Zee Entertainment: More GST pain likely in Q2

Advertising revenue growth below estimates in quarter as advertisers cut spends due to GST uncertain

Zee Entertainment posted numbers in line with analysts’ expectations for the June quarter (Q1), both on the revenue and operating profit fronts. Revenues at Rs 1,540 crore fell 2 per cent year-on-year (y-o-y). But the financials were impacted by the sale of Ten Sports and acquisition of two channels from Reliance Broadcast Network (RBNL). 

Having said that, the two key parts of top line are advertising (70 per cent of revenues) and subscriptions (the rest). Adjusted advertising revenues were up just 6.9 per cent y-o-y to Rs 869 crore, and came below analysts’ expectations of 9-10 per cent growth, mainly due to disruption in the month of June in the run-up to the goods and services tax (GST) roll-out. 

Managing Director and CEO Punit Goenka said advertisers reduced ad spends on existing brands and launched fewer products as the distribution chain was not fully prepared for seamless transition to GST. Analysts expect the September quarter, too, to be similar to Q1 with advertising revenue growth at 6-7 per cent.

Zee, however, given its market share gains of 100-150 basis points over the past two months, will be able to outperform the sector’s advertising revenue growth of 4-5 per cent in FY18. 

Adjusted subscription revenues at Rs 379 crore grew a strong 14.5 per cent led by increasing pace of digitisation. What could impact revenues on this front are the new tariff regulations, currently under litigation. Zee has guided for a mid-teens growth in subscription over the next three years. While RBNL properties were a drag in Q1, the company expects to grow both on the top line and operating profit front for the full year.

Operating profit at Rs 484 crore was up 7 per cent y-o-y, and operating profit margins came in at 31.4 per cent. The management continues to guide for margins above the 30 per cent mark. Though costs on account of employees went up by 11 per cent, what would help at the operating level going forward was reduction in programming costs related to sports. While operating profit was in line with expectations, reported net profit at Rs 251 crore (up 16 per cent y-o-y) fell short, influenced by other income (Rs 101 crore, up 37 per cent), mark-to-market loss of Rs 53 crore and one-time higher tax rates.

Given the recent run-up, the stock could take a breather awaiting further signals on the Street, which will keep an eye on how advertising revenue growth pans out and will await the revamped digital platform strategy Zee unveils in the second half of FY18.