Zee results confirm robust business model: Merrill Lynch

MUMBAI: The Merrill Lynch report dated 28 April 2003 states that the Zee's 4QFY03 result reinforces the analysts' confidence in Zee's business model. However, the report adds that the delay in return of advances given to Buddha Films and likely investment in Essel group's DTH venture (up to maximum of 20 per cent limit) remain a concern.

The Merrill Lynch report still maintains a "BUY rating on the Zee stock based on:

1. Attractive valuations at 10x FY04E EPS vs the Asian (ex-Australia) average of 16x.

2. Rise in subscription revenues driving Zee's leading earnings growth in the global sector (20 per cent YoY) during these challenging years.

3. Recent stock underperformance; and

4. Improvement in the balance sheet.

The following are some relevant excerpts from the report:

* Zee delivered 52 per cent YoY growth in recurring PAT (excl. earlier period PAT of Rs 20 million for subsidiary, Padmalaya and Rs 386 million extraordinary write-off), to Rs 800 million in tough times.

* Importantly, Zee turned cash flow positive and this led the company to repay term debt of Rs 1.13 billion. Net debt at end-FY03 was Rs 5.9 billion - down 11 per cent YoY. This was aided by recovery from debtors (170 days in FY03 vs 213 in FY02) and should address market's liquidity concerns.

* Sales grew 17 per cent YoY. A 16 per cent YoY fall in ad revenues led by the World Cup on competing channels was more than offset by 54 per cent YoY growth in global subscription revenues and consolidation of film subsidiary, Padmalaya.

* Ignoring changes in the base (4Q FY02) made by the company to match unaudited nos. with audited FY02 results, Merrill Lynch analysts estimate that the 4Q recurring PAT grew 33 per cent YoY in a tough quarter.

* The report mentions that the debtor days were further reduced to 155 in May 2003 according to the Zee management. This could lead to repayment of another Rs 1 billion of loans in 1Q FY04, adds the report.

* The report says that the Zee management claimed its readiness to supply a digital set-top box at Rs 3,500/pc (US$74) on the conditional access system (CAS).

* The report says that the key risk is the company's ability to increase penetration of Zee Turner in domestic pay markets and maintain the creative execution of the broadcasting business.

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