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  • Jul 25, 2011 - Zee Ent : Dismal performance in advertising revenue

Zee Ent : Dismal performance in advertising revenue

Jul 25, 2011

Zee Entertainment has announced its 1QFY12 results. The company has reported 3% YoY growth in sales and a fall of 13.4% YoY in net profits. Here is our analysis of the results.

Performance summary
  • Topline grew 3% YoY during the quarter largely due to poor performance of the advertising segment.
  • Operating margins reduced to 22.3% in 1QFY12 from the 27.6% in the corresponding quarter last year.
  • Other income increased by 102.1% over the same period last year.
  • Net income fell by 13.4% YoY On account of the poor performance at the operating level coupled with higher depreciation charges.

(Rs m) Q1FY11 Q1FY12 Change
Net sales 6,770 6,983 3.1%
Expenditure 4,900 5,423 10.7%
Operating profit (EBDITA) 1,870 1,560 -16.6%
EBDITA margin (%) 27.6% 22.3%  
Other income 126 255 102.1%
Interest 51 30 -40.0%
Depreciation & amortisation 62 89 43.3%
Profit before tax 1,884 1,696 -10.0%
Exceptional items (291) -  
Tax 673 394 -41.4%
Profit after tax before minority 1,501 1,302 -13.3%
Share of minority 38 35  
Profit after tax 1,463 1,266 -13.4%
Net profit margin (%) 21.6% 18.1%  
No. of shares (m)   978.1  
Diluted earnings per share (Rs)*   5.0  
P/E (x)   27.1  
(*trailing twelve month earnings)

What has driven performance in 1QFY12?
  • Zee Entertainment's revenues grew by a marginal 3% YoY during the quarter. This was mainly due to a dismal performance by the media company in the advertising segment that grew by only 0.5% over the same quarter last year. Revenue from subscriptions were up by 16.7% YoY.

    Revenue Break up
    (% of sales) Q1FY11 Q1FY12 Change
    Advertising Revenue 3,769 3,787 0.5%
    % sales 55.7% 54.2%  
    Subscription Revenues 2,614 3,051 16.7%
    % sales 38.6% 43.7%  
    Other sales and services 387 145 -62.6%
    % sales 5.7% 2.1%  

  • Operating margins reduced to 22.3% in 1QFY12 from the 27.6% in the corresponding quarter last year. The expenses rose quite substantially with programming and operating costs rising by 12% and employee costs rising by 25% during the quarter.

  • Net income fell by 13.4% YoY in the current quarter on account of the 17% YoY drop in operating profits. Although interest costs and taxes reduced, depreciation charges grew by 43.3% YoY and further contributed to the fall in net profits.

  • The company's flagship channel Zee TV recorded average channel share of 23% (vs. 19% last quarter) and average weekly Gross Rating Points (GRPs) of 201. The channel delivered an average 23 of the top 100 weekly shows in the quarter.

  • Zee has gotten into a distribution alliance with Star for distributing the channels of both these media companies. A new company has been formed by the name of MediaPro Enterprise India Pvt Limited and it is a 50:50 joint venture between Zee Turner Ltd and Star Den. This alliance is expected to mutually benefit both Zee and Star in earning better revenues and gaining better bargaining power while dealing with cable operators, multi system operators and direct to home operators.

What to expect?
Zee Entertainment has completed a rebranding exercise which involved designing of a new logo, change of tagline, better programming content and repositioning. Although the company is facing near term pressure, its restructuring is an attempt to make things better. The dismal growth in advertising revenue of only 0.5% QoQ in the first quarter of financial year 2011-12 speaks volumes about the company's vulnerability to the economic slowdown. .

It has recently announced buyback offer for its existing investors at a price not exceeding Rs 126 per equity share (Face Value= Rs1). The maximum buyback size is Rs 7 bn which is within 25% of the aggregate of the company's paid-up equity capital and free reserves as on March 31, 2010. At the current valuations, we do not see the stock offering returns to shareholders over the next 2 to 3 years that would be commensurate with the risks. Thus, we would advise subscribers to tender their shares if they are not willing to hold them beyond this time frame. Kindly refer to our latest recommendation for further details.

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