Zee: Earnings upgrades likely on strong Q1

In the quarter, Zee's consolidated revenues stood at Rs 1,340 crore, up 27% y-o-y

Zee Entertainment reported better-than-expected results on all fronts for the June quarter.

Healthy contribution from new channel &TV (so named) to its advertising revenues, marginal profit (Rs 1.5 crore) in the sports business vis-à-vis expectations of loss (Rs 14 crore) and lower tax rate were the key reasons for its outperformance.

Consolidated revenues were Rs 1,340 crore, up 27 per cent year-on-year, and four per cent ahead of the Bloomberg consensus estimate of Rs 1,288 crore. Higher other income (up 74.5 per cent to Rs 68 crore, largely forex gains) also aided net profit in the quarter.

As a result, this was 11.8 per cent higher than the Bloomberg estimate of Rs 218 crore and stood at Rs 244 crore, up 15.8 per cent year-on-year. The Ebitda (earnings before interest, tax, depreciation and amortisation) margin was impacted by full quarter expenses towards &TV and contracted 608 basis points year-on-year to 23.2 per cent.

Zee’s consolidated numbers included full quarter numbers of &TV (launched in March 2015) pushing advertisement revenue growth to a strong 25.4 per cent year-on-year to Rs 780 crore. Management seemed confident with &TV’s performance so far and expects it to achieve break-even in three years or when it gains double-digit market share. Subscription revenues grew 12.2 per cent in the quarter to Rs 463 crore and are likely to grow in the low double digits for FY16, as gains from digitisation are likely to be gradual.

The management remains confident of maintaining the annual Ebitda margin at around 25 per cent level. “Though we maintain our guidance of Rs 100-crore loss for sports business in FY16, there is high possibility that we may end up on the favourable side of that guidance,” said Mihir Modi, chief finance and strategy officer, Zee Entertainment.

Zee also announced its foray into the Odisha market by acquiring the state’s top GEC channel, Sarthak, in an all-cash deal worth Rs 115 crore. The channel enjoys 25 per cent market share in the Rs 110 crore advertisement market of Odisha and is profitable. Thus, this buyout will aid margins and revenues. The company is also investing heavily in the digital medium and is creating specific content for its app, Ditto TV. It is also looking to tie up with players such as Reliance Jio to air their content.

In this backdrop, most analysts remain positive on the stock. While their average target price of Rs 365 indicates downside of about 3% from Wednesday's closing price of Rs 376, this number could be revised upwards as analysts factor in the June quarter beat.