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Mr Subhash Chandra, Chairman.

Shanthi Venkataraman

Zee News, which operates a clutch of regional channels that cater to the Bengali, Marathi, Gujarati, Punjabi and, recently, to the Telugu and Kannada audiences, has emerged as a strong player in the regional entertainment television market.

Leadership in Marathi and Bengali markets and improving traction in newer regions has helped the company deliver blockbuster growth in FY-08.

Zee News’ stock has also rebounded from its lows and now trades at 25 times its likely FY-09 earnings per share. The valuation is on a par with the media conglomerate, Sun TV, which has till now dominated the lucrative, but intensely competitive, South Indian television entertainment market.

While the company is likely to record an impressive growth rate over the next year on the back of higher subscription revenue and sustained advertising momentum, we anticipate challenges in its launch into the Tamil GEC (General Entertainment Category) segment.

Nearly a dozen channels already operate in this segment where Sun TV is the dominant player. If its other recently launched channels fail to break even over the next year, the drag on earnings growth would be considerable. Shareholders can hold on to the stock.

Zee News delivered a strong fourth quarter performance. Advertising income grew 84 per cent over the corresponding previous quarter, buoyed by improving market share across channels in the network. Zee Marathi and Zee Bangla are now leaders in their respective markets; the company’s newer ventures, Zee Telugu and Zee Kannada, have also significantly improved market share to about 10.5 per cent each.

The company expects these channels to break even once they cross a market share of 12 per cent. The new businesses are expected to break even in a staggered manner over the next 18 months. Advertising income rose 70 per cent in FY-08 over the previous year.

Almost all of Zee News’ channels are on “pay” mode, which would make the company a strong beneficiary of the shift towards digitisation. Subscription currently accounts for 20 per cent of the overall revenues. With Zee Kannada and Zee Telugu turning pay channels in the fourth quarter, subscription income jumped 50 per cent in the fourth quarter.

Subscription growth will continue to be buoyant for the next three quarters, due to the low-base effect.

Operating margins of its existing businesses (Zee Telugu, Zee Kannada and 24 Taas are classified as new businesses) rose sharply to 37 per cent in FY-08 from 30 per cent a year earlier.

Losses at the operational level from its new businesses reduced marginally to about Rs 50 crore.

Zee News plans to enter the Tamil market in July 2008, a step that would deepen its entry into the southern regional entertainment market, which is considered a lucrative market for advertisers.

The company has managed to make a mark with its Telugu and Kannada channels. But making inroads into the Tamil GEC segment might be significantly more difficult, given the leader’s dominance and the presence of several channels vying for the second place.

The company has earmarked investments of Rs 90 crore (inclusive of operating costs) for Zee Tamil. Clearly, the company would spend significant sums in marketing the channel and ensuring connectivity to compete with the incumbents.

The company has acquired movie rights, but the streaming of movie content has become the strategy of several channels and may not be sufficient to attract eyeballs.

Zee Tamil will have to oust Kalaignar TV, Star Vijay, Raj TV and Jaya TV — all close contenders — to get to the No. 2 spot and manage to steal considerable market share from Sun TV to make good on its investment.

Current valuations factor in significant reduction in losses of other recently launched channels. If the company takes longer than expected to break-even in Zee Telugu and Zee Kannada, valuations could take a significant knock.

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