Zee: Regaining the thunder? - Views on News from Equitymaster

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Zee: Regaining the thunder?

Jul 18, 2002

Zee Tele has reported a strong first quarter performance with 31% rise in consolidated net profits. The company's earnings growth was fueled by a sharp improvement in operating margins and over 50% jump in subscription revenues.

Zee Telefilms (Consolidated)
Rs m) 1QFY02 1QFY03 Change
Sales 2,335 2,488 6.5%
Other Income 206.5 162.1 -21.5%
Expenditure 1,740 1,730 -0.6%
Operating Profit (EBDIT) 596 758 27.3%
Operating Profit Margin (%) 25.5% 30.5%  
Interest 204.3 182.2 -10.8%
Depreciation 36.1 56.7 57.1%
Profit before Tax 562 682 21.3%
Tax 197.8 204.8 3.5%
Profit after Tax/(Loss) 364 477 31.0%
Net profit margin (%) 15.6% 19.2%  
No. of Shares (m) 412.5 412.5  
Diluted Earnings per share* 3.5 4.6  
P/E (at current price)   25.5  
*(annualised)      

During the quarter, the company's advertising revenues inched up by just 2% due to stiff competition from Star & Sony and tighter credit norms imposed by Zee to strengthen its receivables position. Zee's aggressive collection drive enabled it to bring down its debtor days to 227 from 251 days as on March 2002. The company aims to bring down the number to normal levels (161 days in FY01). On the content front, the channel's newly launched programmes, 'Khelo Number Khelo' and 'Kitne Kool Hain Hum' are yet to make its position. In order to improve TRP ratings, the company aims to launch five new programmes before the end of next quarter. Zee, however, is doing well in regional channels (under 'Alpha' brand). Its international operations have also recorded a YoY growth of 35% in revenues during 1QFY03.

Revenue breakup
Rs m) 1QFY02 1QFY03 Change
Advertisement 1,373 1,400 1.9%
Subscription 668 1,016 52.1%
Other sales & services 294 72 -75.4%
Total 2,335 2,488 6.5%

While advertisement revenues are sluggish, Zee's subscription revenues are flourishing. It has recorded a growth of 52% during the quarter, which accounted for over 40% of total revenues. In order to strengthen pay revenues in the southern market, Zee is in the process of re-launching its 'Kaveri' and 'Bharathi' channels under the 'Alpha' brand name. It could however, face challenges from Sun Network and Vijay TV. Zee Turner presently distributes 14 channels of Zee and 3 channels of Turner in its pay bouquet. ETC Music and ETC Punjabi are also expected to join this bouquet in the near future. The company's official connectivity has increased to 4.4 m homes as on June 30, 2002. Among other developments, Zee has also completed acquisition of both ETC (51% equity stake) and Padmalaya Enterprises (63% stake).

On a YoY basis, Zee managed to improve its operating margins to 31% in 1QFY03 (30% in 4QFY02) on the back of stiff control on operating costs which declined by 11%. The company also managed to bring down its interest cost by 11% by improving its working capital management.

At the current market price of Rs 118, Zee is trading at a P/E of 26x 1QFY03 annualised earnings. Overall, the Zee Network has shown strength in its performance in the June quarter driven by healthy growth in subscription revenues. However, sluggish ad revenues and higher debtor days still remains a concern for the company. The company's future re-rating is highly linked to the improvement on these areas.


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