Zee Extraordinary Prop

THE COMPASS

On the face of Zee Telefilms' performance seems fine on an individual and on a consolidated basis. However, its results lose their sheen when one considers that there is a huge extraordinary income, which has been included in its sales, and the equity expansion that had taken place last year.

Zee Telefilms' sales has increased by 397 per cent to Rs 244.09 crore in the fourth quarter while its net profit has increased by nearly ten times to Rs 208.44 crore. The full year results for 1999-00 show a 133 per cent increase in sales to Rs 408.58 crore, a 32 per cent increase in commission income from advertisement bookings. Net profit increased by 336 per cent to Rs 267.12 crore.

 

Zee Telefilms has got its films and television library valued by a international consultant for Rs 2,634 crore. This gives shareholders an idea of the intangible assets on their company's books which by itself is a good disclosure. However, the company has gone a step ahead and sold a portion of this library and accounted for the sales and profits from the transaction in its books.

Moreover, the sale has been to its subsidiary Asia Today. The purpose of the transaction thus, seems to be just to prop up performance of Zee Telefilms. In the first place, accounting for extraordinary income along with normal revenues is not a standard accounting practice. It should have been accounted for separately after computing profit before tax (excluding extraordinary income).

However, another view is that Asia Today is a cash rich company. Since Zee is in the expansion and acquisition mode, these funds will come handy. Thus, it is transferring funds from the subsidiary. Yet, the accounting could have been more transparent. Also, the objective could also have been achieved through a one-time dividend pay out, instead of a holding company-subsidiary transaction.

If one strips this income out from its fourth quarter sales, then growth is just 12 per cent and for the full year, sales growth is about 25 per cent. Also, gross profit growth would have been flat during the fourth quarter and increased by 28 per cent in the full year. The redeeming part of its performance is that revenues from advertising are up which is a healthy sign. However, on a diluted equity capital and shorn of extraordinary income, its earnings per share for the full year would be much lower.

The massive expansion in its equity capital means that shareholders will not be satisfied with just a 28 per cent increase in gross profit. Its equity capital has increased by 119 per cent to Rs 40.85 crore. The reasons for this are: the merger of Zee Multimedia with a swap ratio of 1:1 and issue of shares to acquire stakes in joint ventures with the Newscorp group of companies.

Here, one also has to factor in the performance of its subsidiaries. Their consolidated revenues are up by 26 per cent to Rs 794 crore and net profit up by 50.7 per cent. This too is largely due to Asia Today's performance. On a consolidated basis too, if one strips out extraordinary income, profit after tax growth would be moderate. The share price hit the lower end of the circuit filter yesterday, reflecting bearish sentiment.

Engineering goods

There is some more positive news on the old economy front. Overall, capital goods production and imports continues to be slack, indicating the low level of capital formation in the country, according to CMIE's Monthly Review, May 2000. In the engineering goods sector, however, certain categories seem to be performing really well.

In the April 1999-February 2000 period. Air and gas compressors have bounced back after facing a rough period, posting a 155 per cent increase in production to 67,352 numbers. This augurs well for companies like Ingersoll Rand, Atlas Copco and Chicago Pneumatic.

Diesel engines too have done well in this period, with an increase in production by 32 per cent to 2,672,018 numbers in the same period. Kirloskar Oil Engines, Cummins India and Hindustan Powerplus are some of the leading companies in this segment. The Technology Upgradation Fund for the textiles sector seems to have started taking effect, with textile machinery production too increasing.

A major change is also visible in the electrical machinery segment. Telecom cables have been showing a major production growth after DOT and private operators started placing orders. Switchgears' production has increased by 235 per cent while production of insulated cables/wires increased by 81 per cent. Transformer and turbines' sales are also up during the period. Companies like Siemens, L&T, ABB, Alstom and Bhel will benefit from the upturn that seems visible in these segments.

It should be noted that these figures represent production figures and their impact on actual performance will be with some lag, and will also depend on price realisations. Moreover, since performance in the previous period was badly affected, these figures have to be adjusted as such. It nevertheless represents a recovery in fortunes which if sustained will get reflected in their performance.