MUMBAI: A JP Morgan Asia Pacific Research report dated 28 April 2003 has stated that Zee Telefilms has reported good 4QFY03 numbers and that advertising revenues performed in line with expectations in a tough environment, while subscription revenues continued to show strong growth.

Overall, the report adds that the earnings momentum will continue to be strong, especially on the pay revenue front, and there might be some positive surprises on the ad revenues front. JP Morgan has reiterated its "Overweight" status rating on the stock at the Rs 70 level.

The JP Morgan report appreciates the strict cost control measures implemented by the company - especially the sharp decline in the programming and employee costs. Additionally, the JP Morgan analysts are happy with the fact that the company has paid off Rs 1.13 billion of debt, which led to a reduction in finance costs.

The JP Morgan report says that there has been a significant reduction in the debtor days, which currently stands at around 155 days, and expects it to come down to 140 by 1QFY04.

The report mentions that the stock has fallen by 19.5 per cent in the past three months, contrary to expectations. However, JP Morgan analysts believe that the result vindicates their stance of strong fundamental growth.

The 4QFY03 earnings will set pace for further earnings momentum, says the report. It adds that the outlook for the company looks strong and the near-term triggers are positive - as the negative impact of the World Cup is over. The new programme launches are stabilising and getting better TRPs. Lastly, CAS should be a long term positive for the stock.

The following are some excerpts from the JP Morgan report on Zee results:

Advertising Revenues: In Line with Expectations
The advertising revenues were in line with estimates, down 20 per cent Y/Y. However, the company has seen a pick up in the revenues after the World Cup. JP Morgan analysts are modeling in a 6.5 per cent growth in FY04 ad revenues, compared to a 10-15 per cent growth for C&S ad revenues.

The analysts believe that there could be upside to the numbers. Additionally, it is likely that one sees an end to the Y/Y drop in advertising revenues going forward and that will set pace for earnings growth.

Subscription Revenues: Growth Continues
The subscription revenues continued on the strong growth path and were also in line with estimates. The international and domestic pay revenues rose by 37 per cent and 17 per cent respectively on a sequential basis. The international subscriber base grew to 800,000, while the domestic connectivity rose to 4.6 million from 4.5 million in 3QFY03.

Debtor Days: Down to 155 Currently
Debtor days came down to 170 days in 4QFY03 from 184 days in 3QFY03. Management also mentioned that it is currently around 155 days and they expect it to go down to 140 by the end of the 1QFY04 as their ageing profile has improved significantly.

Operating Costs: Under Strict Control
There was strict cost control exercised by the company. The total expenses (ex-Padmalaya) dropped 11 per cent Q/Q. This is attributable to a drop in the programming and transmission cost and also in the employee cost. The new programmes launched by the company cost significantly lower than earlier programmes.

Additionally, the lowering of employee cost due to decrease in employees, which the management had talked about in 3QFY03, is showing through.

Finance Cost: Rs 1.13 billion Repaid
The company paid back long-term debt of around Rs1.13 billion. This led to a significant reduction in the finance cost. Additionally, the appreciation of the rupee also led to some benefits in finance cost. The management stated that they are going to reduce the debt by another Rs1 billion in 1QFY04E.

Tax Rate: Impact of Higher International Revenues
There was a reduction in the effective tax rate to 21 per cent from 27 per cent. Management stated that this was primarily due to strong growth in international revenues, which enjoyed a tax holiday. With faster growth of international revenues, JP Morgan analysts might see the tax rates settling down at lower levels.

Write-off from Education Business
The company took a one-time write-off of Rs 386.1 million. This was primarily due to assets in the education business and some inventories.

Overall, Good Results
JP Morgan analysts believe that the market will likely receive these results positively. The analysts are impressed by the cost control measures that have been taken by management.

Revenues have also performed in line with estimates, in the time of the World Cup. Additionally, the analysts believe that the market has not factored in the impact of the result as some details were awaited before the closing of markets. The stock has fallen by 19.5 per cent over the past three months, contrary to expectations. The result vindicates the stance of strong fundamental growth. The 4QFY03 earnings will set pace for further earnings momentum.