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Zee Ent : Looking forward to complete digitization - Views on News from Equitymaster

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  • Oct 22, 2014 - Zee Ent : Looking forward to complete digitization

Zee Ent : Looking forward to complete digitization
Oct 22, 2014

Zee Entertainment has announced its results for the second quarter of the financial year 2014-15 (2QFY15). The company has reported 1.5% YoY growth in sales and a 4% YoY fall in profit after tax. Here is our detailed analysis of the results.

Performance summary
  • Zee's sales grew by 1.5% YoY in 2QFY15. The growth in sales was driven by a 7% YoY growth in revenues from advertising; while subscription revenues fell by 7% YoY. Other sales and services which include syndication sales (pertaining to sports channels), play out & transmission services; which contributed about 6% to the total sales, increased by 13% YoY.
  • The company was successful in curtail its overall operating costs, causing a rise in EBITDA margins from 28.2% in 2QFY14 to 28.7% in the quarter gone by. This has helped operating profit grow by 3%, faster than the pace of sales growth.
  • Other income for 2QFY15 fell by 5% YoY. Further, depreciation costs also saw a sharp rise of 47% YoY. These factors put together led to profit after tax falling by 4% YoY.

(Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Net sales 11,013 11,178 1.5% 20,745 21,729 4.7%
Expenditure 7,908 7,974 0.8% 14,726 15,433 4.8%
Operating profit (EBDITA) 3,105 3,205 3.2% 6,020 6,296 4.6%
EBDITA margin (%) 28.2% 28.7% 0.5% 29.0% 29.0% 0.0%
Other income 549 522 -4.9% 1,271 912 -28.3%
Interest 34 23 -32.5% 56 44 -20.3%
Depreciation & amortisation 91 134 47.4% 177 330 85.7%
Profit before tax 3,529 3,570 1.2% 7,057 6,834 -3.2%
Exceptional items - -   - -  
Tax 1,166 1,300 11.5% 2,456 2,464 0.3%
Profit after tax before minority 2,363 2,270 -3.9% 4,602 4,370 -5.0%
Minority interest 0 (6)   (7) (11)  
Share of profit & loss of associate            
Profit after tax  2,363 2,276 -3.7% 4,609 4,381 -5.0%
Net profit margin (%) 21.5% 20.4%   22.2% 20.2%  
No. of shares (m)         960  
Basic reported earnings per share (Rs)         9.0  
P/E (x)*         37.9  
*on a trailing twelve month basis

What has driven performance in 2QFY15?
  • Domestic subscription revenues grew by almost 1% during the quarter. However, there are differences during the two periods due to accounting changes necessitated by a change in TRAI's content aggregator rules. Further, as far as international subscription revenues go, due to a change in arrangement with various operators across international regions, the reporting of subscription revenues for the current year has undergone a change and hence previous years' quarter's figures are not comparable with that of the current years'. As a result of these factors, the management has expressed that overall revenue figures too are not comparable with that of the previous year's quarter due to the above changes.

  • As for television industry advertising spends, even though the overall economic sentiment had turned positive during the quarter, it resulted in increased advertising spends only during the fag end of the quarter. The company expects that advertising spends will continue to increase during the rest of the year.

    Revenue Break up
    (% of sales) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
    Advertising Revenue 5,833 6,259 7.3% 11,134 12,480 12.1%
    % sales 53% 56%   54% 57%  
    Subscription Revenue 4,581 4,245 -7.3% 8,822 8,366 -5.2%
    % sales 42% 38%   43% 39%  
    Other sales and services 599 674 12.6% 790 883 11.8%
    % sales 5% 6%   4% 4%  
What to expect?
Zee Entertainment has maintained its position of one of the leading GECs since years. As per the management, the economy has already begun showing signs of revival post the formation of the new government at the center and it expects the media industry to benefit from this improvement in overall economic environment. It expects TV ad spends to improve and the overall television industry to grow faster than the recent past.

Though the digitization deadlines for Phase 3 and Phase 4 have been pushed back, the roll out of digitization is a positive development for the company and will provide it with new growth opportunities. While it will lead to fragmentation of audiences, the company is also looking at this as an opportunity to create new products for specific segments. The implementation of digitization in the remaining parts of the country is what the management expects will push the growth momentum further for the company.

At the current price of Rs 343, the stock is trading at 25.8 times our estimated FY17 earnings. Considering expensive valuations, we maintain a SELL recommendation on the stock at current levels.

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