Zee Entertainment Enterprises is expected to perform well in the days to come, led by higher-than-expected cost savings. The analyst community is positive on the stock, which currently trades at Rs 238.60 per share.
“We note that ZEEL’s price-to-earnings multiples tend to be highly correlated with the advertising revenue growth witnessed by the company. In our view, the worst for ZEEL’s advertising revenues is behind it, and we expect a gradual pickup, which should lead to a re-rating for the stock,” Jamil Ansari and Prabhat Awasthi of Nomura Securities wrote in a note to clients on Tuesday.
Zee is one of the top three players in the general entertainment channels space, the other two being Star and Colors. Analysts maintain that compared with Star and Colors, which rely on high-cost celebrity shows to get top ratings, Zee’s focus is on moderate-cost content, which augurs well for profitability.
The company is expected to benefit from the growth potential in Indian media, backed by its diversified presence across 15 television channels in different genres.
Margins are expected to look better in the days to come.
Over the last two quarters, the company has cut operating costs by 16% to deal with the economic crises. It even suspended the operations of the loss-making channel Zee Next. This is good augury.
Meanwhile, greater competition from Star and Colors is of concern. Also, the slowdown in the Indian ad market is expected to continue in the second half of the year as well on account of cut-back in ad spends due to poor rainfall. This does not bode well.
Zee posted better-than-expected June quarter financial results. Revenues declined 7.4% year on year. Cost rationalisation initiatives adopted by the management led to an improvement of 120 basis points year on year in operating margins to 24.6%.
Sequentially, Zee’s selling expenses fell 39% as the company cut back on discretionary costs. Also, financial costs declined 82% as no FCCBs were outstanding at June end. Net profit fell 5.7% to Rs 91.3 crore.
At the current market price, the stock trades at 22.4 times its estimated earnings for 2010. Analysts like the stock in the space and investors could consider it on declines.
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