Reconstructing Zee

Positive news would ensure some upsides in the near term, say analysts

Financials
(Rs in crore)		Q3FY04		Q3FY03		% change
Net sales		374.57		307.5		21.81
Other income		14.86		17.52		-15.18
Op Profit		126.83		107.69		17.77
OPM (%)		33.86		35.02
Net Profit		90.19		70.88		27.24
Net margin (%)		24.08		23.05
EPS		0.89		0.54
P/E		54.63

Index watchers may recall the glory days - the highs that the Sensex straddled at the start of 2004. However, punters are equally likely not to forget the scare that followed the ides of March when the index threatened to turn back to the 5000 levels.

The Sensex may have corrected course and is presently trading just around 9 per cent lower than its January highs, but media players like Zee, TV 18, TV Today and Balaji Tele are still languishing. Zee has especially felt the maleficent effects of March and is still trading around 30 per cent lower than its January highs.

Analysts play doubting Thomases and express reservations on Zee's revenue visibility and lower TRPs. They also feel that the uncertainty over the implementation of CAS is not boding well for the company going forward.

However, things seem to be getting better for the media behemoth of late after it bagged a couple of animation projects in March. In fact, the Zee stock saw a 11 per cent jump over its previous weekly close. Analysts are also pretty kicked about the company's direct-to-home (DTH) business.

Wild child
A part of the Essel group, Zee always had a troubled past, delivering bloopers like Sawal Dus Crore Ka at a time when Star Plus was ascending. The game show that revolutionised the Indian television industry, Kaun Banega Crorepati, was first offered to Zee, but it was rejected as it was considered too expensive. Analysts say the company had committed an error of overcapitalisation and consequently suffered the effects of lower capital efficiency, effecting the return on capital employed. Besides, the management's image is not something that could be called on to champion the cause of investment, with CEO after CEO facing the axe. "Zee does not have the reputation of being a stable boat and the attrition levels should be kept under check," says Rajesh Jain, director of research and broking house Pranav Securities.

Restructuring push
For the December quarter, the broadcasting major posted a commendable performance, with its bottomline surging 27 per cent on the back of a 22 per cent growth in topline.

Analysts attribute the performance to strong subscription revenue growth and a sizeable reduction in interest outgo. However, on the consolidated operating levels front, the company took a hit of about 110 basis points during the quarter compared to the year-ago period, on the back of a greater-than-proportionate increase in total expenditure. This is due to a 36 per cent rise in programming and transmission costs due to the consolidation of Padmalaya Telefilms during the quarter.

However, margins at the net profit levels actually improved 100 basis points due to a significant fall (46 per cent) in the interest outgo during the quarter, achieved by restructuring debt. That perhaps takes care of the anathema of the overcapitalisation tag that was attached to the company. The channel has initiated a restructuring of international operations. Analysts say the effect of the restructuring on the financials has been more than cosmetic.

Revenues
In terms of advertising revenues, the December quarter saw a 7.7 per cent year-on-year growth. Domestic subscription revenues remained stagnant in the quarter, with the declared subscriber base not rising from 4.6 million in Q1 2004. International revenues, however, have continued to grow. Analysts remain optimistic on the revenue front and say adspend is likely to pick up in the coming quarters on the back of higher economic growth expectations.

However, analysts say growth is lower than the industry average due to losses in market share. Additionally, given the continuing weakness in programming in the flagship channel, it appears unlikely that Zee would deliver a higher-than-industry growth in coming quarters. However, the point is countered by a section of analysts who says the company has managed to claw back TRPs mainly because of movie show programme 'Thursday Premiere'. "The overall programming mix has improved in the last few months," says Jain.

DTH: A palatable dish
Brickbats apart, analysts concede that Chandra has always been a first mover in spotting opportunities and, more importantly, acting on them before the rest of the pack. One such move was the introduction of DTH which analysts see as the precursor of better things to come for the company. Zee's DTH service, Dish TV, has made a breakthrough of sorts by signing an agreement with ESPN-Star Sports to carry the two sports channel on the DTH bouquet. Dish TV can now push ahead with a larger bouquet. Besides, it is known to be close to a deal with Sony to launch its 'one alliance' bouquet on the DTH service. Turner Broadcasting's new kids' channel 'Pogo' is also known to have come on board while Star is said to be in discussion with Dish TV 's DTH service over commercial terms. "Zee would really look to DTH for growth and the alliance with Star and Sony would give momentum to its growth," says an analyst.

Animating growth
Add a dash of animation to the concoction and it sure makes a heady brew. Zee has recently signed a $14-million deal with Europe's second largest animation house, Mondo TV, for developing animation content in India. It has also acquired from Mondo TV the commercial exploitation rights of a new series for India, Pakistan, Sri Lanka and other countries in the region. In addition, Zee has bagged a $5 million animation content development deal from Mallard TV, a Scottish television channel.

Analysts are pretty confident about the company's growth possibilities. Zee's efforts at reducing debt and paring overall interest costs through debt restructuring along with cost savings of Rs 1-1.5 crore from uplinking of Zee TV and Zee Cinema channels will help the channel stand in good stead. Though valuations are a bit stretched as of now, positive news flow on the channel front would see the scrip touch Rs 180 levels in the next few months, say analysts. "The upsides are surely going to accrue in the coming months," says Amol Dhariya of Karvy Stock Broking. He pegs a target EPS of 8.5 for FY05.

What will push the scrip up?

• Benign GDP growth is likely to push up the ad-revenue market by 15-17 per cent.
  
• First mover advantage in DTH.
  
• Animation contracts and DTH augur well on the revenue front.
• Benefits from restructuring of debt and international operations will continue to accrue. 
   

What will drag it down?

• Domestic subscription revenues have been stagnant in the last five quarters.
  
• Corporate governance issues and high attrition rates hound the company.
  
• The channel needs to improve programming to prevent the pick-up in advertising spend accruing to competitors Star and Sony and not necessarily percolating to Zee.