Strong ad revenue growth has helped Zee Entertainment Enterprises Ltd deliver a good March quarter. For perspective: advertising revenue, accounting for 56% of the total revenue, grew 29% compared with the past year. “Ad revenue is expected to grow at 22.2% yoy (year-on-year) on a base of 15% yoy,” Edelweiss Securities Ltd had said in its March quarter preview. A combination of premium content/properties during the quarter and overall viewership share increases helped the company’s ad revenue growth beat expectations. “The launch of Hindi general entertainment channel &tv did help advertising growth in FY16,” says Mihir Modi, chief finance and strategy officer at Zee Entertainment.
On the other hand, subscription revenue, accounting for 39% of total revenue, increased at a relatively slower pace of 16.4%. Zee Entertainment derived its remaining revenue from other sales and services, the share of which dropped to about 5% compared with 12.4% in past year’s quarter. Overall revenue increased by about 14% to Rs.1,532 crore. Still, a decline in advertising and publicity expenses, and other expenses boosted operating profit performance.
Earnings before interest, taxes, depreciation and amortization (Ebitda) increased as much as 53% year-on-year to Rs.414 crore. Kotak Institutional Equities and Edelweiss Securities were expecting an Ebitda of Rs.372.7 crore and Rs.366.8 crore, respectively. Nevertheless, a higher tax outgo and rising depreciation costs together with a decline in other income meant net profit growth was much slower at 13% to Rs.260 crore.
What next? What will really be worth watching is whether ad revenue growth performance is sustainable in fiscal year 2017. That should influence the stock, which has outperformed the benchmark Sensex in the past one year. Zee Entertainment expects industry advertising revenue to grow by 15-16% this year, a rate similar to last year. “While it is true that the likes of Patanjali are adding to advertising momentum from FMCG (fast moving consumer goods) sector, some others in the FMCG space have slowed down; so, we expect stable performance from FMCG sector this year,” says Modi. Also, it’s worth noting that advertising momentum from e-commerce firms is likely to soften, which would be compensated by better performance from auto and telecom sectors, he adds.
Nevertheless, valuations seem to be capturing much of the optimism. Currently, one Zee Entertainment share trades at an expensive 32 times expected earnings for the current fiscal year.
The writer does not own shares in the above-mentioned companies.