Zee: Slowing growth may weigh on rich valuations

Moderating growth in advertising revenues to keep stock price in check

Zee Entertainment Enterprise (Zee)’s core business continues to grow at a steady pace. However, incremental uptick to growth as well as margins will come in from launches, expansion across global markets, and growth of digital business (DittoTV, Ozee). Against this backdrop, the management believes revenue growth could moderate in FY17.

Strong double-digit growth in subscription revenues was the surprise element in Zee’s March quarter (Q4) results. As against Street expectations of single-digit growth, overall subscription revenues grew 16.4 per cent year-on-year to Rs 594 crore. But this growth was a function of higher catch-up revenues from digitisation process. On a full year basis, this metric grew at a slower pace of 14.7 per cent. Advertising revenues grew 29.1 per cent to Rs 865 crore, aided partly by &TV as well as Zee Cine Awards. Overall, consolidated revenues grew 13.7 per cent to Rs 1,532 crore — slightly ahead of Bloomberg consensus estimate of Rs 1,494 crore.

Riding on a lower base of March 2015 quarter, Ebitda (earnings before interest, taxes, depreciation, and amortisation) margin expanded 690 basis points to 27 per cent as the base quarter margins were hit by higher costs related to the launch of &TV. But, owing to a sharp rise in tax rate to 37.8 per cent, net profit at Rs 261 crore was up 12.9 per cent and was a bit shy of Bloomberg consensus estimate of Rs 265 crore. Also, ‘other income’ fell Rs 10.7 crore to Rs 45.8 crore in the quarter, and restricted bottomline.

Though the Q4 performance was steady, the management expects lower growth in FY17, especially in ad revenues, which formed 56 per cent of FY16 revenues. Mihir Modi, chief finance and strategy officer, says, “FY17 advertising revenues will have &TV in the base. Our FY17 ad revenues should grow at least in line with sector growth of 15-16 per cent, with upsides driven by viewership share gains.”

Slowing ad intensity from e-commerce players is another pressure point on advertising revenues though steady FMCG (fast-moving consumer goods) spends and uptick from telecom-related spends will provide some support. Zee expects its subscription revenues to grow in mid-teen levels in FY17 even as its sport losses will be higher due to two India cricket series, high-cost in nature. Global revenue growth was healthy at 35.3 per cent in the quarter. The firm believes Ebitda margins are sustainable at current levels despite investments in businesses.

Analysts are concerned about doubling of investments in the movie business to Rs 160 crore in FY17. While most analysts are positive on Zee as it’s a play on growing advertising spends, valuations of 35 times one-year forward estimated earnings appear stiff.