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Zee's dismal 1Q performance

Aug 1, 2001

Zee TV has reported disappointing performance for the first quarter of FY02. The company's consolidated earnings dropped by 13%, while revenues were up by a marginal 10%.

Zee Network (Consolidated)
(Rs m) 1QFY01 1QFY02 Change
Sales 2,130 2,335 9.6%
Other Income 109 207 90.3%
Expenditure 1,533 1,740 13.5%
Operating Profit (EBDIT) 598 596 -0.4%
Operating Profit Margin (%) 28.1% 25.5%  
Interest 112 204 82.7%
Depreciation 33 36 10.1%
Profit before Tax 562 562 0.0%
Tax 143 198 38.0%
Profit after Tax/(Loss) 418 364 -13.0%
Net profit margin (%) 19.6% 15.6%  
No. of Shares (eoy) (m) 408.6 412.5  
Diluted Earnings per share* 4.1 3.5  
P/E (at current price)   25  
*(annualised)      

Though Zee's advertisement revenues declined by 13% to Rs 1.4 bn, subscription fees jumped by 37% to Rs 668 m. The company's programmes have failed to show improvement in TRP ratings, which led to a fall in ad revenues. The contribution of subscription fees however, increased to 29% in the June quarter compared to 23% in 1QFY01. The company's initiatives in digitizing channels and converting them into pay mode has fueled the growth in subscription fees. Zee expects to garner close to Rs 1 bn by converting 'Zee TV' into a pay channel. Though the initial response to the new channels is encouraging, it remains to be seen whether the company would be able to make a strong foothold over the long run (especially among the south Indian audience).

Zee's other sales increased by over 300%, accounting for about 13% of total revenues (3% in 1QFY01). This could be due to increase in sales of decoders to the cable operators. The company has however, not given any breakup of this sales.

Operating margins of the company are sliding quarter over quarter. The higher costs of programming seem to be the main cause for the pressure on the margins. During the quarter, Zee's operating margins declined by 260 basis points on a consolidated basis and by 960 basis points on a standalone basis. Operating losses in Zee Interactive, Dakshin Media, Kaveri Entertainment and E-connect dragged down the performance of the company. On the other hand Zee TV, US and Siticable reported a 45% and 118% growth in operating profits.

Zee Telefilms (Standalone)
(Rs m) 1QFY01 1QFY02 Change
Sales 707 989 39.9%
Other Income 204 104 -48.8%
Expenditure 405 658 62.7%
Operating Profit (EBDIT) 302 330 9.4%
Operating Profit Margin (%) 42.7% 33.4%  
Interest 43 141 226.6%
Depreciation 7 9 31.4%
Profit before Tax 455 284 -37.6%
Tax 89 85 -5.1%
Profit after Tax/(Loss) 366 200 -45.5%
Net profit margin (%) 51.8% 20.2%  
No. of Shares (eoy) (m) 408.6 412.5  
Diluted Earnings per share* 3.6 1.9  
P/E (at current price)   45  
*(annualised)      

On a standalone basis the performance was dismal. Zee's earnings dropped by 46% due to significant rise in interest cost and a fall of 49% in other income. Its revenues on the other hand jumped by 40%. During the quarter, Zee made bumper profits on sale of distribution rights of Hindi movie 'Gadar', which fueled the revenue base of the company.

In the June quarter, tax provision of the company was higher by 38% due to additional provision for deferred tax (Rs 8.4 m) according to the new accounting standard, AS -22. Also, non availability of tax deduction on loss making subsidiaries kept the tax provision amount on the higher side.

At the current market price of Rs 87, Zee is trading at a P/E of 25x on a consolidated basis and 45x on a standalone basis on its 1QFY02 annualised earnings. The company's decision to induct a strategic partner and success of the pay TV strategy will determine its future valuations. Its ad revenues are likely to remain under strain in absence of any improvement in TRP ratings. Both Star and Sony are giving a tough competition to Zee. Apart from this, diversion of funds by the company and suspect corporate practices cast a shadow on the company's valuations.


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