Zee Ent : Defies industry concerns

Zee Entertainment has announced the results for the first quarter of FY2012-13. The company has reported 20.7% YoY growth in sales and 18.3% YoY growth in net profits. Here is our analysis of the results.

Performance summary

• The company's topline grew by 20.7% YoY during the quarter. This was led by 18% YoY growth in advertising and 19% YoY growth in subscription revenues. This is being attributed to higher viewership of flagship channel Zee TV.
• Operating profits were up by a healthy 49.6% YoY on account of higher growth in topline (20.7%) as compared to the same in operating expenses (12.4%) Operating margins expanded by 5%.
• Other income grew by 27% YoY.
• Depreciation charges increased by 11% YoY while interest even though up by 54% is now a very negligible expense for the almost debt free company Zee Entertainment.
• The consolidated net profit resultantly was up by 18.3% YoY during the quarter ended June 2012.

Financial performance snapshot

(Rs m)	1QFY12	1QFY13	Change
Net sales	6,982	8,430	20.7%
Expenditure	5,423	6,097	12.4%
Operating profit (EBDITA)	1,559	2,333	49.6%
EBDITA margin (%)	22.3%	27.7%
Other income	237	301	27.0%
Interest	12	18	53.8%
Depreciation & amortisation	89	99	11.4%
Profit before tax	1,696	2,517	48.4%
Exceptional items	-	-
Tax	394	947	140.2%
Profit after tax before minority	1,302	1,570	20.6%
Minority interest	(35)	(12)
Share of profit & loss of associate	-	-
Profit after tax	1,337	1,582	18.3%
Net profit margin (%)	19.1%	18.8%
No. of shares (m)			953.96
Diluted earnings per share (Rs)*			6.46
P/E (x)			23.39

(*On a trailing 12-month basis)

What has driven performance in 1QFY13?

• The company's topline grew by 20.7% YoY during the quarter. This was led by 18% YoY growth in advertising and 19% YoY growth in subscription revenues. This is being attributed to higher viewership of flagship channel Zee TV. Zee TV has recently launched a number of shows which have been well received by the audience resulting in more viewership.
  
  Revenue Break up

  (% of sales)	1QFY12	1QFY13	Change
  Advertising Revenue	3,787	4,472	18.1%
  % sales	54.2%	53.0%
  Subscription Revenue	3,051	3,641	19.3%
  % sales	43.7%	43.2%
  Other sales and services	143	317	120.9%
  % sales	2.1%	3.8%

  
  
• Other sales and services which includes syndication revenue especially spoorts syndication jumped by 120.9% YoY during the quarter.

• Operating expenditure saw an increase of 12% YoY led by 19% YoY increase in employee costs. Other expenditure was up by 16% YoY.

• Operating profits were up by a healthy 49.6% YoY on account of higher growth in topline (20.7%) as compared to the same in operating expenses (12%). Operating margins expanded by 5%.

• Other income was up by 27% YoY during the quarter.

• Depreciation charges increased by 11% YoY while interest even though up by 54% is now a very negligible expense for the almost debt free company Zee Entertainment.

• The consolidated net profit resultantly was up by 18.3% YoY during the quarter ended June 2012.

• The company's flagship channel Zee TV recorded average channel share of 21.2% up from 18.7% in the previous quarter. Average weekly Gross Rating Points (GRPs) were 215. The number of Zee shows that featured in the top 100 stood at 23.

What to expect?

At the current price of Rs 151, the stock is trading at a multiple of 23 times its trailing twelve month earnings. Although digitization deadline has been deferred again, as per media industry it is surely going to see the light of the day. One of the biggest beneficiaries of this will be Zee Entertainment. The company's recent venture with Star as Media Pro Enterprises has been doing well and bringing in more revenues for the company. However, Zee continues to invest in content and sports is still a loss making venture for the company. Zee has been able to defy industry concerns and display a sound performance in advertising through 18% YoY growth. However, we feel that a probable drought situation will worsen the economic scenario in rural areas and it may get difficult to report such growth numbers in future. Also, first phase of digitization is expected to happen in November this year but looking at the history of its developments, we cannot be sure when this will actually become reality. With all these concerns in mind and the current valuations too, we maintain our negative view on the stock.