Zee Entertainment’s September quarter signals healthier outlook
A better-than-expected showing in the September quarter and expectations this can continue sent the Zee Entertainment Enterprises Ltd stock up by 6.6% on Tuesday.
Consolidated Ebitda (earnings before interest, tax, depreciation and amortization) rose by a mere 0.4% over a year ago to Rs491 crore but this was far better than what the Street was expecting. Analysts at Kotak Institutional Equities and Motilal Oswal Securities Ltd were expecting it to decline by 6% and 3.7%, respectively.
Part of the credit goes to curtailment of expenses. Operating costs, accounting for a major portion of overall expenditure, were down by a fourth, helped by the sale of its sports business. Adjusting for that, operating costs have increased due to the launch of new channels and higher original programming hours on existing ones.
To be sure, other expenses such as employee costs, advertising and publicity expenses, and other expenses showed a reasonable increase.
While curtailment of expenses was one reason for profit growth, advertising revenue growth did not disappoint either. On a comparable basis, domestic advertising revenue increased 5.8%. This was good considering that Zee Entertainment’s customers had reduced advertising spends in the first half of the quarter, after the implementation of the goods and services tax (GST) disrupted their business. However, the onset of the festive season helped a strong rebound in growth in the second half of the quarter.
What’s more, the management was upbeat on outlook for advertising in its conference call, say analysts. The company is looking at mid-teen growth in domestic advertising from a near- to medium-term perspective, which augurs well.
Note that the second half anyway offers a favourable low base, owing to demonetization-related slowdown in the year ago. So second-half growth needs to be taken with a pinch of salt.
Overall, advertising revenue accounted for 62% of consolidated revenue, while subscription revenue contributed 31.6% during the September quarter.
Even after Tuesday’s increase, Zee Entertainment’s shares have underperformed the S&P BSE 100 index so far this fiscal year. There are concerns over advertising, and the combined effect of demonetization and GST on its business. While it may have underperformed, its valuations aren’t exactly cheap.
The Zee Entertainment stock trades at about 35 times estimated earnings this year, based on Bloomberg data. If the company’s advertising business outperforms and supports a higher-than-expected growth in earnings, that can support these rich valuations.
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