ZEEL Q3 Earnings Hit By Poor ad Spend – Provision Overhang

ZEEL Q3 earnings

Private sector television broadcaster Zee Entertainment Enterprises (ZEEL) reported a 37.9% on-year fall in consolidated net profit during the October-December quarter due to lower revenue and operating income.

Profit during the quarter declined to Rs 349.4 crore, from Rs 562.4 crore in the same period last year.

Revenue from operations in Q3 dropped 5.5% to Rs 2,048.7 crore on year, dented by lower advertising revenue.

Zee reported a 15.8% drop in advertising revenue at Rs 1,230.8 crore. Domestic advertising revenue declined by 15.7% to Rs 1,157 crore.

As most of its advertisers are passing through a slow-growth period, they decided to cut in advertising spends.

As regards subscription revenue, Zee witnessed a 15.4% fall at Rs 713.7 crore, during the quarter under review, ahead of analyst’s expectations.

At the operating level, earnings before interest, tax, depreciation, and amortization (EBITDA) in Q3 plunged 25% to Rs 565.8 crore and margin contracted 720bps to 27.6 % compared to a year ago.

For ZEEL, the fiscal third quarter is normally a strong growth period, however, a tough macroeconomic environment led to a decline in our ad revenues.

The broadcaster will face a challenging time going forward given the large dues from two players and regulators trying to enforce a ceiling on the channels distribution platform.

ZEEL has informed exchanges of trade receivables worth Rs 750 crore overdue from two customers. It hopes to recover almost half of this due as per the revised plan.

Telecom Regulatory Authority of India (TRAI) has set RS 160 price ceiling for all channels available on a distributor’s platform as it aims to reduce rising costs for subscribers.

Meanwhile, post the earlier pledging transaction, Essel group’s holding will reduce to 5%, of which encumbered holding will be at 1.1% (20% of promoter stake vs. 96% pledge earlier).

As the incumbent CEO retains the position, we believe management control with a mere 5% holding will be a difficult task.

Moreover, a stronger strategic partner would have been preferred than financial investors.

While the deal announcement is positive, we highlight that the total debt of Rs 2200 crore is yet to be paid.

As per the agreement between lenders and the Essel group, the remaining debt will have to be paid by March 2020.

Net net we believe that with the pledging issue now over the next growth trigger for the company will come only when the demand scenario improves significantly as far as the Advertisement revenues are concerned and second whether the company generates positive OFCs and FCFs ahead.

Until then the stock is likely to remain subdued as macro challenges persist despite the fact that Zee is a large content provider and should do well over the long term once the economy bounces back and FMCG spends start increasing again.

This is expected to take at least 6 months to see a strong recovery ahead in H2 of FY21.

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