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Zee Telefilms: The mix is changing…

Aug 7, 2006

Media is one of the sectors, which is growing at a fair clip owing to the robust economic growth. Moreover, the recent initiatives taken by the government is taking the sector to even greater heights. Recently, FDI was permitted in two important sectors-print media and radio. Films, television and other segments are already open to foreign investment. The industry size is currently estimated at Rs 222 bn, although precise numbers are not available. Television is the Indian entertainment industry's fastest growing segment, accounting for an estimated 62% of the industry's growth. With such a huge market to cater to, the segment is witnessing intense competition as quite a few players have entered the fray and few more waiting to enter. One of the oldest and a major player in this market is Zee Telefilms. Here is an analysis of the company's business; it's past financials and future prospectsCompany background
Zee Telefilms was formed in 1982. It is India's largest vertically integrated media and entertainment company. The company has an integrated range of businesses, encompassing the content-to-consumer value chain; television content, broadcasting, cable networks, films, music and animation. Zee TV is India's first private TV channel covering nearly 30% of India television homes and reaches an estimated 250 million people worldwide. Its operations are spread across more than 10 countries worldwide including, India, USA, UK/Europe, Africa, Caribbean, Canada, Australia, Middle East and many South Asian countries.

The operations of the Zee can be classified into four main areas of business, which includes content & broadcasting, access, education and film production. The company's revenues are largely derived from the advertising and subscription revenues. Syndication and education sales, also called as other sales and services form the other revenue source

The main growth drivers of the company are the following:

Advertising revenues: Zee has an approximately 30% share of the total Cable & Satellite (C&S) adspend, which is estimated at about Rs 20 bn. In FY05, 44% of the company's revenues were derived from advertising. Zee TV has a strong brand recall by virtue of its global presence and as a consequence is able to garner a sizeable chunk of the total adspend of the industry. With the company planning to foray into newer channels, growth is likely to be robust on the advertising revenues front, as more and more viewers will come under the company's umbrella.

Subscription revenues: The revenues stream, which is likely to take the company to a new level is the revenue from subscriptions. Domestically, it generates its Subscription revenues from Siticable Network. Beside this, it also get its subscription revenues from Direct-to-Home (DTH) services. The total revenue of the Zee from the subscription part stood at 50% in FY05. Subscription revenues also accrue to the company through its international operations. Zee is one of the largest Indian television networks in the world with an estimated subscriber base of more than 900,000 outside of India. The company exports its channels to over 120 countries through various distribution platforms, and has entered into agreements with DTH and local cable operators in each of the countries in which its channels are distributed. The company has a strong subscriber base of 230,000 in South East Asia, followed by Middle East. It also enjoys strong brand recognition in international markets like the USA, Canada, the Caribbean, UK and other parts of South Asia.

Analysis of the past…
During the period between FY02 and FY06, Zee registered a CAGR of 7% in sales. Operating margins however declined drastically during FY06 after remaining stable in the previous years.This is mainly due to the aggressive investments, which the company is undertaking in its new channels. Besides this, Zee is also modifying and updating its existing programmes and channels.

Financial Snapshot
Net sales(Rs m)10,762 12,079 13,702 13,079 14,233
% growth 12%13%-5%9%
PAT1,946 2,136 2,942 3,122 2,174
Profitability ratios
EBITDA margins (%)28%31%31%33%19%
EBIT margins (%)34%35%35%35%21%
Net profit margin(%)18%18%21%24%15%

What to expect?
At the current price of Rs 260 the stock is trading at a lofty price to earnings multiple of 49 times its FY06 earnings. The reason the stock looks expensive from a P/E standpoint is because investors are expecting its cable and DTH operations to be a significant growth driver from a long-term standpoint. While we do not deny this, the risks appear to be on the higher side.

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