The Hindu Business Line : Zee Telefilms: Pare exposures

SHAREHOLDERS of Zee Telefilms can capitalise on the sharp run-up in the stock price over the past few weeks and reduce exposures. The company's growth prospects are likely to be affected by the imminent threat to its content and distribution businesses.

The costs associated with the new regional language and business channels, direct-to-home (DTH) business and the imminent sports channel are likely to act as a drag on profitability and earnings growth.

We believe that Star-Tatas' DTH venture — Space TV, which has secured clearance from the government after a two-year wait — is likely to dominate the DTH business over a two/three-year period.

We remain sceptical of Zee's ability to improve content to an extent that could enable it to emerge as a serious challenger to Sony and Star Plus. We retain our bearish view on the stock.

The possibility of a superior declaration rates by cable operators that could provide an impetus to subscription revenues and earnings is the principal risk to our recommendation.

We are, however, of the view that a significant improvement in declaration rates is unlikely over the next couple of years. Balaji Telefilms and NDTV are our preferred media sector plays. Zee — the flagship channel of Zee Telefilms — which has been a laggard for more than four years, still remains weak on content.

It has only five slots in the list of 100 most-watched programmes. Star Plus and Sony have strengthened their franchise on weekdays and weekends respectively.

Zee has overhauled its content several times over the past three years to no avail. Star Plus continues to dominate the rating charts, especially on prime time in the evening on weekdays and the post-noon band of four hours, which it has converted into a valuable franchise.

In the next six-12months, Zee's position could come under even greater threat. As Star Plus is poised to re-launch Kaun Banega Crorepati, to be anchored by Mr Amitabh Bachhan, in August, it is bound to enjoy higher audience share on weekends.

The second version of KBC is likely to be spread over 85 weeks. As an interactive programme — unlike the popular one in 2000 — KBC2 may attract even greater audience support.

Sony is also set to launch a reality-based soap opera — Fame Gurukul — that could add to competitive pressure on Zee. Even as its flagship channel flounders, Zee recently launched a business channel and is set to pursue its plans for the sports channel.

In our view, the former is unlikely to garner meaningful audience share, as CNBC TV 18, NDTV Profit and Awaaz are likely to remain the channels of choice for business news.

The sports-channel domain would be an even more tough market for Zee to crack as SET Max, ESPN-Star Sports, DD and Ten Sports own the rights to coveted properties in football, cricket, tennis, formula one and golf.

Zee may also not be able to raise resources (and earn commensurate returns) needed to bid successfully for marquee sports events.

Zee has pursued the DTH business for a couple of years now. But it has not made much headway. The channels available on its platform do not include several popular ones such as Star Plus, Sony and SET Max.

Even if all channels are required to be made available on every DTH platform by a regulatory diktat, which could also be challenged in courts, the Star-Tatas venture would enjoy an edge; the Rupert Murdoch group, which owns Star, has much expertise in DTH rolling it out successfully in the UK.

It also has deep pockets to subsidise the process, and the Tatas have a distribution reach that can be put to effective use. Zee recently cut prices of its DTH service, but it is likely to soak up resources and that could add to the stress on profitability.

If the broadcasters have the freedom to choose the platforms on which they would be available, Space TV and the Sun Network, which has also secured a DTH licence, are likely to be the preferred ones. Sony and Star are likely to make their bouquets available on both these platforms, giving them a decisive edge.

Zee recently given a facelift to its channels by introducing more appealing logos. But this is unlikely to prove beneficial unless content improves.

We expect marginal growth in subscription revenues from the domestic and overseas markets. Despite being the most expensive, the Zee bouquet is unattractive, barring a few channels such as CNBC, Cartoon Network and HBO. In the international markets, as Star and Sony expand their footprint, Zee is likely to witness flat trends in subscription revenues.

If the conditional access system is introduced in more places, it may work to Zee's detriment, as viewers would have option to pick and choose the channels they want to pay for and watch.

If viewers opt for one or two channels from the bouquet, it could act as a drag on subscription revenues.

A silver lining is the close to 10 per cent growth in ad revenues in the January-March quarter. Zee would have to sustain this pace to notch respectable earnings numbers. For FY-05, it managed a moderate 5 per cent growth.

Given its track record over the past four years and weak content, we are not sanguine about its ability to sustain this level of growth.

It is no longer vouchsafed healthy growth in subscription revenues to provide a cushion. In this backdrop, the risks of staying invested far outweigh the prospect for any gains in stock price.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Investment quiz

FAQ on buybacks

Rana Sugars: Accept/Sell in market

Sale by invitation only!

Question `n' auto

Changing rules for the IPO investor

Learning from the trends

Turnaround sectors are good bets

Tracking the regulatory trail

SBI Magnum Global: Invest in small lots

HDFC Prudence: Invest