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Zee Telefilms: Howzzat?
Sep 7, 2004

The chart below has a story to tell. At a time when the broader index has gained a mere 3% in the last one-month or so, one of the index stocks, Zee Telefilms has appreciated by nearly 23%! Of course, this is not without reason. Prior to this surge, the Zee Telefilms stock had broadly underperformed the index for much of the time in the last 3-4 moths. So, what has suddenly turned the scenario in favour of the company and consequently the stock?

The news during mid-August that the Indian media giant had bid for acquiring BCCI’s world telecast rights for Indian cricket and had come out as the highest bidder for the same, set the stock rolling on the bourses. While there were initial hiccups in the bidding process and questions raised about the eligibility of Zee to participate in the bidding process, considering that it does not have the experience with respect to cricket telecasting, Zee was prompt to refute these charges that it did telecast matches in the international markets and would launch a sports channel on acquiring the rights.

Finally, after much media attention and a final debate with the BCCI (along with competitor ESPN-Star Sports combine), the BCCI awarded the telecast rights to Zee. While this seems to be the final curtains on the issue, ESPN-Star Sports has taken legal course opposing BCCI’s move of awarding the rights to Zee, which has cast a temporary shadow on the Zee-BCCI deal. Nonetheless, markets seem to be thinking otherwise as the stock has remained rather firm on the bourses.

So, what has prompted the markets to push the stock higher? 23% gains within a month are rather impressive for a large-cap stock considering that the Sensex has gained a mere 3%! We attempt to take a look at what’s in store for Zee Telefilms now that it has acquired the telecast rights and look at the possible impact on its financials considering that the costs for Zee pertaining to these rights would be in the vicinity of about Rs 17 bn (Rs 14 bn for telecast rights + Rs 2.5 – 3 bn for other production costs).

Zee Telefilms is India’s largest private sector media company. The company has a presence across India through its bouquet of 19 channels, including regional channels. The company, through its channels, covers nearly 30% Indian television homes and has an estimated reach of over 225 m 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, the latter gaining immense market share in recent years, thanks to the cricket telecast rights that it had acquired from BCCI last time.

However, bagging of the cricket telecast rights for the next 4 years by Zee seems to have the potential to change the fortunes for the company, which had been facing rather tough times owing to its relatively poor quality programming content. It must be noted that advertisement and subscriptions are the two sources of revenues for the company, with the growth in subscription revenues being the savior for the company over the last couple of years and a key driver for growth in revenues in the future.

With the telecast rights now in its pocket, the company is all set to launch a sports channel early next month, which was the only genre where Zee did not have a presence. With the launch of this channel, the Zee bouquet would stand completed with channels catering to various aspects of life like entertainment, religion, lifestyle and also the regional channels. Considering India’s passion for the game of cricket, which is vindicated by the fact that cricket attracts nearly 70%-75% of the total sports ad spend in the country (Rs 4 – 4.5 bn), it seems that the Zee is definitely in for some good times over the next 4 years. Our back of the envelope calculation estimates that Zee could garner about Rs 10 bn in additional advertisement revenues over the next 4 years from the telecast of these matches.

Zee Telefilms intends to leverage on the addition of the sports channel to its bouquet and the wide reach it has. It would now be much easier for the company, not only to push its Direct-to-Home (DTH) offering, but this would also aid in increasing the subscription to its bouquet considering India’s appetite for cricket. Further, the company will now be in a better bargaining position with the under-declaration of subscribers by cable operators. Considering that the cable viewership is on an uptrend and that Zee would charge additional revenues for its sports channel, our back of the envelope calculation suggests the possibility of the company garnering an additional Rs 8 bn from subscriptions (including DTH). Other revenue sources that could be earned by Zee are the sale of its terrestrial and international telecast rights, which could help Zee Telefilms, rake in another Rs 6 bn approximately.

Thus, considering all of the above, Zee Telefilms has the potential to earn additional revenues of about Rs 24 bn over the next 4 years i.e. gains of about Rs 7 bn (revenue gains). Further, keeping in mind the nature of the additional sources of revenues; a substantial chunk of the revenues (about Rs 4-5 bn) could be reflected in its bottomline. It must be noted that in FY04, the company’s net profits were at Rs 3 bn.

However, one must bear in mind the potential threats to the above numbers coming through. While peaceful relations between countries (e.g. India-Pakistan) are an important aspect for ‘all’ the matches to mature and bear fruit for the company, other factors like terrorism, which tend to hamper international cricket need also be watched. Thus, though at the outset it may seem that Zee has bid somewhat higher for acquiring the rights, considering the growth potential of the media industry over the next 4-5 years, this development is beneficial for the company.

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