Zee Telefilms; Hold

Recommendation: Hold

S. Vaidya Nathan

SHAREHOLDERS of Zee Telefilms can stay invested now and look at cutting exposure.s once the market trading system changes stabilise.

The stock is one of those scheduled to go into the rolling settlement mode and has a sizeable outstanding position. The latter can impose some near-term strains but much of it may be recovered as the move to make it a pay channel could augment revenues. But once the initial phase (a month or so) of the new trading systems is over, the shareholders should look at opportunities to cut exposure in the stock. This time gap would also allow for the effect of the switch to pay be priced properly and in a sustainable manner.

The company's performance may continue to be under strain, given the intensity of competition. Though it has recovered some lost ground, STAR Plus continues to rule the roost. Sony, as always, has a good share of the ad cake though it is running on an even keel with Zee now on top viewer-ship programmes. The competition scene may only get more intense in the days ahead and this can mean strains for Zee's profitability.

Concerns still remain on the quality and transparency of Zee Telefilms' operations and its tilt with the Ketan Parekh operations in the market. Improvement on this score would be necessary before investors can look at the stock with confidence.

Suitability: The Zee Telefilms stock is only for investors with a high risk profile. Not only is this a consequence of its business profile but also of the proclivities of its promoter group to take on market operators. Investors who cannot accept such a risk profile should stay well clear of the stock.

Performance trends: Going by the numbers reported, the company managed to turn in a par-for-the-course performance for 2000-01. The following are the significant pointers:

*The revenues rose 72.1 per cent to Rs 384.66 crore (Rs 223.46 crore in 1999-2000).

*The sustainable post-tax earnings moved up by 70 per cent to Rs 138.18 crore (Rs 81.10 crore).

*Unlike last year, there has been no end-of-the-year transaction to boost profits. Last year, some of the library rights were sold to a group concern for a one-time profit of Rs 184.2 crore. This year, the company has taken a one-time charge of Rs 56.95 crore for prior-period tax liabilities. The net profit, as reported, is Rs 81.23 crore.

*The interest costs moved up sharply to Rs 21.14 crore (Rs 8.37 crore). This appears to be the result of enhanced borrowings to meet operational costs and other aspects of its business.

*The operating profit margins were a healthy 35 per cent for the year as a whole. But this appears to be a consequence of the performance in the first half, as the fourth quarter margins have been just 28 per cent. These numbers, as reported, portray a picture better than last year, when there was a sharp slip up in operating margins and cash flows.

Going forward, there may be an upscaling of revenues on account of the switch to pay mode and this could also lead to a one-time jump in profitability levels. But of greater importance would be the trends in ad revenues. With the overall economy in a slowdown and competition intensifying, Zee Telefilms would have to go the extra mile to keep ad revenue growth at healthy levels. The kind of ad support it attracts on its bouquet of channels would also assume importance. The fact that it does not have too much of the top 20 programmes is also a cause for concern. With STAR Plus raking in the moolah, it may also be in a position to strengthen its presence.

The company's stock trades at a price-earnings multiple of around 35 times. The room for improvement from the present levels may be limited. In this backdrop, shareholders can consider staying invested and cutting exposures once the market stabilises.

Pic.: Mr Subash Chandra, Chairman, Zee Telefilms...Can the company shake off perception problems?