Zee’s FY19 earnings may aid better valuation

At a time when the Subhash Chandra-led Essel Group is pulling all stops to repay a significant quantum of debt by selling a stake in its flagship company, Zee Entertainment Enterprises, the strong earnings reported by the broadcaster for the quarter and financial year ended March 31, 2019 may help the promoters realise a better valuation for its stake, than otherwise.

For the quarter ended March 31, 2019, Zee reported a net profit of ₹291.7 crore, 26.3% higher year-on-year. The media conglomerate’s operating revenue in the same period stood at ₹2019.3 crore, up 17% over the year-ago period. For FY2019, Zee’s turnover stood at ₹7,933.9 crore, up 18.7%; while net profit grew 6% to ₹1,567.1 crore.

According to analysts tracking the company, Zee’s revenue for the fourth quarter of fiscal 2019 was ahead of estimates since most had expected revenue to take a hit post the implementation of Telecom Regulatory Authority of India’s (TRAI) new tariff order, under which each channel of a broadcaster has to be sold at a retail price separately, and not in a bouquet as was the case earlier.

Zee’s ad revenue surged 16% year-on-year to ₹1,210 crore. “Outperformance in domestic ad revenue was led by market share gains in regional genres and positive impact of Zee5 (Zee’s over-the-top video streaming service),” analysts Karan Taurani and Viren Deshpande of Elara Securities (India) wrote in a research note dated May 28.

Subscription revenue, however, grew a modest 3.4% year-on-year to ₹560 crore, due implementation of the new tariff order. “The management refrained from revising its subscription revenue guidance downwards for FY20 despite muted subscription revenue growth in the near term," says the Elara report. “However, we believe Zee will report subscription revenue growth lower than industry average, as our channel checks with MSOs (cable operators) indicate a lot of disruption on the viewership front.”

Zee’s EBITDA (earnings before interest, tax, depreciation and amortisation) margin for the January-March quarter stood at 28.1%, down 1.2 percentage points year-on-year and below Street estimates, largely due to higher programming costs and investments being incurred to build a content library at Zee5.

Despite the churn in the Indian broadcast industry since the new tariff order came into effect, Zee, as a network, has maintained its leadership position with a 17-18% share of viewership, according to the Elara report. In many markets like Marathi, Bangla, Tamil and Kannada it is the market leader.

The promoters of Zee, led by Chandra, have announced their intention to sell half of their stake in Zee to a strategic investor in order to realise funds to pare debt at the group level. The Essel Group, which has other interests from infrastructure and renewable energy to packaging, found itself facing a debt crisis since trouble broke out at non-banking financial company (NBFC) IL&FS and spread like a contagion across the NBFC sector, making it difficult for borrowers to borrow more and rollover existing debt.

Punit Goenka, Zee’s MD and CEO, has been quoted in media reports as saying that the process of selling a stake in Zee should be concluded by July. It was earlier reported that Zee was in talks with Sony Corp. for a potential partnership, but those talks fell through over alleged differences over expected valuation.

The promoters’ stake sale in Zee was initially mooted as part of a strategy to bring in an international strategic partner who can help the broadcaster with global reach and technology, especially to benefit Zee5, which has notched up 61.5 million monthly active users. However, the narrative changed when the group was faced with the debt woes and the sale has now become necessary for the group to stay afloat. Potential buyers of a stake in Zee also sense that and might be trying to drive a hard bargain, hoping that the promoters will relent under pressure from lenders.

Zee’s share price has declined as much as 23% in the last six months. It ended 2.6% lower at ₹372.20 per share on the BSE on Wednesday.

At a time like this, robust earnings are the best way for a company to showcase its worth to potential suitors and persuade them to ascribe a higher valuation to the quality of assets created.