According to a Motilal Oswal equity research report on Q1 performance,

• Ad revenues have declined 20 per cent year on year (yoy) to Rs 1.1 billion on a comparative basis.

• Subscription revenues have been robust; domestic pay revenues up 68 per cent yoy.

• Balance sheet quality is improving consistently; debtors outstanding reduced to Rs 4.9 billion from Rs 5.6 billion in March 2003.

The report on the Zee financials says that given the promise of a pickup in ad revenues coupled with robust subscription revenue growth, there is enough reason to remain positive on Zee. The report also sounds off the company financials as healthy given the improving quality of their balance sheet.

Revenues and margins

The report echoes the general reaction in the market about revenues for the quarter being lower than expected due to a sharp decline in advertisement revenues. However despite the concern, the report sounds optimistic given the higher EBITDA margin.
As far as researchers at Motilal Oswal are concerned, Zee has delivered the expected profits.

However, the report expresses concern over low advertisement revenues of Rs 1.2 billion, which actually show a yoy de-growth of 13.4 per cent. Moreover, Q1 results include advertisement revenues of ETC Networks. To make the numbers comparable on a yoy basis, if the ETC revenues are deducted, actual advertisement revenues for the quarter would be in the vicinity of Rs 1.1 billion, which is a high yoy de-growth of 20 per cent.

The Zee management has waved off this decline as a one off situation and has attributed it to:

· The continued hangover of ICC World Cup in the month of April 2003.

· The new transparent rate card that Zee brought out in April 2003 took time to generate awareness and acceptance among the media buying community.

Nevertheless, the report gives a positive nod to the robust subscription revenues that are said to be ahead of market expectations. According to the report, growth has come in from all quarters - domestic pay, international pay and Siticable MSO.

The report expresses hope of a higher sequential growth in the domestic pay revenues from the second quarter onwards as that is when paid connectivity starts increasing at a faster pace. Domestic pay revenues at Rs 512 million for the first quarter this fiscal were have registered a yoy growth of 68 per cent and qoq growth of 2.2 per cent.

International pay revenues at Rs 618 million have also witnessed a qoq growth of 12.4 per cent. Each of the international markets has grown in terms of topline and bottomline with Zee adding 35,000 pay subscribers in the international markets in Q1FY04.

Siticable MSO operations, at Rs 298 million, have also registered a qoq growth of 16.9 per cent.

What really made the day on the declaration of Zee Q1 results was that the EBITDA margin expanded by 60 basis points to 31.1 per cent on the back of flat personnel expenses and lower-than-proportionate growth in overheads.

Programming, transmission and other direct expenses have grown 23.6 per cent, driven by a 9 per cent growth in programming costs while transmission costs remained flat.

Healthier balance sheet

Emphasising the consistently improving quality of the balance sheet, the report says that debtors outstanding have been reduced to Rs 4.9 billion in June 2003 from Rs 5.6 billion in March 2003. So have the debtor days, which have gone down to 152 at the end of Q1 from 171 in March 2003. The report estimates that the average debtor days are likely to improve to 120 days by March 2004.

Total debt has already been brought down by Rs 1.6 billion to Rs 5.8 billion in Q1FY04. Long term debt to the extent of Rs 746 million and working capital loans of Rs 814 million have been repaid during the quarter. The report expects another Rs 1 billion debt repayment in Q2FY04, which will bring the total outstanding debt down to Rs 4.8 billion.

Overview and fastforward

Over all, the Motilal Oswal research report gives a positive outlook on Zee.

The report puts the estimated advertisement revenues for this fiscal at Rs 6.4 billion which would be a yoy growth of 2.4 per cent.

Researchers at Motilal Oswal also seem to be optimistic on the note that Zee has already achieved 42 per cent of its annual advertisements revenue target by sewing up annual deals with advertisers as of July 2003.

As far as the domestic pay revenues are concerned, the researchers say that have factored in any possible loss of pay revenues on account of the honeymoon pricing during the four-month CAS implementation period. Their estimate for FY04 stands at Rs 2 billion.

Whereas advertisement revenues are expected to bounce back in Q2FY04 with stability in the overall advertising market and improved acceptance of the new rate card by media buyers, for international subscription revenues, they are projecting a growth of 15.3 per cent at an estimated year-end figure of Rs 2.6 billion.

Further, the net profit for the year is expected to grow at 23.6 per cent, which will be in the vicinity of Rs 3.1 billion. This translates into a healthy EPS of Rs 7.5.

Maintaining a healthy outlook on Zee, Motilal Oswal has retained its buy recommendation and is optimistic about Zee's overall performance in this fiscal.

Also read: Kotak Securities retains 'in-line' status on Zee