Higher ad, other revenues bail out Zee Entertainment

Subscription revenue growth to remain weak and margins likely to fall, but analysts positive

Higher than expected growth in advertising revenues (up 21.5 per cent to Rs 582 crore) and a sharp surge in other revenues helped Zee Entertainment Enterprises (Zee) post largely in-line results for the March quarter. Following the 12-minute ad cap implemented in October 2013, the ad inventory fell about 12 per cent in the quarter. The growth, thus, was led by higher ad rates as Zee continued to gain viewership share across its various channels.

Zee’s total income grew 20.2 per cent to Rs 1,159 crore and net profit by 20.1 per cent to Rs 216 crore as compared to the March 2013 quarter, versus the Bloomberg estimates of Rs 1,079 crore and Rs 212 crore, respectively.

Although the higher base in the year-ago period played a role, the disappointing subscription revenue growth of two per cent (Rs 464 crore) was lower than 9-10 per cent estimated by analysts. Subscription revenues have been flattish for the past three quarters as gains from the first two phases of digitisation are largely accounted for. In FY15 as well, management expects this metric to grow slower than 13 per cent posted in FY14. Breaking up of Mediapro (distribution joint venture between STAR and Zee) will impact subscription revenues as Zee builds a new team and negotiates on its own. Likely delays in the implementation of Phases 3 & 4 of digitisation beyond FY15 are another pressure point.

However, management expects growth to come back in FY16 and then on be driven by gains in average revenue per user (Arpu). Zee’s international subscription revenues (up 10 per cent year-on-year to Rs 129 crore) were aided by rupee depreciation but declined in dollar terms for the quarter.

Atul Das, chief corporate development officer, Zee, says, "We believe FY15 industry ad growth could be slightly better, given a stable government. We hope to take price hikes but that will be based on actual market share gains for Zee. However, international subscription revenues will grow in single-digit levels and further rupee appreciation could impact these revenues.”

Zee could also gain from a 15 per cent rise in rates charged by broadcasters to cable operators with effect from April 1. However, actual gains from this rise will depend on the operators' ability to pass these to the end consumer.

Analysts like Abneesh Roy, associate director, institutional equities research, Edelweiss Securities, suggests that Zee is being conservative. He is positive on the stock, as it is a good play on advertising recovery.

Zee's operating margins will remain under pressure in FY15 as it plans to make higher investments in new channels, in marketing as well as existing content.

The sports business would also continue to see pressure. Zee expects the losses to be similar to the Rs 97 crore seen in FY14.

Analysts like Abneesh Roy, Associate Director - Institutional Equities - Research, Edelweiss Securities, though suggest that Zee is being conservative. He is positive on the stock as it is a good play on advertising recovery.