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S. Vaidya Nathan

The subscription revenue story appears to be winding down with the growth rate dipping to less than 10 per cent. Even if TRAI allows broadcasters to revise pay channel rates, Zee may be able to make only a modest hike for its bouquet.

SHAREHOLDERS of Zee Telefilms may cut exposure in the stock in the wake of an unimpressive performance in the July-September quarter.

The growth prospects over the next few quarters also do not support the stiff valuation at which the stock trades now — in the Rs 150-160 range.

There is the possibility of a revision in subscription rates in November as the Telecom Regulatory Authority of India (TRAI) is likely to review the freeze imposed at December 2003 levels.

Such a rate revision is likely to provide a one-time boost to revenues, and any upside linked to this development can be used to cut exposure in the stock. Starting tomorrow, Zee would have a tough task of growing its business as the STAR group steps up its presence in the broadcasting business.

This recommendation represents continuity in our stance on the stock over the past couple of months. We had a sell recommendation on the stock in early September, when the battle for the telecast rights of cricket matches in India was at its heights.

The telecast rights for the key series, involving matches featuring Australia and South Africa, have now been vested with Prasar Bharati.

This arrangement is subject to a final judgment in the spat involving the Zee group and ESPN-STAR Sports. Irrespective of the outcome, the more attractive part of the rights would have lapsed; our view that Zee had bid at an exorbitant price also remains unaltered.

The concerns over Zee's core business have been reinforced by the company's insipid performance in the July-September quarter. Growth in subscription revenues had bolstered the Zee Network's performance over the past couple of years, neutralising the sluggish trend in advertisement revenues. The subscription revenue story, however, appears to be winding down with the growth rate dipping to less than 10 per cent.

Even if TRAI allows broadcasters to revise their pay channel rates, the Zee Network may be able to make only a modest hike for its bouquet.

Barring Cartoon Network, HBO and CNBC TV 18 — niche channels distributed by the group on a revenue-sharing basis — the rest of the Zee bouquet is less attractive compared to the Star and Sony groups. Crucially, Zee's own channels trail competition. This could affect the hikes that could be effected for its channels, the revenue stream that would accrue in entirety to the group.

The flat trends in earnings have been attributed to costs associated with the launch of the Direct-to-Home distribution services under the banner of Dish TV. The latter's operations are now hampered by the limited number of channels on offer.

Even if TRAI's proposal that all channels be available on every DTH platform is implemented, Zee's DTH business would have to contend with intense competition from Space TV, the STAR-Tata venture. Once the latter secures regulatory clearances, the rollout of the latter's network could place stress on Zee's resources and profitability.

Zee's sluggish growth of 5 per cent in advertisement revenues remains a cause for concern. The flagship channel — Zee TV — is still to come up with a strategy and a set of programmes that could pitchfork it to viewership to higher levels and enhance advertiser support. STAR Plus' dominance on weekdays stays unchallenged, even as it has succeeded in expanding the prime-time band in the afternoon and evening. Sony has made headway in mounting a modest challenge, especially on weekends. Despite efforts at recasting its programming thrust and content, Zee stays a distant third in the sweepstakes.

As STAR One — a new channel targeted at a different audience profile than the one catered to by STAR Plus — begins operations tomorrow, Zee would find it even more difficult to differentiate its programmes and break the stranglehold of the Star group in the Hindi entertainment space.

Unless Zee lifts the quality of its content, it may end up battling the likes of STAR Utsav, SAB TV and Sahara One in the Hindi entertainment space. This would also be crucial to lift its advertisement and subscription revenue growth rates. A substantial improvement in declaration rates by cable operators appears unlikely.

With TRAI also proposing a phased rollout of address-ability platforms such as DTH, CAS and broadband across the country — a process that could take several years and also offer wide-ranging choice to consumers — revenues from the distribution business may not get scaled up rapidly to ramp up growth.

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