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Zee Ent : Subscriptions fail to keep pace
Jul 28, 2014

Zee Entertainment has announced its results for the first quarter of the financial year 2014-15 (1QFY15). The company has reported 11.6% YoY growth in sales and a 6.3% YoY fall in profit after tax. Here is our detailed analysis of the results.

Performance summary
  • Zee's sales grew by 11.6% YoY in 1QFY15. The growth in sales was driven by a 17.4% YoY growth in revenues from advertising; while subscription revenues grew by an anemic 4.4% YoY. Other sales and services which include syndication sales (pertaining to sports channels), play out & transmission services; which contributed about 2% to the total sales, increased by 9% YoY.
  • The company failed to curtail its overall operating costs, causing a fall in EBITDA margins from 30% in 1QFY14 to 28.5% in the quarter gone by. This has restricted operating profit growth to just 6.1%; which is significantly lower than the sales growth.
  • Other income for 1QFY15 also fell by 46% YoY. Further, depreciation costs also saw a sharp rise of 126% YoY. These factors put together led to profit after tax falling by 6.3% YoY.

Financial performance snapshot
(Rs m) 1QFY14 1QFY15 Change
Net sales 9,733 10,857 11.6%
Expenditure 6,818 7,765 13.9%
Operating profit (EBDITA) 2,915 3,092 6.1%
EBDITA margin (%) 30.0% 28.5% -1.5%
Other income 722 390 -46.0%
Interest 22 22 -1.4%
Depreciation & amortisation 87 196 126.0%
Profit before tax 3,528 3,264 -7.5%
Exceptional items - -  
Tax 1,289 1,164 -9.8%
Profit after tax before minority 2,239 2,100 -6.2%
Minority interest (8) (5)  
Share of profit & loss of associate      
Profit after tax  2,246 2,106 -6.3%
Net profit margin (%) 23.1% 19.4%  
No. of shares (m)   960  
Basic reported earnings per share (Rs)    2.2  
P/E (x)*   31.6  
(*on a trailing twelve month basis)

What has driven performance in 1QFY15?
  • Zee's sales growth during 1QFY15 was driven by a robust growth in advertising revenue of 17.4% YoY. In fact, as per the company, the industry grew by 13% during the quarter, and thus the company outperformed the industry on this front. The growth in subscriptions, however, was lower at 4.4% YoY.

  • Geography wise, domestic subscription revenues were up by 2.2% YoY during the quarter. International subscriptions were up by 10.8% YoY.

  • Zee reported a feeble growth in operating profits of 6.1% YoY during the quarter. Operating margin thus deteriorated from 30% during last year's corresponding quarter to 28.5% in 1QFY15. Profit after tax was down by 6.3% YoY during the quarter.

  • The company's flagship channel; ZEE TV had a share of 16.9% and was amongst the top 6 General Entertainment Channels (GEC) during the quarter.

    Revenue Break up
    (% of sales) 1QFY14 1QFY15 Change
    Advertising Revenue 5,301 6,221 17.4%
    % sales 54.5% 57.3%  
    Subscription Revenue 4,241 4,428 4.4%
    % sales 43.6% 40.8%  
    Other sales and services 191 208 9.0%
    % sales 2.0% 1.9%  
What to expect?
Zee Entertainment has maintained its position of one of the leading GECs since years. Advertising growth during this quarter is what has given a boost to the company's performance; and was in fact better as compared to industry's growth of 13% during the same period. The bulge in the general election related advertising by political parties gave a fillip to advertising expenses during this quarter - especially to Zee's news channels.

The company launched a new channel this quarter - ZEE Zindagi. The launch related initial costs incurred by the company for this channel was also one of the factors that negatively affected costs for the quarter.

The company sports business made a small profit this quarter after making losses until now, however, the management does continue to expect losses for the full year FY15. Despite some delays, the roll out of digitization is a positive development for the company and will provide it with new growth opportunities. While it will lead to fragmentation of audiences, the company is also looking at this as an opportunity to create new products for specific segments.

At the current price of Rs 289, the stock is trading at 24.5 times our estimated FY16 earnings. The SOTP based FY16E target price for ZEE comes out to be Rs 213. We would recommend investors not to buy the stock at current levels.

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