Stock Fundamentals

Zee Entertainment: Pretty picture

Bavadharini KS | Updated on January 08, 2018 Published on January 07, 2018

Popularity of Zee’s channels and healthy business operations boost the prospects

The media and entertainment industry is set to grow well in the coming years due to the changing consumption pattern, increasing penetration of television and digital media and higher surplus income with consumers. Zee Entertainment Enterprises’ (Zee) stock stands to benefit from this trend.

The stock has already been moving up sharply over the last five years, backed by strong growth in advertisement revenue from the popularity of Zee’s channels and content, and healthy business operations. The pending implementation of TRAI’s tariff order regulation is viewed as a concern for the industry as it could hamper subscription revenue growth.

But with Zee’s channels already leaders in various segments, the company is expected to benefit from higher transparency, and reduced revenue leakage resulting from the implementation of this order.

Investors with a long-term perspective can therefore buy this stock. The valuation of the company, while not cheap, is reasonable. Zee currently trades at ₹589, at a multiple of 40 times its twelve-month trailing earnings, slightly below its three-year average PE multiple of 45 times.

Betting on ad revenue

Nearly 57 per cent of Zee’s revenue is generated from domestic advertisements, which has grown at a healthy pace in recent quarters, despite GST-linked slowdown in various sectors. Domestic subscription accounts for 28 per cent, international subscription 7 per cent with other segments accounting for 8 per cent of the revenue. Zee also has a small presence in movie production and distribution, digital broadcasting and live events.

Advertisement revenue has recorded annual average growth of about 16 per cent between FY14 and FY17, subscription revenue grew at about 8 per cent.

Advertising growth is driven by the fact that Zee’s channels are well entrenched across genres and in various Indian languages. The network enjoys leadership in domestic broadcasting. It improved its market share to 18.3 per cent in the second quarter of FY18, up from 17 per cent in the previous quarter. Zee Cinema now holds about 30 per cent viewership in the Hindi movie segment, behind Sony Cinema. Zee Marathi is the market leader with 61 per cent viewership and Zee Bangla enjoys 35 per cent, trailing Star Jalsha that enjoys 60 per cent share. The popularity of some weekday shows such as Kumkum Bhagya, Kundali Bhagya in Zee TV and Mazhya Bavryachi Bayko in Zee Marathi has been attracting advertisers.

The Zee network, which currently produces about 500 hours of original content every week, has lined up to deliver better content in the coming months. The Zee TV channel is expected to increase original content to 30 hours a week in the next quarter from 27.5 hours currently. It further plans to increase original content to 32 hours per week by the end of FY18. All this will help in adding to subscription growth.

The company also has a presence in niche channels such as Zee Café and Zee Studio, delivering international content. Zee also broadcasts in regions such as Europe, the US and APAC.

Tariff order impact

With the digitisation of cable television yet to be completed in certain areas, the company stands to benefit from addition of subscribers. This, along with the implementation of TRAI’s tariff order, will have a positive impact. According to this order, broadcasters are required to offer their channels on a la carte basis, where Maximum Retail Price (MRP), excluding tax, for each pay channel should be disclosed.

However, for the half-year ending September 2017, subscription revenue declined 12 per cent year-on-year, mainly due to the delay in contract renewal negotiations with the operators owing to pending implementation of the tariff order regulation. This order, once implemented, will help improve subscription revenue as customers get to pick and choose instead of paying for a bouquet of channels. As Zee has significant market share in various regions, it will gain through the implementation of this order, which is under dispute in court.

In its movie segment, Zee holds one of the largest collections of movies and has acquired several movie and music rights in the last one year. It also intends to make 10-12 movies a year gradually. Zee’s theatrical revenue increased from ₹55 crore in FY16 to ₹112 crore in FY17.

With the acquisition of 9X Media last October for ₹160 crore, Zee will be adding six music channels to enjoy leading market share in the respective languages.

Digital presence

Zee has a presence in the digital space through its digital platform, ditto tv and OZEE. The company is set to combine both OZEE and ditto tv to launch Z5, offering a larger content catalogue to customers. Digital advertising is expected to grow at an annual average of 31 per cent from 2016 to 2021, as per the latest KPMG India-FICCI report.

However, the monetisation from its digital platform will take time as the OTT (over the top) — where content is delivered over the internet without an operator — platform is crowded with players such as YouTube, Facebook, Hotstar, Voot, and telecom companies and distribution platform owners such as Tata Sky.

Though the company plans to offer newer and differentiated content, the success and sustenance of the platform will have to be watched. This is evident from its digital (OZEE) video views, which registered over 75 million views as of March 2016 but only recorded 60 million monthly views during March 2017. The alliances with telecom players such as Airtel, Vodafone and Idea for integration of these applications should help grow its digital customer and advertisement base.

Strong financials

Zee’s consolidated revenue and adjusted profit grew at an annual average of 28.4 per cent and 29.6 per cent, respectively, over the five years from FY12 to FY17. Advertisement and subscription revenue grew 9 per cent and 10 per cent year-on-year, respectively, in FY17.

While revenue declined 4.4 per cent to ₹3,122 crore in the six months to September 2017, compared to the same period last year, adjusted profit grew about 65 per cent to ₹752 crore for the same period on improved operating efficiency and jump in other income. Revaluation of shares held in India Web Portal and Fly by Wire International Web Portal resulted in increasing other income. Operating margin improved to 29 per cent for the six months to September 2017, compared to 23 per cent in the six months to September 2016. The company’s debt-equity ratio is under 0.3 times, giving enough head-room for expansion.

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