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ZEE Ent.: Buoyant start to the year - Views on News from Equitymaster
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ZEE Ent.: Buoyant start to the year
Jul 17, 2007

Introduction to results
  • Revenue grows 35% YoY on the back of 47% YoY increase in advertisement revenue and 27% YoY increase in subscription revenue

  • Average channel share of the flagship channel ‘Zee TV’ increased by 10% within the general entertainment genre.

  • Expenses increase by 21.8% YoY

  • Profit after tax grows by 51% YoY

(Rs m) 1QFY07 1QFY08 Change
Sales 2,895 3,916 35.3%
Expenditure 2,233 2,719 21.8%
Operating Profit 662 1,197 80.8%
Operating Profit margin(%) 22.9% 30.6%  
Other Income 175 191 9.1%
Depreciation 52 67 28.8%
Interest 109 118 8.3%
Profit Before Tax 648 1,225 89.0%
Tax 109 412 278.0%
Minority Interest 13 42 223.1%
Profit After Tax 539 813 50.8%
Net Profit Margin(%) 18.6% 20.8%  
No of shares (m)   549  
Diluted Earnings per share*   4.3  
P/E   78.1  
*On a trailing 12-month basis

What is the company’s business?
ZEE Entertainment Enterprises is an integrated media conglomerate with operations spanning the entire media spectrum including television programming; satellite broadcasting; production and distribution of films; music publishing, long distance education and the creation of animation software. It was previously known as ZEE Telefilms Limited (ZTL) which got demerged into 4 companies in 2006.

Zee Entertainment’s channels are ZEE TV, ZEE Cinema, ZEE Music, ZEE Café, ZEE Studio, and ZEE Trendz. In 2002, Zee acquired a majority stake in ETC Networks, the market leader in music and Punjabi language programming. In 2006 ZEE acquired a 50% stake in Dubai based sports channel, Ten Sports. Zee boasts its presence in all major markets in the world, including Asia Pacific, the Middle East, the United Kingdom, the United States of America, Africa, the Caribbean Islands and Canada. Since its inception, Zee has been the leading Indian television network driven by hits like Tara, Antakshari, Sa Re Ga Ma Pa, and Amaanat.

What has driven performance in 1QFY08?
Ad rates push topline: The consolidated sales were up 35% YoY in 1QFY08, driven by an increase of 47% in advertisement revenue and an increase of 27% in subscription revenue. The company implemented an ad rate hike in 2007, which helped it increase its advertisement revenues.

Revenue Breakup of Broadcasting division
(Rs m) 1QFY07 1QFY08 Change
Advertising Revenue 1,392 2,044 46.8%
% of divsion revenues 48.1% 52.2%  
Subscription Revenue 1,327 1,681 26.7%
% of divsion revenues 45.9% 42.9%  
Other Sales and services 175 191 9.1%
% of divsion revenues 6.0% 4.9%  
Total 2,894 3,916 35.3%

Subscription revenue: Average channel share of the flagship channel ‘ZEE TV’ increased to 25% within the general entertainment genre. Zee TV has averaged 234 gross rating points (GRPs) during the quarter. During 1QFY08, Zee TV has come closest ever to the genre leader (Star Plus) in the last 7 years. Zee TV has on an average had approximately 20 shows in the Top 50 and 30 shows in the Top 100 across the GEC.

International Subscription revenues were, however, affected because of the rupee appreciation while the domestic subscription revenues were impacted the TDSAT (Telecom Disputes Settlement and Appellate Tribunal) order in favour of Tata Sky, whereby the bouquet price was reduced from Rs 75 to Rs 42.

The sports business revenue during the first quarter was Rs 345 m, after consolidating the results of Taj TV limited (Ten Sports). Sports business during this quarter had a negative EBITDA of Rs 3 m. The performance of the sports business is expected to improve as ZEE Sports and Ten Sports are entering into a variety of joint ventures that will increase their joint impact on the market. In September 2007, the two channels will for the first time, share the prestigious ‘Champions League’ with live games on each channel for every stage of a competition that features the world’s top clubs. In the second half of 2007 Ten Sports will have live cricket from both Sri Lanka and Pakistan. These initiatives are expected to boost the company’s ad revenues from the sports channels.

The company has two major segments: Content and Broadcasting and Education. The revenues of the Content and Broadcasting Segment have grown 35% whereas the revenues of the Education segment have grown 52% on a much lower base.

Segment wise performance
(Rs m) 1QFY07 1QFY08 Change
Content and Broadcasting 2,846 3,842 35.0%
% of total revenues 98.3% 98.1%  
Education 48 73 52.1%
% of total revenues 1.7% 1.9%  
Total 2,894 3,915 35.3%

Margins: The company’s operating profit increased by 81% YoY and the operating profit margin improved to 30.6% from 23% in 1QFY07. Personnel cost were 53% higher than corresponding period last year and other costs were up by 94% YoY. The personnel costs increased because the company hiked salaries, which is usually done in the first quarter of the year. As a result, the total expenses went up by 22% YoY. The effective tax rate in this quarter was 34.4% but the management has clarified that the effective tax rate will be in the region of 3% to 33% for the full year which will reduce the pressure on its bottomline.

New initiatives: ZEE is planning to launch a youth oriented channel by January 2008. The capex for this will be financed through internal accruals. ZEE has also appealed against the TDSAT order. Currently, ZEE is getting the same price per subscriber from Dish TV as it gets from Tata Sky.

What to expect?
At the current price of Rs 336 the stock is trading at 78.1 times trailing 12 months earnings The management has given the guidance that it will be able to sustain its operating margins at 30% in FY08. It has maintained its guidance of 30% growth in advertisement revenues and 30% growth in subscription revenues. We maintain a positive view on the stock from a long-term perspective and will soon update our research report on the stock.

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