ZEE margins take a hit from sports losses in third quarter

An 80.7% growth in sports revenues stood to Rs 191 crore could not result in profits

Zee Entertainment Enterprises (ZEE) reported slightly better-than-expected results for the quarter ended December. The company’s consolidated net profit stood at Rs 213.6 crore, up 10.5 per cent compared to the year-ago period, while sales stood at Rs 1,188 crore, a rise of 26.6 per cent compared to a year earlier. Earnings before interest, tax, depreciation and amortisation (Ebitda) rose 11.3 per cent to Rs 290 crore. Bloomberg consensus estimates had pegged net profit at Rs 202 crore, sales at Rs 1,127 crore and Ebitda at Rs 273 crore.

The Ebitda margin, however, fell 335 basis points to 24.46 per cent, owing to losses in the sports segment rising to Rs 104 crore in the December quarter from Rs 8.6 crore a year earlier. This was primarily due to a packed sports calendar. Growth of 80.7 per cent in sports revenue, which stood at Rs 191 crore, didn’t result in profits, as operations were hit by a weak rupee and cancellation of T-20 cricket matches from India’s tour of South Africa.

Abneesh Roy, associate director, Edelweiss Securities says, "The India-South Africa series was curtailed and the T-20 matches, which are huge revenue spinners for sports broadcasters, were cancelled. This has affected the sports segment to a big extent. Given that the group has no India cricket matches in the next quarter, the spots losses should settle at Rs 150 to 160 crore."

Excluding sports, however, EBITDA margin has expanded from 32.5% to 39.6% driven by strong performance of non-sports channels. The next quarter, will see other sports, but no cricket on ZEEL's sports channels and thus the margins are expected to be better at around 33%, according to Atul Das, Chief Corporate Development Officer, ZEEL. He points out that this is barring the launch of new channels which will take a couple of years to establish themselves. The company is looking at launching at least 2 new channels in the next fiscal.

The non-sports ad revenues were boosted by multiple factors like launch of tent-pole properties such as Dance India Dance, Chennai Express movie and the festive season. These factors combined with the reduction in inventory gave room to increase the ad rates resulting in healthy ad revenue growth. Additionally, ZEEL's channels gained market share across genres which gave thrust to revenues.

Advertising revenues increased by 34.3% to Rs 684.3 crore over last year. This growth was its highest over the past five quarters and was boosted by higher sports advertising revenues. The ex-sports ad revenue grew by 20% approximately-in line with street expectations. Subscription revenues also showed a healthy upswing of Rs 11.4% to Rs 456.5 crore. Though, it has come off from 16% levels witnessed in the first two quarters of this fiscal.

Das says, “The subscription revenues are a function of the contracts we have with over 4000 customers (operators). It depends on how many contracts are renewed in the quarter since not all follow the Arpil-March cycle. We maintain that the subscription revenues will grow by 14 to 15% for the full fiscal.”

The overseas subscription revenues saw a marginal decline in dollar terms. In rupee terms, the revenue was Rs 124.3 crore growing at 9.4% year on year.

ZEEL launched two new channels in the quarter – a Hindi movie channel named &pictures and a general entertainment channel Zee Anmol. Both the channels have helped increase the network's ad inventory considering the 12 minute ad cap was implemented from 1 October 2013.

ZEEL's stock closed up 1.03% on Wednesday at Rs 284.45. Most analysts remain positive on the scrip though they believe current valuations cap significant upsides.