Zee's earnings hit by rise in programming investments: MPA

MUMBAI: If you are looking at Zee Telefilms as a short term investor, think again. Earnings and margins will continue to be under pressure as the company's investments in programming and marketing are on the rise to keep pace with competition.

Zee Telefilms CMD, Subhash Chandra, told analysts in a conference call on 20 October to take a long, or at least medium, term view. If you are looking at this company for quarterly profits, then please do not invest in this company, he said.

Zee has made investments in new channels like Zee Smile, Zee Telugu and Zee Sports. Besides, the company would focus on consolidation of Siticable and its digitisation. "The new channels would take around 12-36 months to break even. Zee Sports is likely to take three years," Chandra said.

What does all this imply? Higher programming and marketing costs has begun to exert significant earnings pressure on Zee, according to an international research report.

Hong Kong-based Media Partners Asia (MPA), forecasts Zee's operating profit in 2005-'06 to fall by 17 per cent year-on-year to Rs 3.6 billion, a 25 per cent margin on a projected revenue of Rs 14.5 billion.

Zees core broadcast business also appears to be under pressure, the report says. Zee's EBITDA (earnings before interest, taxes, depreciation and amortisation) declined 11 per cent Y/Y (excluding losses from the new businesses), and 9 per cent Q/Q during the latest quarter to reach Rs 912 million.

The company posted a total revenue of Rs 3.36 billion ($75 million) during the Q2 FY 2006 period (September 2005 quarter), up 9 per cent Y/Y but down 3 per cent Q/Q while EBITDA fell 43 per cent Y/Y and 41 per cent Q/Q to Rs 585 million (margins down to 17 per cent versus 33 per cent a year ago). Net income (after minority interest) declined by 39 per cent Y/Y and 46 per cent Q/Q to Rs 412 million.

According to MPA, the new investments are critical to Zee as they are made to address weak ratings and build a market for new niche channels. Flagship channel, Zee TV, also faces strong pressure from Star One, which was launched in 2004. Apart from the programming costs, Zee has to invest in distribution or carriage fees to push certain channels.

Dish TV, the direct-to-home (DTH) venture where Zee owns 20 per cent, had 480,000 subscribers till September-end. But it is signing up around 3,500 customers a day and expects to touch one million subscribers by the end of this financial year. The average revenue per user (ARPU) is reportedly running at Rs 200 per month with services subsidised through the provision of a free annual subscription after a one-time charge of Rs 4,000, MPA said.

India's leading broadcasters including Star, in fact, are seeing a squeeze on earnings and margin growth as investments increase in the backdrop of stiff competition. But, Zee will be more affected than Star as its advertising growth is slower. Star's ad growth in India is about 20-30 per cent, offsetting a major erosion in margins. Zee, on the other hand, saw a growth of about 14 per cent Y/Y in the first half of FY 2006 and 12 per cent growth during the recent quarter.

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