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Zee Entertainment: Another restructuring on the cards - Views on News from Equitymaster
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  • Oct 23, 2009 - Zee Entertainment: Another restructuring on the cards

Zee Entertainment: Another restructuring on the cards
Oct 23, 2009

Performance summary
  • Topline declines by 6% YoY during 2QFY10 due to a 13% decline in advertising revenue.
  • EBITDA margins improve to 28% in 2QFY10, up from 26% in 2QFY09 due to lower programming and operating cost.
  • Other income grows by 4% YoY during the quarter.
  • Excluding the tax write back in 2QFY09, bottomline grows by 12% YoY in 2QFY10 on the back of higher operating margins. Including the write back, bottomline declines by 38%.


Consolidated financial snapshot
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Net sales 5,717 5,405 -5.5% 11,136 10,164 -8.7%
Expenditure 4,229 3,897 -7.8% 8,207 7,487 -8.8%
Operating profit (EBDITA) 1,488 1,508 1.3% 2,930 2,678 -8.6%
EBDITA margin (%) 26.0% 27.9%   26.3% 26.3%  
Other income 280 291 4.3% 558 617 10.6%
Finance charges 223 84 -62.5% 437 175 -60.0%
Depreciation 65 77 17.6% 121 152 25.8%
Profit before tax 1,479 1,639 10.8% 2,930 2,968 1.3%
Exceptional Item* 792 -   1,366 -  
Tax 489 529 8.1% 906 945 4.2%
Profit after tax/(loss) 1,782 1,110 -37.7% 3,389 2,023 -40.3%
Net profit margin (%) 31.2% 20.5%   30.4% 19.9%  
No. of shares (m)         434.0  
Diluted earnings per share (Rs)**         8.9  
Price to earnings ratio (x)**         25.6  
* Excess provision for tax in earlier years written back **On trailing twelve months earnings

What has driven performance in 2QFY10?
  • Zee Entertainment witnessed a 6% YoY decline in topline in 2QFY10 due to a 13% decline in advertising revenue although subscription revenue increased by 9% during the quarter. Subscription revenues from domestic direct to home (DTH) were Rs 514 m during this quarter, an increase of 89% over 2QFY09. On a sequential basis, advertising revenues grew by 25% as a result of an improved business environment and steady improvement in ratings across network channels.

    Revenue break-up
    (Rs m) 2QFY09 2QFY10 Change
    Advertising Revenue (Net) 2,851 2,476 -13.2%
    % sales 49.9% 45.8%  
    Subscription Revenue 2,244 2,435 8.5%
    % sales 39.3% 45.0%  
    Other Sales & Services 621 494 -20.5%
    % sales 10.9% 9.1%  

  • Zee Entertainment’s flagship Hindi general entertainment channel (GEC) Zee TV achieved 256 weekly GRPs on an average during 2QFY10 and attained a channel share of 21% in its genre. Agle Janam Mohe Bitiya Hi Kijo, Pavitra Rishta and Saregamapa Lil Champs 2009 were the top rated shows for the channel this quarter. Zee TV had 20 out of the top 50 and 31 out of the 100 programmes in its genre during the quarter. Zee Cinema captured a 32% channel share during 2QFY10, while Zee Café garnered a 17% share.

  • Zee Entertainment will acquire the regional-entertainment channels of Zee News (Zee Marathi, Zee Talkies, Zee Bangla, Zee Telugu, Zee Kannada & Zee Cinemalu). As consideration, the company will issue its equity shares to the shareholders of Zee News based on independent valuation. The company plans to take these channels international and expand revenue streams.

  • In the forthcoming quarter, Zee TV will launch a new fiction show Yahaan Main Ghar Ghar Kheli, Saregamapa Mega Challenge and Dance India Dance-season 2.

What to expect?
Our expectation that advertising revenues will recover from the decline experienced during 1QFY10 has happened this quarter. Going forward, we expect the advertising front to remain tightly linked to the volatile macroeconomic environment. However, we expect subscription numbers to remain strong. Over the long term, we believe that the TV broadcasting sector will continue to grow and that Zee will be able to capitalise on the same given its strong position in the sector.

However, the company tends to undertake frequent restructuring exercises, which makes the task of assessing shareholders’ wealth difficult. It creates unnecessary confusion in the mind of investors. The proposed migration of regional channels from Zee News to Zee Entertainment is the latest instance. The company will be well served by a little less chopping and changing.

At the current price of Rs 227, the stock is currently trading at 19 times its estimated FY12 earnings. At the current price, the stock does not provide the margin of safety we look for. As such we would advise against taking fresh position in the stock.

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