Pick up in ad revenue growth, regional share key for Zee Entertainment

Street will also keep an eye out on cash flow improvement in the coming quarters

The Zee Entertainment stock was down about 1 per cent, even as the broader markets were up, because of a muted operating performance in the September quarter, provisions related to Siti Networks, and market share loss in key regional genres. The pace of advertising recovery, improvement in cash flows, and monetisation of over-the-top application ZEE5 are the near-term drivers for the stock.

The company’s operating profit in Q2 was down by more than half due to pressure on advertising rates, jump in marketing spends, and the Rs 81 crore provision related to Siti Network. The higher advertising and marketing spends was on account of new content campaigns for television and ZEE5. The company also took a one-off charge of Rs  97 crore related to corporate guarantee on behalf of Siti Networks, which hit its bottom line.

The near-term outlook shall be led by growth in advertising revenues. While the revenue scenario in this segment has improved after a 65 per cent fall in the June quarter to a 26 per cent decline in Q2, advertising rates are yet to hit pre-Covid-19 levels. Growth is expected to rebound by Q4 as spending, especially in key consumer sectors, picks up. Like-to-like growth in subscription revenues was muted at 3 per cent, led by ZEE5. 

While sequential ad revenue growth was positive, analysts at Emkay Research said that transparency and delivery on guidance would be essential for re-rating of the stock. In addition to Siti-related provisioning, lack of a full recovery of funds in overseas investments within stated timelines, and the rise in receivables and investments in content delivery arm SugarBox are the other concerns for the Street.

What the Street will also watch out for is the ability of the company to regain market share in key regional markets. In the Marathi general entertainment category, Zee Marathi lost out to Star Pravah, which made significant gains during the pandemic. Similarly, the company lost significant share over the last year in the Bangla market, yielding the leadership position in Q2 to Star Jalsha. 

Analysts at ICICI Securities say that these two markets were the strongest for Zee. They are cautious on advertising revenue growth for both Zee Entertainment and Sun TV because of the IPL and a dip in viewership share in the coming quarters.