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Zee 2QFY03: Strong performance - Views on News from Equitymaster
 
 
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  • Oct 30, 2002

    Zee 2QFY03: Strong performance

    Zee has posted a strong growth of 11% in consolidated topline for 2QFY03, on the back of a steep rise in subscription revenues. However, a decline in operating margin and increased depreciation has caused net profit growth to be lower at 2%.

    (Rs m) 2QFY02 2QFY03 Change 1HFY02 1HFY03 Change
    Sales 2,479 2,746 10.8% 4,814 5,234 8.7%
    Other Income 188 197 4.7% 395 359 -9.0%
    Expenditure 1,711 1,942 13.5% 3,451 3,672 6.4%
    Operating Profit (EBDIT) 767 804 4.7% 1,363 1,562 14.6%
    Operating Profit Margin (%) 31.0% 29.3%   28.3% 29.8%  
    Interest 208 200 -4.1% 413 382 -7.4%
    Depreciation 45 81 79.3% 81 137 69.4%
    Profit before Tax 703 721 2.5% 1,264 1,402 10.9%
    Tax 170 175 3.1% 367 380 3.4%
    Profit after Tax/(Loss) 533 546 2.4% 897 1,022 14.0%
    Net profit margin (%) 21.5% 19.9%   18.6% 19.5%  
    No. of Shares (m) 412.5 412.5   412.5 412.5  
    Diluted Earnings per share* 5.2 5.3   4.3 5.0  
    P/E (at current price)   15.3     16.3  
    *(annualised)            

    The decline in operating margins is due to a steep rise in other expenses that increased by 34% compared to the previous year. Consequently, the other expenses head increased from 20% of the revenues in 2QFY02 to 24% of the revenues in 2QFY03. The company has seen a steep 16% decline in staff costs. The major expense head - transmission and programming costs (41% of the revenues) - grew inline with the company’s revenues.

    Revenue breakup
    (Rs m) 2QFY02 2QFY03 Change
    Advertisement 1,406 56.7% 1,424 51.8% 1.2%
    Subscription 780 31.5% 1,211 44.1% 55.3%
    Other sales & services 293 11.8% 111 4.0% -62.1%
    Total 2,479 100.0% 2,746 100.0% 10.8%

    To compensate the impact of sluggish advertisement revenues, the company took several initiatives. These include converting its leading channels Zee TV and Zee News into pay mode with effect from June 2001. The move seems to have paid off. The pay revenues were up 21% on a sequential basis. While the growth in subscription and pay revenues has been robust, the revenues from advertisements continued to decline. The weak market environment and Zee’s not so impressive performance on the TRP charts caused the advertisement revenues to decline by 7%. However, after consolidation with advertisement revenues from ETC, the revenues are up by 1.2%.

    During the quarter, the company’s flagship channel, Zee, had taken a number of steps to increase its viewership. These include efforts to create a Sunday prime time segment. The slot has traditionally been dominated by movies across channels. Zee has broken the rut buy airing soaps in the slot. Also, the company aired new serials like ‘Kittie Party’, ‘Lipstick’ and ‘Aati Rahengi Baharein’ during the quarter. Some of these are drawing good reviews. The move to show relatively new Hindi movies on Thursday’s under the slot ‘Thursday Premiers’ seems to have met with initial success. The channel saw a 140% growth in viewership on October 10, the day it aired the first Thursday Premiere movie. The viewership figure increased by 270% on October 17. The company has gone ahead to claim that is has established itself as the number 2 channel ahead of Sony.

    The company has further strengthened its presence in the regional markets, one of its key focus areas for the fiscal, by appointing 40 GSAs (General Sales Agents). The move is to create a presence in the regional markets with a view to tap the full potential of the pay markets at a regional level. The international operations grew by a robust 41%.

    Standalone numbers
    (Rs m) 2QFY02 2QFY03 Change 1HFY02 1HFY03 Change
    Sales 1,046 880 -15.8% 2,035 1,811 -11.0%
    Other Income 186 187 0.6% 389 343 -12.0%
    Expenditure 683 670 -1.9% 1,341 1,352 0.8%
    Operating Profit (EBDIT) 363 211 -42.0% 693 459 -33.9%
    Operating Profit Margin (%) 34.7% 23.9%   34.1% 25.3%  
    Interest 145 138 -4.8% 286 271 -5.4%
    Depreciation 22 24 8.3% 31 47 53.1%
    Profit before Tax 382 236 -38.3% 765 483 -36.9%
    Tax 86 74.4 -13.4% 170 156 -8.7%
    Profit after Tax/(Loss) 296 161 -45.5% 595 327 -45.0%
    Net profit margin (%) 28.3% 18.3%   29.2% 18.1%  
    No. of Shares (m) 412.5 412.5   412.5 412.5  
    Diluted Earnings per share* 2.9 1.6   2.9 1.6  
    P/E (at current price)   51.1     50.4  
    *(annualised)            

    The standalone numbers indicate that parents business continues to be under considerable pressure. The revenues have declined by a steep 16% for 2QFY03. However, a fall in operating margins has caused the net profit to fall even more swiftly.

    At the current market price of Rs 80, the stock is trading at a P/E multiple of 16x its 1HFY03 consolidated annualised earnings. While the company has shown some initial signs of success on viewership front, it has a long way to go before it displaces the No. 1 player STAR TV, from the TRP charts. On the other hand, the company has been steadily gaining ground in the regional markets and the pay revenues are likely to witness robust growth going forward. The subscription revenues also continue to grow swiftly. Therefore, at the current valuations the stock looks attractive. However, considering concerns over the management, the element of risk is extremely high.

     

     

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