.

  • Zee Entertainment’s programming and operating costs grew by 6.6% YoY (as a % of sales) during 1QFY10. However, staff cost declined 4.6% (as a % of sales) YoY during the quarter.

  • The company redeemed its foreign currency convertible bonds worth US$ 3.79 m during the quarter as full repayment.

  • Zee Entertainment has decided to start, subject to approval at the next AGM, an employee stock option scheme. The company will issue stock options over a period of 5 years which would be convertible into equity shares up to maximum of 5% of the paid up capital of the company.

What to expect?
While Zee Entertainment has not given any guidance on the advertising front due to its linkage with the volatile macroeconomic environment, subscription numbers will continue to remain strong. We also expect advertising revenues to recover from the decline experienced during this quarter. 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.

However, at the current price of Rs 181, the stock is currently trading at 15 times its estimated FY12 earnings (without excluding minority interest). At the current price, the stock does not provide the margin of safety we look for. As such we would advise against taking fresh positions in the stock.

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