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Zee’s earnings guidance: A perspective

Oct 3, 2001

September quarter has ended and companies (specially media and software) are expected to come out with their earnings guidance for the current year. For most of these companies profits are likely to be on the lower side keeping in view the impact of the recent attacks on the US. Zee Tele, one of India’s largest broadcasting company, has already indicated a dip in advertisement revenues for the current year. Its flagship channel, Zee TV, is facing cutthroat competition from Star and Sony. Star is dominating the position on the back of hit family soaps provided by Balaji Telefilms. The entertainment market is full of challenges and Zee failed to become proactive to respond to this change. This has resulted in the channel losing its viewership and consequently a drop in ad revenues.

Although, it has changed 90% of programmes on its flagship channel Zee TV, the change would take some time to reflect. Overall economic slowdown and a cut in ad expenditure of corporates would continue to depress the company’s revenues. Meanwhile, Zee’s efforts to shift to pay mode would to an extent support its sliding topline. The company expects subscription revenues to grow by over 200% in FY02 and over 100% in the next two years. Subscription business is not only high margin but also more stable compared to ad revenues. The segment contributed 29% of Zee’s total revenues in the June quarter.

To improve the subscriber base, Zee is eyeing the global markets. Induction of a strategic partner in the company is expected to increase the channel’s presence internationally. It has already made presentations to some of the media-entertainment conglomerates like Viacom, Vivendi Universal and AOL-Time Warner, which are reportedly interested for a stake in the company. However, in the current global economic environment it could take longer time for the company to successfully divest the stake. Also, large number of subsidiaries makes the valuation process more complicated. Zee has already indicated that it would reduce the number to around 10 in the current year from 20 as on March ’01. But until it actually happens, the company is likely to face difficulty in attracting a partner of repute.

At the current market price of Rs 85, Zee is trading at a P/E of 24x its 1QFY02 annualised consolidated earnings. In the current year Zee is expected to report profit growth in the range of 10%-15%. The trigger for the stock would be improvement in TRP ratings and more transparency from the management.

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