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ZEEL is media stock of the year

In the first year of cable TV digitisation, Zee Entertainment Enterprises Ltd (ZEEL) has emerged as the crown jewel of media stocks, indicating that broadcasters have more to benefit in the immediate run than distribution platforms.

The entertainment broadcasting company yielded returns of 20.24 per cent in 2013 and in the process dwarfed many blue chip companies that would hog the limelight once.

zeel-graphIncidentally, this is ZEEL’s second consecutive year of gain and its performance clearly underlines its dominant position within the media and entertainment sector. The achievement is remarkable as it came in a year when the media stocks did not perform strongly.

What has triggered the turnaround in ZEEL’s performance on the bourses was the change in satellite television ecosystem, particularly after the mandatory implementation of digitisation. While the multi-system operators (MSOs) had to invest in set-top boxes (STBs) and struggled to collect money from the ground, broadcasters benefited from content deals that were done on a much wider subscription base.

ZEEL moved in the right direction to address fragmentation in a digital cable TV environment. The flagship channel Zee TV also performed strongly in the year along with some of Zee’s regional-language entertainment channels.

“The company made fresh investments to ensure that its market share did not get fragmented. It also gained in highly competitive regional markets,” says a media analyst with a leading brokerage firm.

Reaping the rewards of change in outlook from media analysts, ZEEL’s share price commenced its recovery path since mid-April 2013. After having fallen to its 52-week low of Rs 194.30 recorded on 16 April 2013, the scrip bounced back to Rs 291.95, a 52-week high on 17 December. This translated into a whopping gain of 50 per cent.

Even as other broadcasters suffered through the year, frenzied buying drove the ZEEL share price to a 13-year high recently.

For ZEEL, however, the pace of growth this time around was rather subdued as the trigger points that led to its stupendous growth in 2012 seem to have attained some level of maturity by now. In 2012, ZEEL posted gains of over 75 per cent or Rs 100 per share when it ended the year at Rs 220.

Meanwhile, its counterparts namely Sun TV Network and TV18 Broadcast Network (TV18 Broadcast) suffered heavily due to lack of investor support.

Sun TV Network’s market cap slid 11.2% for the year to Rs 15,049.92 crore ( Rs 150.49 bn). The company had gained 53 per cent in 2012.

Shares of TV18 Broadcast slumped 26.9 per cent to Rs 4,099.43 crore ( Rs 40.99 bn).

Adapting to changes effectively

ZEEL has adapted to the changing business environment effectively. Following digitisation, the company collected higher growth numbers in its earnings as it rode over a wave of change.

The momentum created by the implementation of digital addressable system (DAS) in early 2012 helped ZEEL to maintain revenue growth at a faster clip. Subscription revenue accelerated partially due to digitisation, contributing to a rise in profitability. The revenue pie that once used to be heavily dominated by advertisement income now generates nearly 44 per cent from subscription revenue.

In FY2013, subscription revenue grossed Rs 1,623.3 crore ( Rs 16.23 billion), which is 43.9 per cent of the total revenue. Ad revenue contributed Rs 1,963.9 crore ( Rs 19.64 billion) or 53 per cent of total revenue.

In FY12, the contribution of subscription revenue was 43.6 per cent of the company’s total revenue, or Rs 1324.4 crore ( Rs 13.24 billion), following the commencement of digitisation and also its partnership with Star India in a distribution joint venture company Media Pro.

Advertisement revenue took a dip to Rs 1,581.1 crore ( Rs 15.81 billion) in FY2012, accounting for 52 per cent of the company’s total revenue due to a softening of the economy.

In FY2013, EBITDA margin remained well over 25 per cent helped by sharper growth in operating profit. Except for Q2FY2013, when operating profit grew in single digit, the remaining three quarters recorded growth of almost 50 per cent. A similar trend was visible in the first two quarters of FY2014.

For a company recording double-digit growth in operating profit and generating strong growth in subscription income, that would definitely spawn investor interest.

Investor community stays positive

The investor community has given a thumbs-up to ZEEL because of digitisation. ZEEL’s advertising revenue growth also remained above the industry average.

Investors have turned positive on ZEEL’s future prospects. “Better earnings visibility helped ZEEL to perform exceedingly well during 2013. The markets are always built on expectations,” said a media sector analyst with a leading brokerage firm. “Given the improvement in earnings visibility, the resultant impact was visible in improved valuations.”

ZEEL’s market cap has climbed. “Lack of many other credible listed investment alternatives for overseas investors has been a major factor propelling valuations for ZEEL,” says Motilal Oswal Securities VP of research Shobhit Khare.

ZEEL leads other broadcasters

hindi-graph

ZEEL’s performance on the bourses is worth taking note of when compared to other companies from the same space who struggled throughout 2013.

Sun TV suffered from adverse news flow, which dented its market value. The promoters coming under the lens of the Central Bureau of Investigation (CBI) was a big negative for the stock.

marathi-graphFurther, TRAI’s 12-minute ad cap regulation negatively impacted the company’s topline. The sharp decline in ad revenue played its part in pulling down the share price of Sun TV.

In the second fiscal quarter, the company took a hit on ad revenue as it asked advertisers for higher ad rates. With advertisers refusing to yield, ad inventory went unsold. Hence, Sun TV’s ad revenue contracted 4.5 per cent year on year (YOY) even as its income from broadcast business grew 7.63 per cent to Rs 466.41 crore ( Rs 4.66 billion).

So what has helped ZEEL on its success path?

While Zee TV figured among the top three Hindi general entertainment channels, other regional channels from the Zee stable have spearheaded the ratings chart in their respective segments.

telugu-graphZee Telugu improved its performance dramatically in 2013, remaining at the top in a particular prime-time band. The channel averaged 60,688 GTVTs, recording a relative channel share of 19 per cent.

Zee Marathi also captured the top slot consistently during the year. The channel’s average weekly GTVT of 107,146 in the July–September quarter meant it recorded a relative share of 42 per cent among the top 3 Marathi GECs.

New channel launches positioned ZEEL for the future. The company launched two channels, namely Zee Anmol, a free-to- air Hindi GEC, and &pictures, a Hindi movie channel.

Strongly build on finance

As far as earnings performance is concerned, the company beat the street estimates. During the quarter ended 30 September 2013, the company posted a healthy 26.03-per cent jump in consolidated net profit of Rs 236.31 crore ( Rs. 2.36 billion) compared to Rs 187.49 crore ( Rs 1.87 billion) a year ago.

This is aided by a 15.5 per cent jump in the company’s revenue and a mere 7.5 per cent increase in expenses during the quarter. Total revenue during the quarter under review stood at Rs 1,101.3 crore ( Rs 11.01 billion) compared to Rs 953.5 crore ( Rs 9.54 billion) in the corresponding quarter of the previous fiscal.

ZEEL’s consolidated operating profit (EBITDA) for the quarter was up 43 per cent to Rs 310.5 crore ( Rs 3.11 billion). EBITDA margin stood at 28.2 per cent.

This was commendable considering the launch of two new channels (&Pictures and Anmol) and fresh hours of programming. ZEEL has been able to exhibit higher than expected margins in the non-sports business.

Advertising revenue for the quarter stood at Rs 583.3 crore ( Rs. 5.83 billion), up 10.5 per cent. ZEEL’s ad revenue growth without sports business was 20 per cent.

For the fiscal through March 2013, the showing had been exceedingly better. ZEEL’s revenue grew 21.7 per cent to Rs 3,699.6 crore ( Rs 36.99 billion) bolstered by higher contribution from advertisement and subscription income.

Importantly, its profit after tax (PAT) advanced 22.1 per cent to Rs 719.6 crore ( Rs 7.19 billion) even after a 19.3 per cent increase in expenses to Rs 2,745.3 crore ( Rs 27.45 billion).

Riding on the back of this financial performance, ZEEL’s market capitalisation jumped to Rs 26,548.8 crore ( Rs 265.49 billion) on 31 December from Rs 22080.33 crore ( Rs 220.80 billion) on 1 January 2013.

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