Multiple headwinds for Zee

Falling advertising revenue growth rates, weak ratings and the recent cash crunch have taken a toll on the Zee Entertainment stock, shed 22 per cent since early October. Ad revenue growth, which was 15.7 per cent in the September quarter, has been coming down from its peak of nearly 35 per cent a year ago. While ad growth in the September quarter was good, considering the high base of last year, the near-term outlook is muted, both on account of expected cutback in promotions as well as a drop in ratings. Ad spends by consumer goods companies, over half of ad revenues, have been soft due to the rural slowdown and could see a significant decline as companies rein in spends. Although ad spends by e-wallet/banking, financial services and insurance players are expected to compensate a bit for the muted spends by other sectors, Edelweiss Securities believes  Zee’s ad growth in the second half of the financial year will come be 5.7 per cent, against the earlier estimate of 19.4 per cent (given the impact on consumer demand from demonetisation). The company posted ad growth of 17 per cent in the first half of year. For the sector, ad revenue growth, according to Ambit Capital, could come down by 400 basis points to 12 per cent for FY17, against earlier estimates of 16 per cent.

The more worrying trend for analysts is muted flagship channel ratings for the company. Zee had a viewership share of 11 per cent among urban audiences as compared to 14 per cent in July 2016. The reason for the decline or drop in market share, according to Macquarie Capital, is low original programming hours, poor execution and launch of marquee shows by Colors. Zee, however, is working on new shows for Zee TV and &TV with a view to increasing programming hours for the two channels to 30 hours (up 20 per cent) and 24 hours (14.2 per cent higher) respectively by the end of FY17. Any improvement in regional language shares is important given the weakness in the flagship channel performance. 

The acquisition of two regional channels from Reliance Broadcast Network, ratings improvement for Zee Tamil, launch of Marathi and Bangla high-density general entertainment channels, Telugu movie channel Cinemalu and Zee Yuva (Marathi) should help achieve regional focus and scale.

While this should help in the long term, the near term would be a tough climb for the company.

Vivekanand Subbaraman of Ambit Capital believes that continuation of weak viewership trends in the company’s flagship channel could result in the company getting a lower allocation of TV industry advertising translating into a double-whammy of slowing industry growth (compounded by demonetisation) and reduced allocation to Zee, implying sub-par advertising revenue growth.

At the current price, the stock is trading at 25 times its FY18 earnings estimates. Given the expected weakness in advertising growth and lower ratings, the near-term outlook is muted with the stock expected to be under pressure for some more time.

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