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Zee: Delivering performance - Views on News from Equitymaster
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Zee: Delivering performance
Aug 3, 2005

Performance summary
Zee Telefilms (Zee), India’s leading broadcaster, announced its 1QFY06 results last week. The company’s topline has registered a handsome growth during the quarter as envisaged by the management during the previous quarter. However, some pressure on the operating margins led to a slower bottomline growth. Nonetheless, the results were pretty encouraging and are an indication that the company’s efforts at improving the channels image and content have started to yield results.

Consolidated snapshot…
(Rs m) 1QFY05 1QFY06 Change
Net Sales 2,787 3,471 24.5%
Expenditure 1,807 2,473 36.9%
Operating Profit (EBDITA) 980 998 1.8%
EBITDA margin (%) 35.2% 28.7%  
Other income 155 113 -26.9%
Interest 74 25 -66.0%
Depreciation 77 97 25.1%
Profit before tax 984 989 0.5%
Tax 292 210 -28.0%
Profit after Tax/(Loss) 691 779 12.6%
Net profit margin (%) 24.8% 22.4%  
No. of Shares (m) 412.5 412.5  
Diluted earnings per share* 6.7 7.5  
Price to earnings ratio (x)   23.3  
(* annualised)      

Company profile
Zee is India’s first private TV channel covering nearly 30% of Indian television homes. It reaches an estimated over 225 m people worldwide (including Indian viewership). 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) services should augur well for the company in the long-term.

What has driven performance in 1QFY06?
Strong topline:  Zee derives its revenues primarily from advertisements and subscriptions, which together accounted for 88% of total revenues in 1QFY06 (95% in 1QFY05). The balance is contributed by other sales and services, which include revenues from film production and distribution, education sales and sale of set top boxes. This segment grew by 224% YoY during the quarter, albeit on a small base (see table below) and was the key contributor to the revenue growth, as is evident from the fact that it contributed nearly 43% of incremental sales.

As far as the company’s advertisement revenues are concerned, these witnessed an encouraging 17% YoY growth during 1QFY06. This growth is largely a factor of increased advertisement rates on its channels, which is seemingly a factor of improved quality content and better promotional and marketing efforts. It must be noted that the company continues to lead the Hindi movies, music and the regional channels genre, which have seemingly contributed their bit to the overall improvement in advertisement revenues.

Subscription revenues registered a 13% YoY growth in 1QFY06. Zee’s subscription revenues comprise of both international and domestic markets. For the quarter, while domestic subscriptions, including DTH and siticable, (around 54% of total subscription revenues) registered a 4% YoY growth, it was the international subscriptions that led the charge with the 14% YoY growth.

Margins under pressure:  Zee’s operating margins came under pressure during the quarter and were lower by 640 basis points. This was primarily owing to a sharp rise in its largest cost head, cost of goods and operations, which is responsible for over 2/3rd of the company’s total operating expenditure. This led to the rise in this particular cost head from under 44% of net sales to over 49% in 1QFY06. This was primarily due to investments made in new channels like Zee Sports, Zee Smile, Zee Telugu, Zee Jagran and the marketing spend on Dish TV, the company’s DTH venture. These costs (Rs 148 m) have been fully expensed for by the company in the June quarter, while the benefits of these would continue to accrue over the following quarters.

Costs breakup
(as % of net sales) 1QFY05 1QFY06
Transmission & Prog. Costs 43.6% 49.1%
Staff Costs 7.7% 7.6%
Other expenses 13.6% 14.5%
Total 64.8% 71.3%

Cushioned bottomline:  While the bottomline growth of 13% YoY during the quarter lagged the topline growth owing to operating profits getting hit for the above mentioned reasons, a 66% fall in interest outgo and lower tax incidence (21% in 1QFY06 compared to 30% in 1QFY05) helped cushion the bottomline. However, just to put things in perspective, if one were to remove the Rs 148 m effect in additional costs and keep the tax incidence at the 30% levels, then net profit growth would have been a tad higher at 15%.

What to expect?
At Rs 176, the stock is trading at a price to earnings multiple of 18.3 times our estimated FY07 earnings. We had recommended a ‘Buy’ on the stock in April 2005 at Rs 132 with a price target of Rs 190, which was achieved in June 2005. Post the June quarter results, we would not be making any major changes to our full year estimates, as the company seems to be well on course as estimated by us.

The recent image/brand makeover by the company along with efforts to improve content quality seems to have started yielding positive results for the company in terms of growth in ad revenues. Also, the change in strategy of its DTH venture wherein the company is now aiming at spreading its reach is delivering results as is evident from the almost 0.3 m subscribers that the company has signed up. As rightly put by the company and a view we subscribe to, the potential subscription revenue from these subscribers would be significant.

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