Zee Entertainment Enterprises Ltd’s operating profit margin for the March quarter dipped sharply by 680 basis points over the same period last year to 20.1%. (A basis point is one-hundredth of a percentage point.) The key reason was the jump in its advertising and publicity expenses (up 123% year-on-year). This jump was mainly on account of expenses related to the launch of new Hindi general entertainment channel (GEC) “&tv". Other expenses too were considerably higher. Operating profit in the March quarter thus declined.

The stock barely reacted, though. Zee shares fell marginally by 0.4% on Thursday, when numbers were announced, a day when the benchmark Sensex was down marginally as well. That’s probably because the impact of launch expenses for “&tv" were expected to reflect in the results. Moreover, Zee’s reported March quarter financial results beat Bloomberg estimates.

Consolidated total revenue last quarter increased 16% year-on-year to 1,347 crore, while net profit increased at a slower pace of 6% to 231 crore. Despite the decline in operating profit, robust other income and a dip in the tax outgo boosted net profit growth. A Bloomberg poll of analysts had pegged Zee’s March quarter revenue and net profit at 1,225 crore and 199 crore, respectively.

Zee’s two main businesses—advertising and subscription—performed well for the quarter. The company derived nearly half of its revenue from advertising, which increased by 15%. Reported subscription revenues contributed 38% of the total revenues last quarter and increased by 10% (helped by certain one-offs).

According to Mihir Modi, chief finance and strategy officer at Zee, on a like-to-like basis (adjusting for accounting changes), subscription revenues increased by 23% with domestic subscription revenues performing far better than international revenues. Zee maintains that in 2014-15, like-to-like domestic subscription grew in the low teens, while international subscription revenue grew in mid-single digits in rupee terms.

Advertising growth, though, was robust. Domestic non-sports channels’ advertising growth was in the high teens in 2014-15 compared with the industry average of 13-14%, said Modi, expecting a similar trend to continue for this fiscal year as well. Of course, a strong economic recovery will augur well for advertising revenues and boost the Zee scrip, currently trading at seemingly full valuations of 30 times its estimated earnings for this financial year.

The writer doesn’t own shares in the above-mentioned companies.

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