Zee stock factors in most of the positives
The valuations seem stretched and a further rise may be tough
Shares of Zee Entertainment Enterprises Ltd recovered most of the losses on Monday, after falling on Friday in reaction to its results. Investors should anyway have little to complain as the Zee stock has risen by 11% since April and currently trades at about 30 times its estimated earnings for the current financial year.
These valuations seem stretched and a further rise may be tough.
As Elara Securities pointed out, the stock price has seen a sharp re-rating during fiscal year 2013-14, as Zee posted elevated earnings growth in a tough macro environment, but a slowdown is expected, given the rising base in advertising and subscription revenue. “Further, future earnings growth now depends more on performance of new channels, and, thus, lacks clarity, which should slow the stock price movement," Elara said in its post-results earnings note.
Zee’s latest results were below expectations mainly because of disappointing growth in subscription revenue. Consolidated revenue for the June quarter increased by 11.5% over the same period last year to ₹ 1,085.7 crore. That’s the slowest revenue growth in at least five quarters.
Zee’s subscription revenue, which contributed two-fifths of June quarter revenue, increased by just 4.4%. Subscription revenue was adversely affected by a change in accounting treatment of the domestic subscription revenue. Domestic subscription revenue increased by just 2.2% but “like-to-like growth is in high single digits," the company said.
What’s heartening is the fact that Zee’s advertising revenue, which contributed as much as 57% of total revenue, did well. Advertising revenue increased by 17% on a year-on-year basis to ₹ 622 crore. Zee maintains that its advertising revenue growth has outperformed the industry growth rate, which is in low double digits.
While that augurs well, it couldn’t offer much respite to the operating profit performance, as overall revenue growth was slower.
Zee’s operating profit margin for the June quarter declined by about 150 basis points over the same period last year to 28.5%.
One basis point is one-hundredth of a percentage point.
Operating profit thus increased at a relatively slower pace of 6% to ₹ 309 crore. Further, a decline in other income and higher depreciation costs affected the net profit performance adversely. Net profit declined by 6% to ₹ 210.57 crore.
Investors would do well to watch out for subscription revenue performance in the days to come. Delays in digitization are expected to adversely affect subscription revenue growth this year, weighing down on its performance.
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