Zee: Next in trouble

The disconcerting bit about Zee Entertainment’s June 2008 quarter numbers is the small increase in the subscription revenues, of just under 4 per cent, sequentially. Otherwise, the television broadcaster has seen a smart increase in advertising revenues of 37 per cent y-o-y, which have helped it post a 38 per cent rise in revenues y-o-y, at Rs 542 crore.

Advertising income was to some extent driven by the 78 per cent growth in revenues from the sports business. However, despite a good topline show, the company’s operating profit margin dropped 400 basis points to 26.6 per cent with the Zee Next channel piling up losses of nearly Rs 40 crore. And programming costs were up sharply.

The IPL cricket matches appear to have impacted Zee’s viewership ratings because its gross rating points (GRPs) have come off from 273 in the March 2008 quarter to 271 in the June quarter. The new competition in the general entertainment space — in the form of INX and NDTV Imagine —- too may have taken away audience share.

The launch of yet another entertainment channel, Colors, could hurt Zee’s ratings even as Star Plus continues to occupy the number one slot. The competition in the entertainment space promises to get more intense and Zee may not have the financial strength to compete given the rising cost of production and people. Already peak advertising rates for incumbents such as Star have been coming off thanks to viewership becoming increasingly fragmented.

Zee is expected to close FY09 with revenues of around Rs 2,300 crore and a net profit of about Rs 450 crore. The company had planned to consider a buyback of its shares but has decided against it for the present. That may not go down well with shareholders.

The stock, at Rs 205, commands a price-earnings (P/E) multiple of 19 times on estimated FY09 earnings and is not cheap given the keen competition in the entertainment space.