Zee Entertainment: Positives factored in

While subscription revenue growth is expected to remain strong, subdued ad revenue growth and rich valuations limit upsides

Broadcasting major Zee Entertainment Enterprises reported a higher than expected performance for the quarter ended March 31. Though growth rates moderated on expected lines in the quarter, they were still healthy in the subscription and advertising segments, given the subdued environment.

Total income grew 11 per cent to Rs 964 crore. While Ebitda (earnings before interest, taxes, depreciation and amortisation) margins expanded handsomely (up 672 basis points) to 25.1 per cent due to better cost control, net profit increased just 12.1 per cent to Rs 180 crore as interest expenses and tax outgo grew sharply.

Zee enjoys strong pricing power with advertisers, as well as cable and multiple shystem operators. Also, aided by timely implementation of digitisation, subscription revenue is expected to sustain a little over 20 per cent growth, thereby driving overall performance in FY2014.

However, its huge investments in sports and new businesses will be a drag on profitability (at least in FY14). On the other hand, Zee’s advertising revenues have grown faster than the sector’s, a trend likely to continue. However, unlike in FY13, the growth in Zee’s ad revenue is estimated to be lower, due to a subdued economic environment. Unless these turn out to be higher than analysts’ estimates, it will be difficult for the stock to sustain its outperformance.

From the stock perspective, though most brokerages remain positive on Zee, they believe the current valuations of 28 times FY14 estimated earnings are not cheap and, hence, will limit further upsides. The stock, which has doubled in a year versus a 25 per cent rise in the Sensex, might thus track broader markets.

Market share, digitisation
While the overall ad environment (excluding the fast moving consumer goods sector) remained soft, market share gains enabled Zee to post a 15.5 per cent rise in advertising revenue (53 per cent of total revenue). Zee’s management believes the broadcasting segment’s ad spends will continue to post single-digit growth in FY14 and expects to grow ahead of the sector via further market share gains.

The growth was 13 per cent in subscription revenue but the actual rise was higher, after excluding the one-off items reported in March 2012. In fact, Zee’s subscription revenue of Rs 455 crore was its highest ever. Abneesh Roy, media analyst at Edelweiss Securities, says: “Adjusting for one-offs, Zee’s subscription revenue growth is about 23 per cent.” Domestic subscription revenues were boosted by the partial benefits of Phase-II of digitisation, with Phase-I largely factored in.  Zee is set to reap significant benefits in the form of a rise in subscribers, increased premium subscription and higher revenues per subscriber over the next two to three years as the digitisation process is completed.

Sports losses
The weak link for now is Zee’s sports segment, wherein revenues remained weak and stood at Rs 107 crore (down 16 per cent over the March 2012 quarter and flat sequentially). The business continued to report losses (Rs 40.5 crore in the quarter), though the company delivered on its promise of keeping losses under Rs 100 crore in FY13. For the full year, sports losses were Rs 86 crore, down 41.8 per cent over FY12. Atul Das, chief strategy officer, says: “FY14 has a heavy sports calendar. Hence, we will make significant investments in the sports business, which means sports losses will continue to be at similar levels in FY14 as well.”

Meanwhile, to mark completion of 20 years of the broadcasting business, Zee announced a bonus issue of 21 redeemable preference shares of Rs 1 each (coupon rate of six per cent per annum) for every  share held. This is in addition to the recent buyback of shares and dividend of Rs 2 for each share of Rs 1. These moves should provide support to sentiment.