Positively, in a quarter when most consumer product companies scaled back their advertising spending to cope with the after-effects of demonetisation, Zee’s domestic ad revenues grew eight per cent over a year before. This was higher than the 3.7 per cent growth in this metric in the December quarter.
Importantly, the management believes ad revenues have come back to pre-demonetisation levels. It is the softness in international markets
which has pulled down overall revenues. Here, too, the management told analysts the business was seeing a recovery.
On the subscription side, uncertainty around rates had impacted revenues, which fell three per cent in the domestic market. This metric was also impacted by loss of one month of subscription revenues from the sports business. Around September 2016, the company had announced sale of its Ten Sports channel business to Sony Pictures for Rs 2,600 crore.
The decline in international subscription revenues was sharper at 19 per cent, partly due to a high base effect; the year-before quarter had revenues from two cricket events. Going forward, even as the new rate order is stuck in litigation, Zee has published the prices of its channels and bouquets, and is confident of improving subscription revenues.
Even as the revenue trend was influenced by various factors, Zee’s consolidated operating earnings' margin expanded by a robust 367 basis points to 30.7 per cent, driven by cost reduction measures. Analysts were expecting around 30 per cent. The management is confident of maintaining this, which should help drive faster growth in earnings when revenues pick up pace. In the earlier six-odd quarters, the margins have largely been 26-29 per cent, except on one occasion.
Robust margins, along with a one-off gain from sale of its sports business, aided profit in the quarter. The company booked a gain of Rs 1,223 crore on this sale in Q4, which boosted its consolidated net profit to Rs 1,514 crore, an increase of 568 per cent over a year. As a result, this number raced past the Bloomberg consensus estimate of Rs 299 crore.
Profit before tax, excluding the one-time income, grew at a healthy 13.9 per cent, even as revenues were flat — on the back of better margins, savings in finance costs, higher other income and minor profits posted by the sports business.
Overall, Zee’s leading position across its bouquet of channels, strong position in the music business and continued investments to grow the movies business make it an attractive play on India’s entertainment sector. The company has been growing ad revenues ahead of the industry and enjoys strong margins, as well as return ratios. However, at current levels, the stock trades at 32 times the FY18 estimated earnings, between its average valuation of 25 times and peak valuation of about 37 times. Investors could consider buying on declines.