Zee Entertainment: Costly channel

Zee Entertainment, a pan-India broadcaster, is present across many genres. It has a strong foothold in the Hindi and the regional language general entertainment channel space, which forms a chunk of the TV viewership base. It also has international presence, though the Indian business is the main revenue spinner (87 per cent). Its channels have a good presence among South Asian peers in countries, such as the US, West Asia and Africa.

Ad revenue, 60 per cent of the company’s income, should grow at a healthy rate. Likely improvement in economic growth in the coming year should spur advertisement spending. Zee Entertainment is well placed to benefit from the expected rise in ad spends by companies in sectors, such as FMCG, e-commerce and telecom. It should also continue to deliver on the subscription revenue front, as in the past.

The stock of Zee Entertainment, which has shed 4 per cent year-to-date, trades at rich valuations. At ₹420, it discounts its estimated 2016-17 earnings by 38 times, higher than its five-year historical average of 30 times. Given the company’s good prospects, investors can continue holding the stock. Fresh exposure can be considered on a stock price decline linked to the broader markets.

Adding revenue Zee Entertainment reported 29 per cent year-on-year growth in ad revenue for the nine months ended December 2015. This was thanks to big ad spenders, such as FMCG and e-commerce. Consumer durables, telecom and auto too lent support. The launch last year of &TV, a new channel, also contributed to the growth; the base effect though should ultimately wear off. In the past too, Zee Entertainment has upped its ad revenue at a robust rate.

The company is optimistic of healthy growth in this segment over the next two-three quarters. An expected improvement in economic growth should boost ad revenue even beyond that. More specifically, easing raw material costs should give FMCG companies the headroom to continue increasing their ad spends. E-commerce players too should continue advertising as should telecom companies, thanks to the roll-out of 4G services.

Subscribing to growth For the nine months ended December 2015, Zee Entertainment posted 14 per cent year-on-year rise in subscription revenue, which contributes a third to the company’s revenue. But with the delay in the implementation of Phase III and IV of digitisation, there appears to be no immediate trigger for a big boost to subscription revenue. That said, subscription revenue is expected to grow at double-digit rates as in the past (12 per cent CAGR). The benefits of higher digitisation — a larger subscriber base and higher yields with better channel packaging — should flow to the company in the long run.

Despite posting 22 per cent revenue growth during the nine months ended December 2015, Zee Entertainment posted a modest 2.5 per cent net profit growth. A sharp increase in tax expenses and a fall in other income in the December quarter played spoilsport. According to the company, with a larger proportion of income coming from Indian operations vis-à-vis overseas, the tax expense (tax rate of 37 per cent) during the quarter was higher. For fiscal 2015-16 as a whole, the company is guiding for a 34 per cent tax rate.

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