Zee Telefilms: Cut exposures

Recommendation:Cut exposures

S. Vaidya Nathan

SHAREHOLDERS in Zee Telefilms can pare exposures in the wake of possible deterioration in fundamentals and questions regarding the financing and earnings attractiveness of the wide-ranging plans announced by the company.

The lack of high-order transparency regarding major corporate actions continues to be a feature and this does not inspire confidence. The company may find it tough to post the kind of fancy growth rates needed to justify the current valuation. A fresh look at the stock may be advisable after there is evidence of how it fares in a more competitive market and more information and action on its plans to emerge as a convergence major.

Two Novembers with a difference

Last November, the Zee Telefilms stock at this time was trading over Rs 5,000 on a pre-stock split basis, and moving towards a Rs 6,505 high. Once it began trading on a post-stock split basis, there was no stopping the interest in the stock. The company had announced a stock split in the ratio of 1:10 (one share of Rs 1 each for every share of Rs 10 each).

With many domestic mutual funds mobilising sizeable sums of money and the inflows of FIIs strong in the November 1999 to February 2000 period, there was no stopping the uptrend in the stock. It quickly moved to Rs 1,400-1,500 by mid-February 2000.

Nothing it seemed could go wrong, and in keeping with the grandiose operations, the company announced an ADR offer of $1.50 billion. It also concluded a private placement with Goldman Sachs at Rs 1,000 per share. But after this, nothing quite seemed to go right. And here there is a tale.

Over-ambitious approach kills interest

The ADR offer size of $1.50 billion (close to Rs 6,000 crore) raised eyebrows. The big plans straddling its core business and stretching to the wider cable network and forays into web-based education and other Net initiatives would have required this kind of money over a period of three-five years.

But to announce an offer of this size seemed to focus attention on the various business plans and their likely profitability. There was also the factor of whether the company was trying to rake in as much as possible while the going was good. And such opaque exercises were in line with the company's track record.

The meltdown in the valuation of technology, media and telecom stocks at the global level and its impact on such stocks in India also did the damage. But the kind of erosion in the stock price to the tune of 80 per cent from the peak levels points to more company-specific factors at work. As a consequence, the company's ability to finance some of its proposed plans may also get affected and cost more in terms of earnings dilution than in the past. This is why the recent move to allow DTH and domestic uplinking have not had a positive impact on the valuation of the Zee stock.

The one-time show

In its keenness to show high levels of earnings growth, the company made a deal with a subsidiary at the end of fiscal 1999-2000. By selling a part of its content library to the group company Asia Today, Zee managed to add Rs 185.1 crore to its bottomline. This deal raised questions over the quality of management and the transparency factor.

The deal simply did not wash, considering that the company closed out the year with a modest growth in the sustainable earnings stream. This particular deal also prompted a serious re-think in the stock held largely by a small set of institutional investors and promoters (with holdings of 75 per cent).

And the close look does not seem to have helped as quite a few funds have sold out large portions of their holdings. Even at Rs 600, the stock was trading at price earnings multiples of over 250 times the historical earnings. Growth in forward earnings had to be consistently in excess of 100 per cent to even remotely justify such valuations.

With the company reporting modest rates of around 35 per cent, with concerns regarding the quality of underlying numbers, the plethora of firms under the Zee umbrella and their future ownership patterns, the stock price suffered a sharp downtrend. The one-time `earnings show' was another trigger. But the big blow came much later in June and since then the stock is down 56 per cent.

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The KBC knockout

Since its entry in the early 1990s, Zee Telefilms has had a free run of the market, until Sony came got its act together about two-and-a-half years ago. Zee was comfortably able to beat Doordarshan to the viewership charts and the top 50 programmes were dominated by Zee. But by 1999, Sony emerged a close competitor.

After the acquisition of the stakes held by the Rupert Murdoch group in Zee, Zee had interests ranging from hardware to content and in the entire satellite television media spectrum. However this left STAR Plus free to do its own bidding.

It is here that Zee took the biggest blow. The Kaun Banega Crorepati? programme launched by STAR Plus altered prime time viewership equations in a way that

could have lasting adverse effects.

With the programme modeled on the immensely popular show on ITV in the UK, and anchored by Mr Amitabh Bachan, the hour-long slot at 9-10 pm has been taken over by STAR Plus with good advertising support from top notch advertisers. Though signs of fatigue are evident in flattening viewership numbers, these are still at least three times higher than average top-notch programmes.

This has dealt Zee a big blow as prime time was its preserve when it had programmes with high billing rates. With STAR Plus also coming up with good follow-up programming to KBC, it has managed to have a sizeable number of programmes in the top 20 and top 50. KBC has been a major reason for the increase in STAR TV viewership for its Hindi programmes and managed what its past efforts could not do.

The Zee response

By trying to clone the show with the Sawaal Das Crore Ka with Mr Anupam Kher as anchor, Zee may well have hit the wrong strategy. And there is no way any anchor is going to live up STAR TV's prize catch. In sharp contrast, Sony appears to have taken a more prudent course by skirting the KBC slot and playing around it.

It appears to have had better success. A comparison of the top 50 programmes in the pre-KBC and post-KBC reveals the dent STAR TV has created. While Sony has hung on to its territory, STAR TV appears to have moved ahead at Zee's expense. This, coupled with the prime time advertising garnered by KBC, is being reflected in Zee Telefilms revenues.

If this trend continues, Zee may well have a flat growth curve to report in 2000-01 and nowhere near the kind of rates required to justify even the present lowered valuation levels. This dent in its core area of operations has also had a bearing on the downward re-rating of the stock.

The lasting factor

While KBC and follow-up programming by STAR have posed a direct near-term threat, it is clear that even from the medium- to long-term perspective, the equations have been altered. It is likely to be a three-way fight between Sony, STAR TV and Zee, and if one adds the possibility of perked up Doordarshan programming, then the scenario will be a far cry from the days when Zee virtually grabbed full viewership. In this context, if the company does not quickly get its act together, its already feeble cash flows from operations in recent years may show further strain.

However, Zee strengths are still intact in terms of its programming content and depth and the strength of its distribution network through Siticable. The company also appears to be successful in some regional language channels, such as Marathi and Gujarati. Given the entrenched competition in the South, it may find the going tough.

The immediate focus may well be to retain and improve the position in the core Hindi channels market and the recent problems may set back the time-frame to make Zee TV, the flagship channel, into a pay channel. This aspect could also have adverse revenue implications. Though seven other channels in the stable are in the pay mode, they may not make the kind of impact that a similar move on the flagship channel would do for the earnings stream.

From an overall perspective, difficult times are ahead for Zee Telefilms. It has to now make good the dent in its core business and also show that it can deliver superior earrings growth in a more competitive milieu. Further downside risk may be in store as far as the valuation of the stock is concerned with the earnings and revenues for the October-December quarter likely to show how the company is coping with the intense prime-time competition.

Pic.: Mr Subhash Chandra, Chairman and Managing Director, Zee Telefilms.