Zee Entertainment’s Q3FY09 advertising revenue increased 2% y-o-y partly on account of 21-day workers’ strike during the quarter, and pressure on rack rates due to a dip in Zee TV ratings (Zee TV accounts for 48% of ZEEL’s total advertisement revenues). We expect the next two quarters to be subdued on advertising front.
Zee Entertainment Studios (ZES), the film production and distribution arm of ZEEL, released five films during the quarter - one each in Hindi, Kannada and Marathi, and two in Bengali. ZES registered revenue of Rs36 million and incurred losses of Rs139 million during the quarter.
Competition has pushed up ZEEL’s cost structure, and despite its strong distribution network, ZEEL has been forced to pay carriage fees.
The operating cost has gone up 19% y-o-y as against meagre sales growth of 5% y-o-y, leading to EBITDA margin of 22% y-o-y (down 850 bps).
The full impact of advertising slowdown will be felt on ZEEL’s profitability in H1CY09, when the total impact of the slowdown unfurls on the real economy.
Also, the Hindi GEC landscape is changing with ’Colors’ replacing Zee TV as No.2 GEC. We expect that Zee TV’s effective advertising rates will fall by 10% in the coming two quarters on ratings slippage and economic slowdown.
We estimate advertising revenue to register flat growth of 1-2% in Q4FY09.
At the current price of Rs97, the stock trades at P/E of 10x FY10E EPS of Rs9.65. However, with the broadcasting industry working on high operating leverage, the risks to earnings are high, given the pressure on advertisement volumes and yields.
We expect the next two quarters will be tough on operational front, and any further slippage in ZEE TV’s ratings would be detrimental to ZEEL’s financial health.
One should enter the stock at around Rs85 and exit at around Rs110 under current market conditions. SELL.