S. Vaidya Nathan

SHAREHOLDERS of Zee Telefilms may reduce exposures, as we expect the company's performance to remain lacklustre; there are no visible triggers that could serve as growth drivers. The stock has declined sharply following the earnings announcement on Thursday. Based on fundamentals, we do not expect significant gains that would justify exposure to the stock. The stock did run up sharply in the July-September period driven by liquidity flows but quickly shed those gains.

Our stance represents a continuation of our negative view on the stock, which we have held over the past few years.

We believe that there are superior players in the media and entertainment space, and it may be better for shareholders to trim exposures in the stock, especially on any upticks linked to the broad market.

Investors have options from other sectors in the large-cap category that could deliver superior returns.

Given its track record of recent years, imminent competition in the distribution business and its investments in new channels that may take a while before they start to deliver value, the stock does appear richly valued even at current levels.

Apart from Zee Cinema, it is difficult to find any compelling positive in the Zee Network that suggests a return to consistent and robust growth in revenues and earnings. Though Zee News has managed to retain a steady audience share over the years, it has now slipped to the fourth slot and more competition is imminent.

Growth rates in subscription revenues, which have been a key factor in ensuring respectable numbers over the past few years, have tapered off. With the Sony and the Star Plus platforms spreading to other geographies with a sizeable population of Indians, Zee may be hard pressed to post growth in subscriptions. Its flagship channel Zee Telefilms shows no signs of matching Star Plus and Sony; it now appears pushed to a stage where it has to hold off competition from the likes of Sahara One, which have benefited from their free-to-air channel status.

Zee has revamped its strategy several times in recent years without commensurate benefits, and appears to have put one more round of restructuring of content. It is not easy to be confident about the prospects, especially as Star Plus and Sony have invested fairly successfully in beefing up content through new programmes.

Zee's foray into sports also appears destined for lacklustre payoffs. As far as cricket telecast rights for India is concerned, Zee's failure to make the cut in the technical qualification process is a setback. It can take the legal route to fight its way into reckoning. Even if it dies so, stiff prices may limit payoffs.

It has entered into a long-term contract for domestic football matches. But this is unlikely to provide gains of the magnitude necessary to bankroll a sports channel. Unless it can land cricket telecast rights with a sizeable number of matches involving India, the ad revenues are unlikely to flow its way. Without popular properties, subscribers may also be reluctant to pay the stiff price that Zee Sports charges. We are not sanguine about Zee Sports and the cost of operating this channel is likely to strain resources without commensurate contribution to profitability.

Zee's assets in cable distribution in a few cities and its fledgling DTH (direct-to-home) business increasingly appear to be the more attractive part of this integrated player in the entertainment business. DTH is likely to be a growth business over the next five years; but Zee will have a competitor with deep pockets and rich experience in six- to nine-months when T-Sky (a joint venture of the Tata and the Star group) starts operations.

The Star brings expertise of an immensely successful rollout of such services in the UK. Zee's DTH business could benefit from an expansion in the market as pricing becomes more attractive from the point of view of customers. The key issue will be its ability to offer content comparable to what the T-Sky platform will offer, without the support of regulatory diktats. If Zee Telefilms were to restructure its distribution business, it may unlock value. We will re-visit our stance on the stock, if there is news flow on this score.

The principal risk to our recommendation is liquidity-driven gains that the stock has enjoyed for short periods, especially when FII inflows have been robust.

But any missed opportunity on this count will be neutralised by exposures in other large-cap stocks that offer a growth story that rests on solid ground. Zee has a long way to go before it can make the cut.

(This article was published in the Business Line print edition dated October 23, 2005)
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