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Zee: The show continues

Jul 29, 2004

Performance summary
Zee Telefilms, India's largest private sector media company, continued its respectable performance by reporting an 18% bottomline growth on the back of a 11% topline growth during 1QFY05. Apart from robustness in subscription revenues, the highlight during the quarter has also been the recovery in advertisement revenues. Operating margins have also improved YoY in 1QFY05.

Consolidated snapshot...
(Rs m) 1QFY04 1QFY05 % Change
Net Sales 2,893 3,207 10.8%
Other Income 191 159 -16.8%
Expenditure 1,992 2,151 8.0%
Operating Profit (EBDIT) 901 1,055 17.1%
Operating Profit Margin (%) 31.1% 32.9%  
Interest 170 76 -55.1%
Depreciation 82 92 12.7%
Profit before Tax 841 1,046 24.4%
Tax 218 313 44.0%
Profit after Tax/(Loss) 623 733 17.6%
Net profit margin (%) 21.5% 22.8%  
No. of Shares (m) 412.5 412.5  
Diluted Earnings per share* 6.0 7.1  
P/E Ratio   20.3  
(* annualised)      

Company profile
Zee is India's first private TV channel covering nearly 30% of Indian television homes. It also reaches an estimated over 225 million people worldwide. Though the channel did not face competition in the initial years of its launch, it has been facing tough times in recent years owing to the competition from other channels like Star and Sony. With an effort at de-risking its existing business model, Zee has been spreading its wings internationally through its wholly owned subsidiaries, which would help it in increasing its subscription-based revenues. Also, venturing into production of films, selling its distribution rights and the DTH (Direct-To-Home) launch would augur well for the company.

What has driven performance in 1QFY05?
Adspend shows signs of recovery: Zee's topline grew by nearly 11% led by the growth in content and broadcasting revenues. Higher pay revenues (subscriptions) and a recovery in advertising revenues over the corresponding period last year have aided this growth.

Revenue breakup
1QFY04 1QFY05 % Change
Advertisement 1,212 1,318 8.7%
Subscription 1,428 1,599 12.0%
Other sales & services 253 290 14.6%
Total 2,893 3,207 10.8%

While the growth in subscriptions is over and above the near 40% rise in pay revenues in the same quarter last year, the rise in ad revenues has to be viewed in the context of cyclical recovery in industry adspend. However, considering the fact that the start of the quarter was overshadowed for broadcasters like Zee on account of the India-Pakistan cricket series in April 2004, the rise in ad revenues in 1QFY05 is respectable. However, the coverage of the General Elections saved the day for the company. Further, on the subscriptions front, the growth impetus was provided by the 23% growth in domestic subscription revenues.

Nothing surprising at the margin level: Margins improved by 180 basis points during the June 2004 quarter over that of the same period last year. While the company's transmission and programming costs have increased in absolute terms by 5%, as a percentage of net sales, it has actually declined by 230 basis points. Since this accounts for nearly 2/3rd of the total operating expenses of the company, overall margins have improved. The performance in 1QFY05 at the margin level is in line with our FY05 estimates.

Costs breakup
(% of net sales) 1QFY04 1QFY05
Transmission & Prog. Costs 44.5% 42.2%
Staff Costs 6.4% 6.9%
Other expenses 18.0% 18.0%
Total 68.9% 67.1%

Debt repayment also helped matter: While operating efficiencies have played their part in propping up the bottomline growth during the quarter, interest charges have also been lower. This is owing to the company's effective capital structuring in which it has, during the previous two quarters, repaid Rs 3.5 bn of gross debt. It had raised fresh debt in the form of Foreign Currency Convertible Bonds (FCCB) at 3.5% (as per company release). The tax provisioning during the quarter has also been higher by 44% owing to the shifting of the Zee TV and Zee Cinema channels to India and the income of these are now being recorded under Zee Telefilms.

What to expect?
At Rs 144, the stock trades at 20.3x annualised consolidated 1QFY05 earnings. While growth in subscription revenues has continued as expected, the recovery in adspend has further benefited Zee and this is likely to continue in the coming quarters on the back of higher economic growth. The company's efforts at reducing debt and paring overall interest costs through debt restructuring have also helped to improve margins at the net level.

Also, the company has initiated a major restructuring of international operations with the aim of garnering substantial tax efficiencies and reduction in operation costs. It is also planning to launch new channels for the Indian market along with increasing regional presence through its channels under the Alpha brand. Further, with clarity still awaited on the CAS front, the company is concentrating on the launch of its Direct-to-Home (DTH) service, which augurs well.

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