Strong growth in base biz powers Zee Entertainment's show in Sep quarter

Despite pressure, margins much ahead of estimates

Worries about the higher scale of investments in the digital vertical taking a toll on margins were put to rest, at least in the September quarter, as Zee Entertainment reported better-than-expected financials. Aided by strong base business growth, operating profit margins came in at 34 per cent, up 300 basis points as compared to the year-ago number. Analysts had expected the number to be in the 30-31 per cent mark.

Profit at the operating level was up 37 per cent, despite the continued high programming costs that were up 25 per cent year-on-year. The cost increase was largely due to funding of new content for ZEE5, movie production, and amortisation costs for the broadcast business. While costs are expected to be elevated, given the 500-600 hours of original content the company plans to create for the digital venture over the next one and half years, the company stuck to its full-year margin target at upwards of 30 per cent. Reported margins in FY18 were at 31.1 per cent. 

While the company did not disclose details of the revenue contribution to overall sales, the digital venture has had a good start, with 41.3 million monthly active users spending about 31 minutes per day on ZEE5, as of September. 

While the firm has tied up with Bharti Airtel and Reliance Jio, it is in talks with other telecom operators, broadband service providers, device manufacturers and e-commerce companies to drive traffic to ZEE5. While the management has given a 3-5 year time frame for the venture to break even, the Street will keenly watch out for revenue uptick from this medium. The management expects the platform to get at least 30 per cent of overall revenues from ZEE5 over the next five years. 

In addition to the digital vertical, how the advertising and subscription revenues scale up will be important. For the quarter, the firm, on the back of market share gains, posted a strong 23 per cent advertising growth on a lower base. 

The company is confident of outperforming the sector growth in the second half of the fiscal, and expects FMCG contribution to remain robust. Subscription growth, too, benefited from a low base, early closure of distribution contracts, and phase III monetisation.  

While the results came in after market hours, the Street seems to have an inkling of the performance given the stock closed 6.4 per cent higher in trade. Given the strong outlook and overall market sentiment, expect the gains to continue.