Zee Entertainment Q3 profit before tax slips 37% as ad revenues dip

Zee Entertainment (Zee) posted a 37 per cent year-on-year (YoY) decline in profit before tax (PBT) to Rs 510.8 crore for the third

quarter (Q3) of the current financial year (FY20), as revenue dipped 5.5 per cent to Rs 2,048.7 crore.

The company also issued clarifications on the related-party transactions, which led to three directors resigning from its board during the quarter. Its auditor Deloitte, however, declined to comment on the matter. The advertising revenue for the quarter came in at Rs 1,230.8 crore, down 15.8 per cent YoY; the domestic advertising revenue declined 15.7 per cent. The international ad revenue came in at Rs 73.8 crore. The subscription revenue, however, grew 15.4 per cent to Rs 713.7 crore in Q3FY20, riding primarily on last February's new tariff order (NTO)-induced changes in subscription patterns. Zee's India subscription revenue grew 21.7 per cent to Rs 631 crore.

The earnings before interest, tax, depreciation and amortisation (Ebitda) declined during the quarter to Rs 565.8 crore, a dip of 25 per cent year-on-year. The Ebitda margin, thus plunged to 27.6 per cent from 34.8 per cent a year back, even as the company cut down on advertising and publicity expenses. Apart from lower revenues, the fall in Ebitda can also be attributed to a rise in operating, employee and other expenses.

The headline operational numbers though were ahead of consensus estimates. As per Bloomberg, analysts had pegged revenues at Rs 1,960 crore and Ebitda at Rs 547.8 crore. One reason is that brokerages had already lowered their estimates in anticipation of a weak quarterly performance.

"Zee’s Q3FY20 operating performance would be disappointing. We expect a sharp 14 per cent year-on-year (YoY) decline in advertisement revenues, significant underperformance versus industry growth rate which may remain flattish. We expect a 630 basis point YoY decline in EBITDA margin to 28.6 percent," Kotak Securities had recently.

Zee's managing director and CEO Punit Goenka admitted that while the third quarter is normally a strong growth period for the company, the tough macro-economic environment led to a decline in its ad revenues. He, however, claimed that the 'worst phase' was behind them and that they would start seeing an improvement from the next quarter.

Meanwhile, Goenka noted that the proposed changes in the February tariff order by the Telecom Regulatory Authority of India (TRAI) are being challenged in court and that the company expects to navigate any regulatory changes in an efficient manner.

"Despite the slowdown, we continue to make investments in businesses where we see potential for growth....We are preparing for the launch of two more channels over the next few months. We also continue to invest in original content for ZEE5, to create a rich content library that will make it a really compelling offering for consumers. These investments will help us grow ahead of the industry once this transient slowdown phase has passed," Goenka elaborated.

On the other hand, Zee also clarified on the related party transactions that had led to three directors of the company resigning from the board during the quarter.

Zee had a fixed deposit with a bank of Rs 200 crore, which the bank had unilaterally adjusted (according to the company) during the previous quarter against dues to certain related parties. The company claimed that subsequently the related parties have refunded the said amount to the company along with interest. The company's audit committee and its board have approved the setting off of the amounts received from these related parties with the aforesaid fixed deposit. Zee said that it is in the process of completing the communication with the bank on the matter.

Zee's auditor Deloitte Haskins & Sells, however, noted that due to non-availability of relevant information (including lien of the fixed deposit) or agreement with the bank for set off of the amounts for its review, it was unable to comment on the accounting done by the company of the set-off of the fixed deposit against the amounts received from related parties. Deloitte, also noted that except for the possible effects of the above matter, it noted no other irregularities in accounting.

Zee also noted that in an earlier year it had given an inter-corporate deposit (ICD) aggregating Rs 150 crore. On account of delays in recovery of the amount, the ICD was assigned to certain related parties, to secure payment of Rs 170.6 crore (including accrued interest up to the date of assignment). However, owing to further delays in receiving payment from these related parties, the amount has been provided for and disclosed as 'exceptional item' during the quarter ended September 30, 2019 and the nine months ended December 31, 2019. Zee claimed it has received interest on the ICD till March 2019.

The company also noted that as on December 31, 2019, it has trade receivables aggregating Rs 750.3 crore from two customers, which include amounts that are long overdue. The company's management has agreed on a revised plan with these customers which involved recovering the amounts over a period of 12 to 24 months. Accordingly, the management has considered the aforesaid amounts as 'good of recovery'. As per Ind AS 109, it has provided Rs 37.6 crore as expected credit loss towards time value of money on account of delayed collection.

At the net level, even as total tax outgo fell by nearly 35 per cent, the profit after tax for Q3 came in at Rs 349.4 crore, a decline of 37.9 per cent over Rs 562.4 crore reported in the year ago quarter. It was also lower than Bloomberg estimate (adjusted profit) of Rs 391 crore.

Zee's promoters had sold 16.5 per cent stake in the company during the quarter to repay loan obligations. Post the sale, the promoter ownership is down to 5 per cent.

Zee says 3 cable operators of 'illegally blocking' channels in Tamil Nadu

Zee Entertainment has accused three cable operators of blacking out its channels in Tamil Nadu, which along with other southern India states fetch a quarter of its business.

"The Zee channel packs have been illegally blacked out in South Market (Tamil Nadu) by certain operators namely Arasu, SCV and VK Digital. As you would know, by law, unless the consumer rejects the channel or the broadcaster discontinues the channel, the operator is responsible of delivering the channel to the consumer, which is not happening in this case," said a company spokesperson in a statement.

SCV and VK Digital did not respond to Business Standard’s emails and Arasu could not be reached for a comment. Direct to home (DTH) operators broadcast Zee channels. There are roughly 35 cable platforms in the Tamil Nadu market.

Nearly 70 per cent of share gains for Zee came from its regional network. Almost 15 channels of the 59 within its overall network are regional-language channels. Data from the Broadcast Audience Research Council (BARC) shows Zee has seen share gains of nearly 0.8 per cent and 0.5 per cent for southern entertainment and movies, respectively in three years.

Zee Kannada is the market leader in Karnataka with a share of 35.4 per cent. In Tamil Nadu and Andhra/Telangana, Zee trails Sun and Star Maa respectively. Zee is readying for launching movie channels in the southern markets.

90% of promoters' stake in Zee pledged with financial institutions

A little over 90 per cent of the promoters’ 22 per cent shareholding in Zee Entertainment is pledged with financial institutions. This was disclosed by Zee Entertainment Managing Director and Chief Executive Officer Punit Goenka in an investor call on Saturday. Following the agreement to sell an 11 per cent stake to Invesco Oppenheimer in September, the promoters’ loan against shares stands at Rs 7,000 crore, as against Rs 13,500 crore on January 26, 2019.

Of the 11 per cent, the promoters have managed to sell 8.7 per cent and are in talks with Invesco Oppenheimer to sell the balance 2.3 per cent. The Zee management indicated that the delay in closing the balance sale was due to restrictions on insider trading window. Some lenders have also invoked the pledge and sold shares in the market, reducing the promoters' stake further. At the end of the June 2019 quarter and prior to the deal with Invesco, the promoter holding in the company was 35.79 per cent and about 64 per cent of it was pledged.

The management indicated that they were committed to paying off the loan against shares over the next three months both from the sale of the group’s media and non-media shares, even as no loans are due within this period. On Friday's disclosure by Russia’s VTB Capital that the promoters have pledged 10.71 per cent with it, the Essel group indicated that the company had disclosed the same as part of the overall pledged shares. The 10.71 per cent stake held by promoter entity Essel Media Ventures in Zee Entertainment is pledged with VTB Capital. The Russian lender disclosed its ownership as new Sebi guidelines applicable from October 1 require indirect pledge details to be disclosed. The maturity of the loan from VTB Capital is a year from now, according to Goenka.

VTB Capital is the only offshore lender to the promoters and accounts for Rs 2,000 crore of the outstanding loan against shares while the rest (Rs 5,000 crore) is due to domestic lenders, he added.

Promoters of Zee Entertainment sell Rs 332 crore worth of shares

The promoters of Zee Entertainment have sold Rs 332 crore worth of the firm’s shares in recent months, according to exchange disclosures.

The disclosures show that promoter entity Cyquator Media Services have sold shares worth Rs 227 crore between February 13 and March 29. Post the share sale, Cyquator’s shareholding has reduced to 22.8 per cent from 23.36 per cent.

Meanwhile, Essel Corporate has sold Rs 105 crore worth of shares between March 13 and March 25, bringing down the promoter entity’s stake to 3.04 per cent from 3.28 per cent.

After seeing their worst single-day fall on January 25, shares of Zee Entertainment have rallied 39 per cent since then.

According to analysts the spurt in share prices has come due to the potential strategic stake sale, which is expected to help Essel group bring down its debt.

The rise in share price of Zee Entertainment should help the promoters in paying back their loan against shares-debt by selling lesser stake.

“Rise in Zee stock price will not only reduce risk of further invocation of shares by lenders, but will also help promoters sell a lower part of current 39 per cent holding in Zee to payback the Rs 13,500 crore of loan against shares at the group level,” analysts at CLSA said in a recent note.