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Zee Entertainment: Programming expenses dents margins - Views on News from Equitymaster

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  • Oct 29, 2010 - Zee Entertainment: Programming expenses dents margins

Zee Entertainment: Programming expenses dents margins

Oct 29, 2010

Zee Entertainment has announced 2QFY11 results. The company has reported 31.7% YoY and 17.1% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Topline grows 31.7% YoY in 2QFY11. Advertising revenue grows by 66.5% YoY, while subscription revenue grows by 12.4% YoY. However, revenues from other sales and services decline 48% YoY.
  • Operating margins fall to 26.5% in 2QFY11 from 27.9% in 2QFY10 due to higher programming costs.
  • Other income declines 17.7% during the period
  • Net profits increase 17.1% YoY in 2QFY11 on the back of strong performance at the operating level, lower interest and depreciation expenses.

Financial performance snapshot
(Rs m) 2QFY10  2QFY11  Change
Sales 5,405 7,116 31.7%
Expenditure 3,897 5,230 34.2%
Operating profit (EBDITA) 1,508 1,885 25.0%
Operating profit margin (%) 27.9% 26.5%  
Other income 291 240 -17.7%
Interest 84 5 -94.4%
Depreciation 77 56 -26.8%
Profit before tax 1,639 2,064 26.0%
Tax 529 801 51.4%
Minority Interest 32 1 -98.1%
Profit after tax/(loss) 1,078 1,262 17.1%
Net profit margin (%) 19.9% 17.7%  
No. of shares (m)   489.0  
Basic & diluted earnings per share (Rs)*   11.5  
P/E ratio (x) *   24.0  
* On a trailing 12-months basis

What has driven performance in 2QFY11?
  • Zee Entertainment witnessed a 31.7% YoY growth during the quarter led by strong growth from the advertising segment. Advertising revenue increased 66.5% YoY due to robust increase attributable to higher channel shares across network, a buoyant macro environment and a continued preference of advertisers towards television. Subscription revenue too registered a strong growth of 12.4% YoY led by increase in subscription revenue from domestic cable operators during the quarter. 2QFY11 results include the numbers of regional general entertainment channel business acquired from Zee News in January 2010 and hence are not comparable with 2QFY10 figures. Revenues from other sales & services declined 48% YoY as education business (part of other sales & services) has been demerged from the company. Accordingly, revenue from the education business has been reversed during the quarter.

    Revenue Break up
      2QFY10 2QFY11 Change
    Advertising Revenue 2476.1 4,122 66.5%
    % of sales 45.8% 57.9%  
    Subscription Revenue 2435 2,737 12.4%
    % of sales 45.1% 38.5%  
    Other Sales & Services 494 257 -48.0%
    % of sales 9.1% 3.6%  

  • On the cost front, programming expenses increased to 48.6% (as a percentage of sales) from 41.2% in 2QFY10 impacting the operating margins. Staff cost also increased from 8.2% ( as a percentage of sales) in 2QFY10 to 9.0% in 2QFY11

  • The company’s flagship channel Zee TV, had an average weekly channel share of 22% and average weekly gross rating points (GRPs) of 237 during 2QFY11. The channel delivered an average 27 of the top 100 weekly shows in the period.

What to expect?
At the current price of Rs 275, the stock is trading at 12.6 times our estimated FY13 earnings. Although the stock has corrected by 10-12% over the last three months we believe it is fairly valued at the current juncture. As such we would advise against taking fresh positions in the stock.

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