Advertising growth revival in Q3 a key positive for Zee Entertainment

Zee Entertainment reported a robust operating performance for the December quarter, aided by a rebound in advertising growth. Led by an increase in content hours, market share gains and low base, the company reported domestic advertising growth of 26 per cent over the year-ago quarter on a like-to-like basis.

The year-ago quarter had the sports business, which was sold subsequently, as also acquired channels from Reliance Broadcast Network and online properties of India Web Portal. While content hours have increased from 22-23 hours to 32 hours for Zee Entertainment, its overall network or viewership share has increased to 18.3 per cent from 16.3 per cent a year ago. Advertising revenues account for 65 per cent of the consolidated top line.

 

Given the base last year, while the company may not be able to achieve similar advertising growth rates, it is confident of achieving high teens growth. The management indicated that a cut in goods and services tax or GST rates has brought back confidence, and advertisers such as the FMCG sector, which accounts for more than half of Zee’s advertising revenue, is looking at higher spending. The company is confident that it will maintain its outperformance vis-à-vis the sector as far as advertising revenue growth is concerned.

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The gains on the advertising front were negated with subscription revenues falling 15.5 per cent over the year-ago quarter. Adjusted for sports business, subscription revenues grew 7.5 per cent. The company indicated that early closure of content contracts with distributors in FY17 resulted in high base, while this year the process is taking longer on account of the regulator’s tariff order and litigations related to it. Contract renewals help increase subscription revenue, given price escalation and higher number of subscribers as digitisation gathers pace. The company has guided for a low teens subscription growth this fiscal year.

While overall revenues grew 12 per cent to Rs 18.38 billion, costs, too, increased 10 per cent, limiting the gains at the operating level. A Rs 400-million spend on brand refresh or events related to 25 years of Zee, costs on release of three movies in the quarter and Zee Cine Awards led to a spike in total expenditure. Operating profit margins at 32.3 were 70 basis point lower than the year-ago quarter, adjusted for the sale of sports business. The management is confident of achieving a 30-per cent-plus margins for FY18 despite the higher investments on movies and digital properties. Given higher taxes, depreciation and lower other income, net profit at Rs 3.22 billion was lower than the Street’s estimates, which pegged it closer to Rs 4 billion. The stock shed 3.3 per cent in trade on Wednesday.

Besides advertising revenue growth trend, the Street will focus on the February launch of Zee’s digital platform, Zee5.