The stock of Zee Entertainment, one of the largest players in the entertainment industry, is down about 8 per cent today in bourses. This follows the weak September quarter results that were announced yesterday.

Muted revenue from advertisements, promoter’s stake sale overhang and decline in cash-flow due to a sustained increase in working capital requirements are weighing on the stock.

In the September quarter, Zee reported revenue of ₹2,122 crore, up 7.4 per cent, y-o-y. Though the domestic subscription business registered robust double-digit growth, it was partly offset by muted advertisement revenue. The Zee5 application continued to sustain its strong momentum with the company now reporting daily active users of 8.9 million.

Zee’s profit growth was 6.9 per cent (₹413 crore) in the quarter.

The operating profit margins contracted 100 basis points to 33 per cent in the September 2019 quarter. This is mainly due to an increase in programming cost, up 23 per cent, y-o-y. The increase in expense was primarily driven by content cost for Zee5 platform.

Strong subscription growth

Zee reported robust revenue growth in its broadcast business with subscription revenue registering an increase of 19 per cent y-o-y. Healthy viewership, not only for Zee TV (Hindi, core offering), but also for its regional channels such as Zee Bangla, Zee Marathi, Zee Keralam and Zee Kannada have helped in this growth.

With the impact of new tariff order settled in the market, it can capitalise on its market position and thereby increase its viewership. The company registered a domestic subscription growth of 27 per cent y-o-y. Sustainable content, expansion to new markets and launch of original content have also aided the company’s revenue. It also has plans to launch new channels in regional markets and increase its viewership base.

Besides, monetisation of video content from digital business, Zee5, has also contributed to this growth. Zee has 23 original shows and movies during the quarter and commits to producing over 70 original content this fiscal year. The partnerships with telecos are also working well for the Zee5 to build traction and strengthen its position in the competitive OTT space.

Subdued ad revenue

The domestic advertisement revenue grew 1.4 per cent y-o-y due to slowdown in the overall economy. Despite the conversion of two free-to-air channels to pay channels in March, ad revenue didn’t pick up for Zee as advertisers preferred to give ads in other free channels.

Zee derives about 67 per cent of its revenue from advertisement, about 30 per cent from subscription and the remaining 3 per cent from other segments such as movies and music.

With the onset of festive season, ad spends have seen gradual improvement says Zee’s management. But sustenance of this trend needs to be watched. Zee5 has launched about five ad-suite products to offer customised advertisement solutions to brands. This is likely to aid advertisement growth going ahead.

Cause for concern

While Zee has the potential to increase its ad and subscription revenue given its market penetration and product portfolio, the sustained increase in working capital requirements has impacted the operating cash flows. It has fallen to negative ₹246 crore in the September quarter from ₹304 crore during the same quarter last year. Further, given the lack of clarity on trade receivables from multiple system operators, including Dish TV and Siti Cable, there is a risk of pressure increasing on cash flows. Zee’s management, however, is confident and expects cash flows to turn positive by FY21.

Stake sale update so far

The stock of Zee Entertainment has been falling sharply since last one month with investors fearing that the promoters may not able to find an potential investor for their assets, and that lenders may sell the pledged shares of the promoter in the market.

In September, some lenders - Kotak Mutual Fund and SBI Mutual, did sell the pledged shares of the promoters of Zee. But still, there is a huge amount of debt (borrowed by pledging shares) that the promoter – Essel Group needs to payback.

In a conference call with investors in October, the company’s promoters said that while they had agreed to sell 11 per cent of their stake in Zee Entertainment to Invesco Oppenheimer Developing Markets Fund for a total consideration of Rs 4,224 crore in July to settle some lenders, only 8.7 per cent of stake was sold, and, 2.3 per cent stake is still with the promoters. The management however sounded confident that it will be able to repay the entire promoters’ debt in three months’ time.

The total loan raised by the Essel Group promoters by pledge of their shares is Rs 7000 crore of which Rs 5000 crore is due to domestic lenders and Rs 2000 crore is due to VTB Capital (Russian investment bank).

The promoter’s holding in Zee is 22 per cent (as disclosed by the management in the conference call in October).

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