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Zee Ent.: Revenues swell while margins fall - Views on News from Equitymaster
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Zee Ent.: Revenues swell while margins fall
Jul 20, 2015

Zee Entertainment has announced its results for the first quarter of the financial year 2015-16 (1QFY16). The company has reported 27% YoY growth in sales and a 16% YoY growth in profit after tax. Here is our detailed analysis of the results.

Performance summary
  • Zee's sales grew by 27% YoY in 1QFY16. The growth in sales was driven by a whopping 368% YoY growth in revenues from 'other sales and services' (details below); while advertising revenues too grew by a healthy 25% YoY. Subscription revenues which contributed about 35% to the total sales, increased by slower 12% YoY.
  • The company failed to curtail its overall operating costs, causing a fall in EBITDA margins from 29.3% in 1QFY15 to 23.2% in the quarter gone by. This caused operating profit to fall by 6% YoY despite the stellar revenue growth.
  • Other income for 1QFY16 however provided some impetus, growing 75% YoY. Further, interest and depreciation costs fell. These factors put together led to profit after tax growing by 16% YoY.

Financial performance snapshot
(Rs m) 1QFY15 1QFY16 Change
Net sales 10,551 13,399 27.0%
Expenditure 7,459 10,287 37.9%
Operating profit (EBDITA) 3,092 3,112 0.7%
EBDITA margin (%) 29.3% 23.2% -6.1%
Other income 390 680 74.5%
Interest 22 15 -29.2%
Depreciation & amortisation 196 168 -14.1%
Profit before tax 3,264 3,608 10.6%
Exceptional items - -  
Tax 1,164 1,185 1.9%
Profit after tax before minority interest 2,100 2,423 15.4%
Minority interest (5) (15)  
Share of profit & loss of associate      
Profit after tax  2,106 2,438 15.8%
Net profit margin (%) 20.0% 18.2%  
No. of shares (m)   960.5  
Basic reported earnings per share (Rs)   10.5  
P/E (x)*   35.9  
*based on trailing 12 months earnings

What has driven performance in 1QFY16?
  • Operating costs were the big dampener this quarter growing 51% YoY and thus taking margins lower. However, the company was able to better manage its employee costs and selling expense which grew at a pace slower than the topline growth.

  • During the quarter, Zee TV was ranked third amongst all Hindi General Entertainment Channels (GEC).

  • Domestic subscription revenues stood at Rs 3,680 m, registering a growth of 13.6% over corresponding period last fiscal, while international subscription revenues at Rs 945 m grew 7.0% YoY.

  • ZEE's International operations constitute a significant part of the company's revenues. In Americas, Zee TV continued to garner the highest viewership share among South Asian networks. Zee TV HD and Zee Bollywood HD were launched on additional platforms. '&tv' and '&tv HD' were launched in the UK. Within a few weeks of its launch, &tv currently ranks among the top 5 Indian channels in UK. Zee TV and Zee Cinema continued to be the Number 1 South Asian channels in their respective genres in the UAE.

  • The company's other sales and services segment, which saw robust growth this quarter, includes many miscellaneous revenue streams such as syndication sales, film distribution, commission on sales, play out & transmission services, facility usage income among others.

    Revenue Break up
     (% of sales) 1QFY15 1QFY16 Change
    Advertising Revenue 6,221 7,799 25.4%
    % sales 59.0% 58.2%  
    Subscription Revenue 4,122 4,625 12.2%
    % sales 39.1% 34.5%  
    Other sales and services 208 974 367.6%
    % sales 2.0% 7.3%  
What to expect?

While the management deems the organic growth this quarter to be quite satisfactory, it has also made an acquisition during the quarter. The company's board has approved the acquisition of 100% equity stake in 'Sarthak Entertainment Private Limited', an entity which owns and operates 'SARTHAK' a leading Odia language general entertainment channel. The acquisition shall be an all cash deal at a consideration of Rs 1150 m, which includes Rs 150 m payable in financial years FY17 and FY18, which will be linked to certain performance milestones of the channel.

Zee Entertainment, the company's flagship channel, has maintained its position of one of the leading GECs since years. The management has expressed its optimism regarding the prospects of the Indian media industry, backed by rising advertising revenues and consumer payments. 61% of all households in India are now equipped with a television making India the second largest TV viewership market after China. Further, with digitization, subscription revenues in urban and rural areas continue to grow, which bodes well for the company's topline growth in the years to come.

At the current price of Rs 379, the stock is trading at 28.5 times our estimated FY17 earnings. We are in the process of updating our FY18 earnings estimates for the company and will subsequently come out with a revised view on the stock. In the meanwhile, we recommend that investors do not buy the stock at current levels.

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