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Zee: Surprise break - Views on News from Equitymaster
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  • Oct 28, 2004

    Zee: Surprise break

    Performance Summary
    Zee Telefilms has delivered a surprising performance, albeit on the downside. The company reported a 1% YoY fall in consolidated bottomline despite an 8% growth in topline. The poor performance at the PAT level could be attributed to the hit at the operating level, wherein the margins have declined by about 180 basis points on the back of higher marketing costs and losses on the film distribution business.

    Consolidated snapshot…
    (Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
    Net Sales 3,231 3,479 7.7% 6,124 6,686 9.2%
    Expenditure 2,217 2,449 10.5% 4,209 4,600 9.3%
    Operating Profit (EBDITA) 1,014 1,031 1.6% 1,915 2,086 8.9%
    EBITDA margin (%) 31.4% 29.6%   31.3% 31.2%  
    Other income 164 87 -47.1% 355 246 -30.8%
    Interest 192 77 -60.2% 362 153 -57.8%
    Depreciation 70 76 8.6% 152 168 10.8%
    Profit before tax 916 965 5.3% 1,757 2,011 14.5%
    Tax 215 273 27.0% 433 587 35.5%
    Profit after Tax/(Loss) 701 692 -1.3% 1,324 1,424 7.6%
    Net profit margin (%) 21.7% 19.9%   21.6% 21.3%  
    No. of Shares (m) 412.5 412.5   412.5 412.5  
    Diluted earnings per share* 6.8 6.7   6.4 6.9  
    Price to earnings ratio (x)   23.1     22.4  
    (* annualised)            

    Company profile
    Zee TV is India’s first private TV channel covering nearly 30% of Indian television homes. It also reaches an estimated over 225 million people worldwide. Though the channel did not face competition in the initial years of its launch, it has been facing tough times in recent years owing to the competition from other channels like Star and Sony. With an effort at de-risking its existing business model, Zee has been spreading its wings internationally through its wholly owned subsidiaries, which would help it in increasing its subscription-based revenues. Also, venturing into production of films, selling its distribution rights and the DTH (Direct-To-Home) services would augur well for the company.

    What has driven performance in 2QFY05?
    Respectable topline performance:  Zee’s topline has registered an 8% topline growth led by an over 5% growth in advertising revenues and a near 8% growth in subscription revenues (see table below). While growth in ad revenues has improved as compared to the same quarter last year, strong growth in domestic subscription revenues aided the overall growth in subscriptions of the company. Just to put things in perspective, while domestic subscription revenues, including DTH, grew by 28% YoY during the quarter, international subscription revenues have registered a 3% decline for reasons not yet known.

    Revenue breakup
      2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
    Advertisement 1,458 1,537 5.4% 2,670 2,854 6.9%
    Subscription 1,489 1,606 7.9% 2,917 3,205 9.9%
    Other sales & services 284 337 18.5% 537 627 16.7%
    Total 3,231 3,479 7.7% 6,124 6,686 9.2%

    While ad and subscription revenues form a major junk of Zee’s revenues (90%), the balance 10% is contributed by other sales & services, which include revenues from film production and distribution, syndication, education sales and sale of set top boxes. This segment registered a 19% YoY growth. Also, it must be noted here that the consolidated numbers of Zee in 2QFY05 do not include Padmalaya Telefilms (PTL) numbers and to this extent, the numbers are depressed. As per the company release, in the corresponding quarter last year, PTL had contributed Rs 261 m to revenues and Rs 33 m to operating profits.

    Operating margins surprise:  Margins registered a YoY fall of 180 basis points during the quarter under consideration. This could be attributed to higher marketing costs and losses in the film distribution business. The company’s transmission and programming costs have decreased in absolute terms by over 2% and also as a percentage of net sales (by 400 basis points). Since this accounts for nearly 2/3rd of the total operating expenses of the company, the fall in overall margins have been curtailed. While staff costs have increased by 20%, other expenses have surged 35% because of higher promotional and marketing costs during the quarter, thus pressurizing operating margins.

    Costs breakup
    (as % of net sales) 2QFY04 2QFY05
    Transmission & Prog. Costs 43.0% 39.0%
    Staff Costs 5.1% 5.7%
    Other expenses 20.5% 25.7%
    Total 68.6% 70.4%

    Lower interest costs save the show:  While operating pressures have dented the bottomline performance of the company during the quarter, a sharp fall in interest rates has acted as a savior for the company. It must be noted that the company has repaid Rs 3 bn from its gross debt during 1HFY05. The pressure on bottomline was also felt on account of other income component showing a sharp fall of 47%. The tax provisioning during the quarter has also been higher by 27% owing to the shifting of the Zee TV and Zee Cinema channels to India and the income of these are now being recorded under Zee Telefilms and are being subject to marginal tax rate.

    What to expect?
    At Rs 155, the stock trades at 22.4x annualised consolidated 1HFY05 earnings. While growth in subscription revenues has continued largely on expected lines as yet, we believe that with a likely removal of freeze on bouquet pricing imposed by the regulatory authority, TRAI, it would further aid the growth in revenues from subscriptions. Also, with DTH services now having commenced its services in entirety, it augurs well for the company. Further, we believe the recovery in adspend to continue in the coming quarters on the back of sustained economic growth.

    Also, the company has initiated a major restructuring of international operations with the aim of garnering substantial tax efficiencies and reduction in operation costs, the first phase of which has been completed. Also, Zee replaced its English movie channel ‘Zee MGM’ with ‘ZMZ’ on October 1, 2004. Further, while currently the Zee-ESPN-Star Sports-BCCI case remains pending in court for a final verdict, the company has incorporated a new wholly owned subsidiary viz. Zee Sports Ltd., to manage and operate a sports channel. Zee intends to launch its sports channel once it wins the cricket rights. It is also planning to launch new channels for the Indian market along with increasing regional presence through its channels under the Alpha brand.



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