Zee Entertainment plunges 15% on profit booking on margin concerns

With high investment proposed in content from FY22 onwards, operating margins and cash flows could remain lower, say analysts

Shares of Zee Entertainment Enterprises (ZEE) dipped 15 per cent to Rs 212 on the BSE in the intra-day trade on Friday on profit booking as investors worried about shrinking operating profit margin. The stock has slipped 19 per cent from its 52-week high level of Rs 216 touched on Thursday, February 4.

"The incremental investments in a new channel, the Digital business, and the Movie business would lead to margin dilution, and the earlier guidance for a 30 per cent Ebitda (earnings before interest, taxes, depreciation, and amortisation) margin would be difficult to achieve," analysts at Motilal Oswal Financial Services said in December quarter (Q3FY21) results update.

ZEE on Thursday reported a 14.4 per cent year on year (YoY) jump in its consolidated net profit at Rs 400 crore for Q3FY21, as against Rs 349 crore in the year-ago period. Operating income grew 33.2 per cent at Rs 2,729 crore on YoY basis.

The company said domestic advertising revenue for the quarter grew by 7.5 per cent YoY and 43.6 per cent quarter on quarter (QoQ); a sharp recovery post April-September period (H1FY21) reflects the rebound in consumer demand and spending. Ebitda, grew 26.5 per cent YoY to Rs 716 crore, with margins at 26.2 per cent, down 140 basis points (bps) on YoY basis.

"While revenue recovery has been encouraging, high investments in content acquisition in the recent past, acceleration in low-margin movie production, and investments in the Digital platform are likely to keep margins contained at 27 per cent in FY22, much lower than 32–34 per cent historically.  On the positive side, it has remained committed to bringing in increased governance and transparency toward investments, although the cleanup is still in process," analysts at MOFSL said.

Any potential re-rating would be governed by a consistent and disciplined investment approach – restricted to the non-core business – and an improving Ebitda/free cash flow (FCF) profile, the brokerage firm added while maintaining 'Neutral' rating on the stock.

Those at ICICI Securities, meanwhile, said ZEE reported a good set of results for Q3FY21. "Domestic ad grew 7.5 per cent YoY while domestic subscription increased 9.3 per cent YoY on like to like basis ahead of expectations. Ad revenue saw strong pick up sequentially owing to festivities and ad pricing reached near normal. However, with high investment proposed in content from FY22 onwards, operating margins and cash flows could remain lower," it added.