The stock of Zee Entertainment, one of the largest players in the entertainment industry, gained 5 per cent on the bourses today despite subdued June quarter results. Weak advertisement revenue due to macroeconomic challenges continued to weigh on the first-quarter performance. The margins too took a hit mainly due to content cost for Zee5 platform and marketing expenses. Operating profit margins contracted to 8 per cent in the June quarter 2020 from 34 per cent in the same quarter last year.

However, there were some positives. The subscription revenue continued to register single-digit growth thanks to increase in viewership and growth in Zee5 subscription. With easy access to data at low cost and movement restrictions across various States, the company’s mobile application Zee5 witnessed a surge in online streaming. The company reported daily active users of four million for the June quarter.

Revenue under pressure

In the June quarter, Zee’s revenue declined 38 per cent y-o-y to ₹1,312 crore. Though the domestic subscription registered a growth of 5 per cent y-o-y, it was mainly offset by muted advertisement revenue, which declined 65.3 per cent y-o-y. The company’s profit fell to ₹29 crore in the recent quarter, a decline of 94 per cent y-o-y. Zee derives over 60 per cent of its revenue from advertisement, about 35 per cent from subscription and the remaining 5 per cent from other segments such as movies and music.

The advertisement revenue declined 65 per cent y-o-y as the Covid-19 pandemic takes its toll across sectors. Ad revenue had already been on the decline in the last 2-3 quarters due to slowdown in the economy. Also, advertisers could prefer advertising in free-to-air channels instead of pay channels in current market conditions. Until the overall demand in the economy improves, the ad revenue is expected to remain muted. Zee5’s portfolio expansion and increase in viewership base would likely aid advertisement growth going ahead.

On the subscription front, the company was able to register growth of around 5 per cent y-o-y despite turbulent market conditions. It was able to improve its market share of Hindi, Bengali and Tamil language channels on the back of resumption of original content. The subscription growth is also driven by the Zee5 platform, where the company released 18 original series/movies during the quarter.

However, it is to be noted that Zee5’s revenue is not sufficient to offset the mainstay subscription revenue from channels. Unless shooting resumes for original content, overall subscriptionmay remain muted. But the management expects growth to come back in H2FY21.

Its ‘others’ segment registered a growth of 30 per cent to ₹146 crore due to sale of rights of movies to other OTT platforms such as Netflix. Zee plans to strengthen its in-house movie production pipeline (Zee Studios). Further, Zee has scheduled direct movie releases on OTT platforms which could aid its revenue going ahead.

Better disclosures

Zee Entertainment is taking steps to improve governance and disclosures. The company has provided balance sheet for Q1FY21 along with the break-up of inventory, advances and deposits. It has also provided guidance for improvement in cash flows and has redrafted financial policies related to treasury investments and related party-transactions.

Any investments or disinvestment will be approved by the audit committee to ensure better governance. Perhaps, this is the reason the stock is up, despite muted results.

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