Zee: Ad break?

Sustaining the momentum in advertisement revenues will not be easy for the broadcaster.

It's been a reasonably good year for Zee Entertainment. After wooing viewers with some good content "" it has a 30 per cent audience share in the general entertainment space "" the Rs1,834 crore broadcaster also won over advertisers. That helped it grow advertising revenues by 33 per cent in the March 2008 quarter.

However, the broadcaster is making continuous investments in new channels such as Zee Next "" where start-up losses for the year are Rs 32 crore "" and in marketing the brand.

That is eating into operating margins which stayed disappointingly flat in the March quarter at 24.8 per cent while for FY08 they were just short of 30 per cent.

That's probably why the stock has given up 9 per cent in two sessions and now trades at Rs 219. Despite forex derivatives losses of Rs11 crore, the company managed to turn in a net profit growth of 58 per cent in the March quarter, helped along by higher other income. For FY08, the broadcaster managed an adjusted net profit of Rs 372 crore, an increase of about 70 per cent.

Unless Zee earns higher subscription revenues "" they grew just 12 per cent in Q4FY08 and revenues from DTH were up just 6 per cent sequentially "" it will be difficult for it to expand margins.

While the DTH subscriber base is expected to grow rapidly; a slower than expected growth could mean a de-rating for the industry.

Also, keen competition in the general entertainment space could mean a fall in viewer ratings for Zee and consequently a slower growth in advertising revenues.

Indeed as audience tastes change and viewership becomes more fragmented with the emergence of new niche channels, the general entertainment space itself is likely to attract a smaller audience.

In short Zee is unlikely to be able to sustain the kind of momentum it has built up and even if it grows advertising revenues above the industry rate, it may not be enough to sustain margins because the broadcaster is making such large investments. As such the stock which has been a relative underperformer since October will probably remain one.

Cement: Grey skies

Cement companies are unlikely to turn in exciting numbers for the March 2008 quarter. Higher input costs, like those for coal which now costs $120 per tonne in the spot market""twice the level ruling last year"" could eat into profit margins. That's despite companies gaining from better realisations because demand still exceeds supply, albeit marginally.

Ambuja Cements' despatches, which were up 10 per cent in the March 2008 quarter, should fetch it realisations of Rs 3,560 per tonne. But, the Holcim-controlled firm could see operating profits dip 6-7 per cent on a decent revenue growth of 15 per cent.

For the year to December 2007, Ambuja turned in a net sales growth of 17.5 per cent at Rs 5792 crore, posting an operating margin of 36 per cent.

At Rs 112, the stock trades at just over 12 times estimated CY 08 earnings and should be a market performer having lost 24 per cent since the start of 2008.

Investors are understandably cautious given the rising costs and the recent government decision to ban cement exports, though cement and clinker exports account for less than 5 per cent of the industry's sales. Moreover, there's enough local demand.

ACC' desptaches were up 7 per cent in the March 2008 quarter and realisations are estimated to have been 5-6 per cent higher at Rs 3460 per tonne. While that should push up revenues by 9-10 per cent, higher fuel, freight and costs could drag down the operating profit by about 7-8 per cent.

In CY07, the company turned in net sales of Rs 7,067 crore"" a growth of 21 per cent""- and operating margins of 27 per cent. At Rs 806, the stock trades at 12.7 times estimated CY 08 earnings and should perform in line with the broader market.