Zee results: share prices down, analysts maintain ratings

MUMBAI: Zee Telefilm's 3QFY03 results has evoked mixed reactions from the market and analysts. The Zee Telefilms scrip opened at Rs 86.85, dropped 9.15 per cent to Rs 78.90 on the Bombay Stock Exchange. The stocks were actively traded and volumes rose to 4,337,401 as compared to 2,223,366 shares traded yesterday.

On the National Stock Exchange, the scrip opened at Rs 86.55 and dropped 8.78 per cent to Rs 78.95. A total of 12,504,715 shares were traded as compared to 8,699,439 on 28 January 2003.

The media sector updates by JP Morgan, Motilal Oswal Securities, Merrill Lynch and Kotak Mahindra Securities maintained their earlier recommendations. Here are some excerpts from the reports prepared by the media analysts.

1) JP Morgan report:

JP Morgan's Zee Telefilms update dated 28 January 2003 retains its overweight rating and observes that Zee trades at multiple lower than the Indian market. It adds that the stock should see its premium expand going forward with significantly superior growth in earnings than the market.

The Morgan report states that it isn't changing the 4QFY03 forecasts as: Zee's costs have been better managed; and Padmalaya Telefilms results are to be consolidated in 4Q03. It adds that the overweight stance is underpinned by: improving program ratings; structural changes lead by legislation in the cable industry; and improving overseas business. All these factors are very much in place, as per the report.

The Morgan report expects the momentum in earnings to continue to improve and be the primary engine for stock performance and premium expansion. It also states that while Zee's profits were about 15 per cent below expectations, the results beat consensus estimates by 5 per cent.

The negative surprise came primarily from advertising revenues, which dropped 9 per cent YoY for Zee (excluding ETC). The report expects flat QoQ ad revenues and adds that ad revenues are likely to be weak even in 4Q FY03 due to the World Cup. The report hopes that there could be an improvement as better ratings shows through in revenues.

A forex loss of Rs 30 million also impacted Zee's profits in 3Q FY03, the Morgan report states. On the pay revenue front, Zee's numbers were in line with expectations and were the key driver of earnings in the absence of a kicker from ad revenues, growing 42 per cent YoY.

It adds that pay revenues should accelerate further due to a 20 per cent price hike taken in January 2003. Zee's days receivables declined to 184 days from 198 days in the previous quarter, it notes.

The report recalls that the Zee management reiterated that debtors would be brought down to 140 days by end FY03. In the conference call, the management mentioned that the receivables on account of Buddha films (Rs 1.58 billion) would be paid by end FY03. Additionally, Zee would likely pay down Rs. 2-2.5 billion debt in the next quarter.

Given the strength in earnings, the Morgan report expects the stock price to rise from current levels.

2) Motilal Oswal Securities Inquire Research report:

Motilal Oswal Securities' Inquire Research (MOSt) report on Zee's 3QFY03 dated 28 January 2003 reiterates its 'Buy' status with a target price of Rs 130.

The report states that the three key triggers to stock price performance in the short term are: free to air bouquet price if fixed at Rs 50-70 per month per subscriber; repayment of Rs 1.6 billion liability by Buddha Films to Zee; and reduction in debtor days to approximately 150-day levels. In the long term, the report is positive on the domestic subscription revenue upside post-CAS implementation. 

The MOSt report also adds that Zee Telefilms has reported results lower than expectations. While PAT has been marginally lower than expected, revenues have been lower by Rs 233 million due to significantly lower advertising revenues than expected, it states. EBITDA margin at 35 per cent was also lower than expectation of 37.7 per cent primarily on account of higher pay channel costs paid by Siticable to pay broadcasters.

The report maintains that the stock has seen a sharp correction in the recent past and there isn't any likelihood of a downside from hereon.

3) Kotak Mahindra Securities report:

Kotak Mahindra Securities' report dated 28 January 2003 states that Zee reported a strong quarterly performance with a 29 per cent QoQ net income growth to Rs 688 million aided by a benign accounting practice on movie amortization.

The report states that the underlying performance is less impressive as lower programming cost (aided by low amortization of movie costs) has primarily boosted EBITDA (+34 per cent QoQ to Rs 1.1 billion). Ad revenues were sluggish at Rs 1.7 billion (+20 per cent QoQ, -2.4 per cent YoY) despite peak festival season and screening of costly movies.

Domestic pay-TV revenues grew by a disappointing 2.5 per cent QoQ to Rs 378 million. The Kotak report retain their earnings estimates and DCF based target price is Rs 100; key risks include failure to consolidate ratings for mainline channel and lower-than-expected growth in domestic pay-TV revenues.

The Kotak report also expresses concerns that the fourth quarter may not look that good. Despite nine-month net income at Rs 1.7 billion versus the full year expectation of Rs 2.07 billion, the report retains its estimates.

The report also notes that Zee would have to provide for amortization of movies in 4QFY03 and subsequent quarters without commensurate revenues. Also, Zee will have to compete with cricket world cup for advertising dollars during Feb-March period. Finally, it mentions that Zee's full year tax rate will be above the 26.5 per cent reported so far according to the management.

4) Merrill Lynch report:

The Merrill Lynch report on Zee Telefilms 3QFY03 dated 28 January 2003 states that he new management has delivered. Zee 3Q PAT Rs 688 million up 32 per cent YoY (6 per cent ahead of MLe), reinforce the view that strong growth in pay revenues will more than compensate for its stagnant ad business.

The report believes that while recent stock under performance leaves scope for appreciation, ensuing cricket World Cup (a once in 4 year event) would keep pressure on its 4Q ad revs and hence, the stock price in the near term.

The Merrill Lynch report states that the key positives of 3Q FY03 were: strong EBITDA margin expansion to 35 per cent from 33.9 per cent in 3Q FY02 led by growth in global pay revenues (38 per cent YoY) & cost cutting; significant reduction in losses of education business (down 76 per cent YoY) & turnaround in cable business (loss to profit in 3Q FY03).

The Merrill Lynch report also mentions that the key shortcomings of 3Q were: Ad revenues were down 0.7 per cent YoY despite consolidation of ETC (8.9 per cent excluding it), indicating pressure due to ensuing world cup; Debtor day down only 3 per cent to 184 days in 3Q from 190 in 2Q; Sales were lower by 8.7 per cent v/s MLe as Zee didn't consolidation recently acquired Padmalaya in 3Q (will start from 4Q).

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