Picture remains hazy for Zee as financials worsen; stock falls 5.5%

Content inventory, related party transactions weigh on cash flows

The Zee Entertainment stock dropped over 5.5 per cent on Friday, on worries that its cash flows could come under further pressure on rising investments, related party activities, and muted advertising growth. 

Further, share pledges and promoter debt continue to be the pain points for the stock. 

Among the concerns of the Street are write-offs and related party transactions. Zee had written off Rs 170 crore on an inter-corporate deposit to related parties during the September quarter. 

In addition, trade receivables have increased by Rs 600 crore over the last six months to Rs 2,400 crore at the end of September quarter. This includes Rs 700 crore (or 30 per cent of receivables), which is owed by related parties Dish TV and Siti. 

Of the Rs 700 crore, Rs 250 crore is due. While the company is hopeful of a recovery in the coming quarters, any additional delay would aggravate the situation.

Besides receivables, what is adding to the pressure on cash flows is the spike in content inventories. They have increased from Rs 3,800 crore at the end of FY19 to Rs 4,300 crore at present. 

Higher receivables and rise in content inventory were responsible for operating and free cash flows turning negative, in the range of Rs 240-340 crore. 

Movie inventory (content), which was Rs 1,700 crore at the end of FY17, has more than doubled to Rs 4,300 crore and this is much more than what the management had guided for, earlier. 

While the management has indicated that the pace of increase won’t be as much, analysts question the need and the timing for the sharp increase in investments related to regional content. 

Analysts at Motilal Oswal Research believe the free cash flow was expected to turn positive by FY21, but this will now be delayed, thus intensifying the worry over additional write-offs. 

What has added to the Street’s worries is muted advertising growth of 1.2 per cent in the September quarter. This, coupled with higher production costs, led to operating profit growth of just 2.5 per cent. The management expects ad revenue growth to improve in the second half of the financial year, led by the festive season. 

The key trigger for the stock, however, continues to be promoter pledges and whether the current management will be able to reduce promoter debt without losing control of the company.