Zee Telefilms: Back In Focus

Analysts are now rerating a company in which investor confidence had plummetted. A report

Had you walked into the Zee Telefilms office three years ago, you would have seen the place brimming with equity analysts finetuning their buy recommendations and understanding the structure of this group. The media boom was set to begin in India, then an entertainment-deficit country, and Zee Telefilms was the only listed company with an exclusive franchise to make software for Zee TV. The financials were strong and management sound. There was no way investors would lose money, it seemed.

Today, the stock price has fallen from Rs 350 in September 1994 to the current Rs 111.50. Things didnt quite work out as analysts expected for several reasons. First, new channels like Jain TV, ATN, NEPC TV and Sony Entertainment Television and the rise of a few hundred software producers meant that Zee TV and Zee Telefilms were losing ground. Later Star TV started beaming Hindi programmes and Zee was entangled in an imbroglio with Star. Most of the channels have either closed or are inconsequential and Zee TVs only competitors are Sony and Star.

 

Zee Telefilms(ZTL) also suffered from a change in industry perception. The disappointing performance by a number of high profile media companies has marred investor sentiment towards media and entertainment stocks.

Now, as Zees management starts addressing the problem of its complex structure (see box Complex Relations), analysts have started re-rating ZTL.

As a first step, ZTL plans to merge its wholly-owned subsidiary Ambience Space Sellers. The first measure has been taken by consolidating the subsidiarys accounts in the September 1997 results.

Atul Das, an analyst with Lloyds Securities, points out that if the merger takes place in 1998-99, ZTLs net profit will see a 49 per cent rise and this will improve investors sentiments. Though ZTL is not expected to record super-normal growth in the future, it will continue its leadership in this segment and thus deserves a better valuation in line with its fundamentals, he says.

In addition, ZTL is cash rich as all its major capital expenditure have already been completed, and is not likely to raise additonal funds. ZTLs 1996-97 annual report mentions that surplus cash funds generated from its core business would be spent on acquiring software assets and the balance will be distributed as dividend or added to reserves.

Since ZTL is the sole supplier of software programming to the Zee TV, any future growth in ZTL depends on the continued success of the channel, which is the market leader in the Hindi satellite channels.

At present Zee TV has a reach of 22 million homes, with a viewership in India alone exceeding 120 million viewers. It has cornered around 18 per cent of the total advertisement on television and 50 per cent of the advertisements on satellite channels. It has also successfully thwarted competition from other satellite channels like Sony TV, Home TV and Star TV, which is reflected in the high television rating points (TRP) achieved.

Of the top 15 programmes in terms of TRP, more than 10 belong to Zee indicating the viewers endorsement of ZTLs programming. Higher TRP translates into higher advertisments on the channel, which ensures growth for the software supplier and higher commission for ASSL. Here, it needs to be noted that in a broadcasting industry, it is the leader that tend to take away almost all the profit and the number two reels under losses.

Besides this, Zee TV has also created a strong cable distribution network through Siticable (50 per cent of its equity held by ZTL), which has a reach in 43 cities and enjoys considerable clout in the distribution of satellite channels to households.

ZTL has a long-term contact for software exports,with Hong Kong based Asia Today Ltd (ATL), the broadcaster of Zee TV, EL TV and Zee Cinema. It currently has a cost plus 10 per cent mark-up arrangement with ATL. From June 1998, it will have the advantage of earning a higher mark-up of 15 per cent. ZTLs exports have grown at compounded annual growth rate (CAGR) of 55 per cent to Rs 84.75 crore in March 1997 over the past three years. This was mainly due to an increase in original programming to

Zee TV from three hours in 1994 to six hours in 1996. But since then, its sales growth to ATL has declined.

Also, software sales to EL TV and Zee Cinema were discontinued from 1996-97. And from this year, software export for these channels are being routed through another group company, Programme Asia Tading Pvt Ltd (Patco), in which ZTL has a 24 per cent stake. In 1995-96, ZTL exported Rs 14.8 crore software for EL TV and Zee Cinema. ZTL now plans to increase its stake to 50 per cent in Patco, after government approvals.

ZTL has started exploiting its huge software library by reselling software to countries where the demand for Hindi programmes is good. It currently has over 10,000 hours of original programming in its library. And the costs for these have been largely written off in the first telecast itself.

ZTL also owns a repertoire of 2,500 movies through Essel Vision, a division of ASSL. It has already exported software to countries like Mauritius, Fiji, UK, USA and South Africa. In the past three years, exports from re-runs have grown by a CAGR of 241 per cent to Rs 11.21 crore in March 1997.

The company also receives dividend income from its wholly-owned subsidiary ASSL. The entry of foreign brand names in India and the boom in the consumer goods sector has seen increased advertising expenditure. According to industry estimates, it has increased from Rs 3,024 crore in 1994 to Rs 5,800 crore in 1997 and is expected to go to Rs 10,000 crore by 2000. This in turn has resulted in higher advertising revenue for ATL and as a consequence ASSL has generated higher commission income.

In the past three years, ASSLs total billing increased at a CAGR of 63 per cent to Rs 211.7 crore. In the first half of the current year, ASSL achieved a total advertising billing of Rs 115.75 crore, a 30 per cent increase over the corresponding previous year. ASSL declared a interim dividend of 80 per cent for 1997-98.

ZTL has seen a decline in its operating margins from 46.67 per cent in 1995 to 28.74 per cent in 1996 due to a change in the method of cost calculation. Earlier ZTLs sales billing were made at an average price depending upon the cost, but this was later changed to billing on individual programmes depending upon on its cost. In the past three years, ZTL has also increased the proportion of purchased programmes to around 90 per cent from around 10 per cent, this in turn helped to improve its operating margins in 1997. ZTLs return on capital employed (ROCE) declined from 42.93 per cent to 38.62 per cent as its investment in Siticable is yet to yield returns. Analysts expect its ROCE to improve further in 1998-99 as investment from Siticable are expected to give steady returns.

As in the past ZTL is expected to continue to maintain its leadership in this line of business and record stable growth. At its current market price of Rs 109 its latest earnings are discounted by a mere 4.5 times, investors could look for medium to long term gains.