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Zee Entertainment: Advertisement leads the way

Oct 24, 2007

Performance summary
  • Revenues grow by 14 % YoY due to 28% increase in advertisement revenue and 10% increase in subscription revenue.
  • Operating profit margin improved to 33.1% from 6.2% in 2QFY07 on the back of 19% YoY decline in expenses.

  • PAT grows by 362% YoY led by the strong performance at the operating level and better operating leverage.

  • Average channel share of the flagship channel ‘Zee TV’ increased to 30% within the general entertainment genre, from 25% in the previous quarter.

(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Net Sales 3,496 3,986 14.0% 6,391 7,902 23.6%
Expenditure 3,279 2,665 -18.7% 5,512 5,384 -2.3%
Operating profit 217 1,321 507.5% 879 2,518 186.4%
Operating profit margin (%) 6.2% 33.1%   13.8% 31.9%  
Other income 152 225 48.3% 298 438 46.7%
Depreciation 51 55 8.8% 102 122 19.0%
Interest 34 85 147.8% 143 203 41.7%
Profit before tax 284 1,405 395.3% 932 2,630 182.4%
Tax 74 435 490.4% 182 847 364.3%
Profit after tax 210 971 362.0% 749 1,784 138.1%
Minority Interest (12) 46   1 88 14483.3%
Net Profit after Minority interest 222 925 316.1% 749 1,696 126.6%
No of shares (m) 425.5 433.3   425.5 433.3  
Diluted earnings per share (Rs)*         7.7  
Price to earnings ratio (x)*         44.81  
* Based on trailing 12-months

What is the company’s business?
Zee Entertainment Enterprises (ZEEL) is a broadcasting company with its operations spread across more than 10 countries worldwide including India, USA, Europe, Africa, Caribbean, Canada, Australia, Middle East and many South Asian countries. It operates the television channels ‘Zee TV’, a Hindi General entertainment channel, ’Zee Cinema’, the first Hindi cinema channel in India, Zee smile, a comedy channel, Zee Music, Zee Café, an English general entertainment channel, Zee Studio, an English Movie channel, Zee Trendz, a channel dedicated to fashion, Zee Sports.

What has driven performance in 2QFY08?
Surge in advertisement revenues: Advertisement revenues clocked a growth of 28% YoY in this quarter. However, it must be noted that on a like to like basis (excluding the revenues of the sports business) advertisement revenues increased by 60%. During the quarter, average channel share of the flagship channel ‘Zee TV’ increased to 30% within the general entertainment genre, from 25% in the previous quarter. Its other channels continue to do well particularly ‘Zee Cinema’ and ‘Zee Café’ which are the leaders in their respective categories. The improvement in TRPs helped the company to increase its advertisement rates.

Marginal increase in subscription revenues: Subscription revenues increased by marginal 10% YoY. Subscription revenues in CAS notified areas were only 25% of what the company received in the pre-CAS regime. This happened due to the price cap imposed by the regulator TRAI and the low subscriber declarations by the local cable operators. However the company expects to receive 150% of the subscription revenues in the CAS notified areas of what it received in the pre-CAS regime in the next 6 months once the local cable operators declare the right number of subscribers. International subscription revenues were adversely affected due to the appreciating rupee even though the number of international subscribers increased. The company expects its domestic subscription revenues to surge in the CAS notified areas on account of higher declaration of subscribers by the local cable operators.

No ‘Cricket’ing fees: Indian Cricket League (ICL) is the rebel cricket league promoted by Zee Entertainment’s promoter Subhash Chandra. Zee Entertainment does not have any stake in ICL. Leading international cricketers from different countries have signed up for this league. The cricket matches of this league will be telecast on Zee Sports with a revenue sharing agreement between ICL and Zee Sports and no minimum guarantee fee would have to be provided. Zee Entertainment will not have to incur any losses borne by ICL.

Revenue Break up
Rs m 2QFY07 2QFY08 Change
Advertising 1,717 2,195 27.8%
% of net sales 49.1% 55.1%  
Subscription 1,474 1,625 10.2%
% of net sales 42.2% 40.8%  
Other sales and services 305 166 -45.6%
% of net sales 8.7% 4.2%  

Cost break up: Operating profit margin improved to 33.1% from 6.2% in 2QFY07 on the back of 19% YoY decline in expenses. The cost of goods and operations declined by 31% primarily on account of no expenses being incurred on acquisition of BCCI sports rights, which were incurred last year. Personnel cost were 41% higher than corresponding period last year and other costs were up marginally by 5%. As a result, total expenses decreased by 19%. The operating profit grew by 508% led by sound growth in advertising revenues and cost efficiency.

Cost Break up
Rs m 2QFY07 2QFY08 Change
Cost of goods and operations 2403 1660 -30.9%
% of net sales 68.7% 41.6%  
Employee cost 239 337 41.0%
% of net sales 6.0% 8.5%  
Other expenses 636 668 5.0%
% of net sales 18.2% 16.8%  

What to expect?
At the current price of Rs 345 the stock is trading at 45 times trailing 12-month earnings. The company expects to maintain its operating margins at the current level. It also expects to increase its advertisement revenues at a rate higher than 25% and subscription revenues by around 15%. Advertisement revenues should increase due to the improved ratings and the agreement reached between the broadcasters association and the advertisers. The company also expects its domestic subscription revenues to increase due to higher declaration of subscriber numbers by local cable operators. Zee Entertainment plans to launch the channel ‘ Zee Next’ in this calendar year whereby the company’s operating expenses would increase. Employee costs and content costs are expected to increase with the entry of UTV, NDTV, INX Media in the Hindi General entertainment space. Any decline in the TRP ratings or slower rollout of CAS may adversely affect the financial performance of the company.

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