Zee: At the crossroads (Analyst meet)

Zee’s management has admitted to increased competition in the broadcasting sector with new genres of programming including big prize money game shows posing a challenge. Zee, which had 7 programmes among the top 10 programmes in the cable and satellite universe till the last quarter now has only 3 programmes among the top 10.

Advertisement rates have shown grown at a relatively slower pace in the last quarter but the management has claimed that Zee has managed to keep margin fall under check. This is because it started with ‘repeat’ serials i.e. those that were telecast earlier and therefore do not cost much to air. The company’s own game show ‘Sawaal Das Crore Ka’ went on air yesterday and the management claims that Rs 200 m worth of advertisement revenue has already been booked.

Zee, however, expects programming costs to increase in the future. These would be met from enhanced revenue streams that would accrue when the flagship channel Zee TV would become a pay channel. This is expected to happen in the fourth quarter. Approximately Rs 23.5 bn accrues to the cable and satellite sector of which only Rs 3.5 bn accrues to the broadcasters. Going forward this business model is likely to change with broadcasting companies likely to get a far higher share of the total cable and satellite revenues. This is what Zee is banking on for driving future revenues. Zee claims to reach 4.5 m homes, at present, but gets paid a revenue of Rs 10 per home per month from cable operators. It should actually be receiving Rs 44 per home per month. The management claims that this is equivalent to revenue receivable from 1 m homes only. The group plans to reach around 8.2 m homes by 2007. It hopes to be paid Rs 44 per home per month for 7 m homes.

As far as the capital expenditure plans of the company are concerned, the group plans to spend almost Rs 37 bn. A large chunk of this will be used to upgrade its Siticable network to a hybrid fiber coaxial network in 26 cities. (Siticable already has a network in 43 cities.) The aim is to provide value–added services such as Internet over cable, pay per view and video on demand. This capital expenditure is likely to be funded via a private placement for Siticable. As far as Zee TV is concerned, the company plans to spend Rs 2 bn on developing new content. This would be funded through internal accruals.

Zee’s stock quotes at Rs 297, down from its high of Rs 1,550 in February 2000. The critical development that has to take place to put Zee on the growth path is the change in the underlying structure of the business model that has operated in the cable and satellite business so far. The management believes that this will happen due to:

• customer demand for broadband access and interactive value added services which would require increasing investment in infrastructure from cable operators and
  
  
• increasing payout from the cable operator to the pay channels that would squeeze the cable operator’s margins

These are likely to lead to a consolidation in the sector and would benefit the larger cable operators such as Siticable. The question is when this will happen and what happens to the stock valuation until then. We are keeping our fingers crossed.