The December quarter was expected to be a tough one for Zee Entertainment Enterprises Ltd, as advertisers cut spending in response to demonetisation.
That was expected to show in the company’s performance in the quarter, which it did, but the big surprise was on the profitability front. Its Ebitda of Rs515.8 crore was much higher than the Street’s estimates. For instance, Kotak Institutional Equities and Edelweiss Securities Ltd were expecting the Ebitda at Rs430 crore. Ebitda is earnings before interest, tax, depreciation and amortization.
A decline in costs led to this improvement, as overall revenue growth was just 3.4% compared to a year ago. Other expenses, and advertising and publicity expenses declined.
Coming to the advertising performance, Zee Entertainment’s consolidated ad revenue, accounting for 58% of total revenue, rose 3.4% year-on-year for the December quarter. In comparison, it had increased 15.7% and 19%, respectively, in the September and June quarters.
According to the company, advertising revenue growth during the first 40 days of the quarter, i.e. pre-demonetisation, was similar to the growth seen in the half year ended September. What offers some comfort is that Zee Entertainment’s December quarter ad revenue performance was better than some analysts’ expectations. For instance, Kotak and Edelweiss were expecting ad revenue growth of 2% and 1%, respectively.
Subscription revenue, accounting for 36% of total revenue, increased 13.7%, helped by closure of content deals with a few large distribution platform operators during the quarter. Subscription revenue included some catch-up revenues for the previous quarters. After a good quarter, much depends on how advertising shapes up. According to Mihir Modi, chief finance and strategy officer at Zee Entertainment, while advertising growth is better than November and December, it hasn’t gone back to pre-demonetisation days.
For the next six-eight months, Modi expects telecom and auto sectors to give impetus to advertising growth. The push from the telecom sector will be driven by Reliance Jio Infocomm Ltd while automobile launches will boost auto sector growth.
Zee Entertainment’s shares have outperformed the benchmark Sensex so far this fiscal year. But more recently, the stock has been hit by the demonetisation blow. From a closing high of Rs579 in early October, the stock has declined 14% till now. Currently, one share trades at 30 times estimated earnings for the next fiscal year. The question investors will be grappling with is if the March quarter will see advertising revenue return to pre-demonetisation levels. That will determine the fortunes of the stock in the near future.