Ad rebound offsets GST impact for Zee Entertainment

Street focus to be on success of digital initiatives

Zee Entertainment's September quarter performance was broadly in line with estimates, but even then the stock surged over nine per cent before closing higher by 6.6 per cent at Rs 525.50 on Tuesday. The results are not comparable though given the sale of its sports business, but a deeper look into the results gives confidence. More importantly, the second half of the fiscal year is expected to be much better, and could support the share price going ahead.

Consolidated revenues for the September quarter (Q2) were down 6.7 per cent over the year-ago quarter to Rs 1,582 crore. The results were impacted due to the higher base of last year on account of the presence of the sports business, which was subsequently sold to Sony. Advertising revenues, the biggest segment of its revenue pie accounting for 62 per cent of overall revenues, was up about 3 per cent year-on-year to Rs 986 crore. Excluding the impact of sports and acquisitions, growth from advertising was 5.8 per cent, which comes even as business was impacted due to goods and services tax (GST) implementation.

What helped the company achieve this number was the pick-up in advertising in the second half of the quarter given the start of the festive season. Advertisers had held back in July given the implementation of GST and the disruption in the supply chain. The management indicated that the bounce back has been good led by FMCG sector as well as e-commerce segment. Advertising growth in the second half is expected to be in the mid-teen level led by a low base and higher spending by consumer companies. Notably, Zee expects that it will continue to do better than the industry on this front.

Subscription revenues at Rs 501 crore was down 14 per cent year-on-year. Adjusted for the sports business it grew 7.2 per cent. The segment had a higher base last year benefitting from earlier closure of content contracts with distributors, the same has been delayed due to ongoing litigations given tariff order of the Telecom Regulatory Authority of India (Trai).

Adjusted for the sale of the sports business, operating costs have gone up due to launch of new channels and increase in programming hours on existing channels. While promotion-related and other costs have jumped 16 per cent, employee costs were up 18 per cent due to increase in employee count on recent acquisitions. Even then, the company reported healthy Ebidta margins of 31 per cent. Costs going ahead are expected to be high given investments in digital content, rebranding exercise, investments in movies, higher programming hours both in its core Hindi general entertainment as well as on regional channels. The company has been acquiring channels such as Reliance Broadcast Network (RBNL)'s two TV channels last year and now 9X Media with a view to expanding its regional market presence as well as in niche generics. But, again, despite the higher costs, Zee has maintained operating profit margin of 30 per cent for FY18.

Reported net profit came in at Rs 591 crore up 148 per cent over the year ago period. The number, however, includes a number of one offs such as the proceeds from sales of sports business (Rs 134.6 crore) and Rs 160 crore of notional gains from revaluation of equity interest in India Webportal and Fly By Wire.

In addition to the traction on the advertising growth front, what the street will be keenly looking forward to the success of Zee's digital initiatives. The company, which currently offers content on two of its digital platforms, DittoTV and OZEE, is expected to unveil a new digital platform called Z5 shortly. Given the increasing shift of consumers to the digital medium and alternative competitive products, the company has its task cut out in growing the revenue pie from the digital space which currently is a small part of overall revenues.

Overall, the street remains positive on Zee's future prospects. Abneesh Roy, Senior Vice President - Institutional Equities - Research Analyst at Edelweiss Securities, says, "Zee's Q2 results were ahead of our expectations. Expect the stock to do well as numbers are good, second half is likely to be much better (due to higher market share, favourable base, uptick in new launches by advertisers)." Roy has a buy on Zee with a target price of Rs 608, up from Rs 585 earlier.