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S. Vaidya Nathan

SHAREHOLDERS of Zee Telefilms can consider using the recent spurt in the stock price as well as any uptrend in the homestretch to the earnings announcement to book profits on a part of their holdings. They may hold to the rest as the company's efforts to cut debt and clean up the balance-sheet, and a growth in subscription revenues, appear to hold upside potential. The gains may be steady compared to the attractive returns that the stock notched up in the bull market of 2003. This recommendation is a change from the consistent `sell' maintained on the stock over the past few years.

The risks to the recommendation are:

The continued lack of success on the programming front and low audience shares with detrimental implications for ad revenues growth; the marginalisation of its news channel; slack trends in advertisement revenues; the edge that the Star-Tata group venture would enjoy in the direct-to-home (DTH) space; and the limited room to ramp up subscription rates due to the presence of only a few attractive channels in the Zee-Turner bouquet. Concerns on management practices, too, enhance the risk associated with investing in the Zee stock.

Trimmer balance-sheet

Zee has initiated an exercise to clean up its balance-sheet by taking cognizance of the lower value of its overseas operations. In the late 1990s, Zee Telefilms had consolidated its global operations and merged a few companies with itself. The plans to raise $100 million by placement of foreign currency convertible bonds with a few foreign investors may bolster the balance-sheet and help Zee move towards a zero-debt status.

Slack on content

Zee continues to trail its rivals — STAR Plus and Sony — in the content space. Zee News, too, appears to have slipped in the sweepstakes in a growing segment, losing out to STAR News, NDTV India and DD News. Despite several initiatives by Zee to revamp its prime time programming, it has not regained the ground ceded to STAR Plus three years ago. Sony, too, is ahead with strong programming on weekends, and a few serials on weekdays which have attracted higher audience shares. From a long-term perspective, improvement on this front would be vital to at least sustain Zee's subscription and ad revenues, if not drive their growth.

Subscription-led growth

The impressive revenue and earnings growth numbers that Zee has reported in FY 04 have been driven by a rise in subscription revenues. A rate hike and an improvement in declaration levels in the domestic market have helped neutralise flat trends in ad revenues. Subscription revenues may hinge on better declaration as it may difficult to push through rate hikes.

Ad revenues have grown by about 7 per cent in recent months after a decline in the first half of FY 04; they, however, appear modest given the widespread improvement in the economy and ad spends, and the emergence of new advertisers from such sectors as insurance, home loans and other financial services, telecom and automobiles.

Content-handicap in DTH

In the DTH space, Zee's first mover advantage may not be significant. Its plans to line up a subscriber base of one million over the next 12 months may remain on paper.

The channels offered on Zee group's DTH platform may not help it build a sizeable subscriber base even in the Hindi heartland and States such as Maharashtra and Gujarat; it may not find takers in the southern and eastern markets especially, as none of the prominent regional players has got onto the Zee platform.

Unless there is a regulatory fiat that all channels would have to be made available on every DTH platform, the STAR-Tata combine would have the edge when it rolls out its service.

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