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Zee: Subscription fees drives 2Q profits - Views on News from Equitymaster
 
 
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  • Oct 23, 2001

    Zee: Subscription fees drives 2Q profits

    Healthy growth in subscription fees and stable growth in advertisement revenues helped Zee report better than expected second quarter performance. On a consolidated basis Zee's revenues rose by 17% and profits were down by a marginal 2%.

    Zee Network (Consolidated)
    (Rs m) 2QFY01 2QFY02 Change 1HFY01 1HFY02 Change
    Sales 2,119 2,479 17.0% 4,249 4,814 13.3%
    Other Income 155 188 21.6% 263 395 49.9%
    Expenditure 1,412 1,711 21.2% 2,945 3,451 17.2%
    Operating Profit (EBDIT) 707 767 8.6% 1,304 1,363 4.5%
    Operating Profit Margin (%) 33.3% 31.0%   30.7% 28.3%  
    Interest 134 208 55.2% 246 413 67.7%
    Depreciation 32 45 40.3% 65 81 24.8%
    Profit before Tax 695 703 1.0% 1,257 1,264 0.6%
    Tax 152 170 11.6% 295 368 24.4%
    Profit after Tax/(Loss) 543 533 -1.9% 962 896 -6.8%
    Net profit margin (%) 25.6% 21.5%   22.6% 18.6%  
    No. of Shares (eoy) (m) 408.6 412.5   408.6 412.5  
    Diluted Earnings per share* 5.3 5.2   4.7 4.3  
    P/E (at current price)   16     20  
    *(annualised)            

    During the quarter, the company's income from subscription jumped by 52% and accounted for 33% of total revenues (25% in 2QFY01). Its efforts in converting the leading channels into pay mode has paid off. This revenue stream is expected to fuel Zee's sales growth in the coming quarters, despite a sluggish growth in ad revenues. Zee's income from advertisement is likely to remain on the lower side (atleast in the short term) as its newly launched programmes have failed to improve its TRP ratings.

    The company's US and UK channels continued to show better performance in the first half of FY02. UK business turned cash positive in the first half while operating profits from US skyrocketed by 174%. Siticable too posted encouraging performance with 61% growth in topline and 154% jump in earnings.

    Zee Telefilms (Standalone)
    (Rs m) 2QFY01 2QFY02 Change 1HFY01 2HFY02 Change
    Sales 911 1,046 14.9% 1,617 2,035 25.8%
    Other Income 139 186 33.5% 243 389 59.9%
    Expenditure 555 683 23.0% 960 1,341 39.7%
    Operating Profit (EBDIT) 355 363 2.2% 657 693 5.5%
    Operating Profit Margin (%) 39.0% 34.7%   40.6% 34.1%  
    Interest 57 145 153.8% 100 286 185.3%
    Depreciation 11 22 104.7% 18 31 75.6%
    Profit before Tax 427 382 -10.5% 783 765 -2.2%
    Tax 106 86 -19.0% 195 170 -12.6%
    Profit after Tax/(Loss) 321 296 -7.7% 588 595 1.2%
    Net profit margin (%) 35.2% 28.3%   36.3% 29.2%  
    No. of Shares (eoy) (m) 408.6 412.5   408.6 412.5  
    Diluted Earnings per share* 3.1 2.9   2.8 2.9  
    P/E (at current price)   30     29  
    *(annualised)            

    Zee's regional channels also showed satisfactory performance in the first half. Revenues of Expand Fast Holdings (broadcasting company of Zee Music, Alpha and English channels) rose by 124% and operating losses were reduced to Rs 41 m from Rs 109 m in the corresponding period of the previous year. However, the company's Africa channels failed to contribute positively in total revenues (52% drop in topline and 89% fall in operating profits). Also a slowdown in education business hit the company's subsidiary, Zee Interactive, which posted a marginal 2% growth in income and an operating loss of Rs 51 m (from operating profits of Rs 2 m in 1HFY01). E-connect Ltd, its subsidiary in portal and e-commerce business also reported similar performance (81% fall in revenues and operating loss of Rs 22 m).

    During the quarter, the company's operating margins dipped by 230 basis points on a consolidated basis and 430 basis points for Zee TV alone. Operating losses from the newly launched south Indian channels (Dakshin Media and Kaveri Entertainment) and Internet subsidiaries hurt the overall margins of the company. Zee's in south Indian language channels are facing strong competition from leading channels Sun TV and Raj. It would be a challenging task for the company to gain market share in these languages.

    Apart from this, high interest expense continue to trim the overall earnings growth of the company. On a standalone basis Zee's interest cost was up by over 150% in the second quarter.

    At the current market price of Rs 85, Zee is trading at a P/E of 20x on a consolidated 1HFY02 annualised earnings. Its current quarter performance was better than market expectations, driven by outstanding growth in subscription fees. However, the trigger for the stock remains its ability to improve the content quality and consequently TRP ratings. Also, the company's decision to induct a strategic partner would bring a positive re-rating in the stock.

     

     

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