Zee Entertainment eyes sports breakeven in 2 years

The sports business, a stumbling block for Zee Entertainment Enterprises Ltd, is expected to break even in two years, Atul Das, president-corporate strategy and business development, said.

“We have had a year of exceptional losses in the sports business, but we expect it to change in the next financial year,” Das said. “We expect the sports business to limit their losses in FY12...certainly they will be lower than in this fiscal, and sports may become profitable in a couple of years.”

Zee Entertainment’s sports business reported a loss of about Rs100 crore for the third quarter ended December 31. In the first half (April-September) of current fiscal, the sports business had reported cumulative loss of Rs90 crore.

This takes the total loss of the sports business so far this year to Rs190 crore, while the company proposed to restrict the sports business loss in 2010-11 (Apr-Mar) at FY10 levels of Rs58 crore.

The extent of the losses reported in October-December instantly triggered ratings downgrade by some brokerages as investor sentiment turned negative.

B&K Securities and CLSA downgraded their target price on the stock, while Motilal Oswal Securities put their rating under review.
Das said the sports business losses for FY11 will be over Rs200 crore, but the company’s core performance has been good, delivering an earnings before interest, tax, depreciation and amortisation margin of 38%.

He rebuffed analysts who advised hiving off the sports business to mitigate the downside risks, saying that such a move would only dilute the upside to earnings when the business starts making a profit. In fact, Zee Entertainment is still committed to launching a niche channel for golf. “We will definitely launch a channel dedicated to golf sometime in FY12. Although launching more channels involves a rise in cost, they also create more opportunities for monetisation,” said Das.

Such has been the case with the launch of Ten Cricket, a 24-hour cricket channel, and Ten Action+, a channel dedicated to football.
Das expects Zee Entertainment’s advertising revenue, which accounts for more than half of the total revenue, to grow by 15-16% in FY12. Of this, 5-6% growth would come from ad rate hikes, he said.

The company has decided to increase advertising rates by 10-18% from April.

Analysts have questioned the rationale for a rate hike at this time when big-ticket advertisers are diverting a major chunk of their advertising budgets from Hindi general entertainment channels to the sports channels that are telecasting international cricket tournaments ICC Cricket World Cup and IPL Twenty20 Season 4.

“We expect it to be difficult for Zee to negotiate a higher advertising rate in the short-term as the share of ad spends for Hindi GECs contracts during the cricket season...we expect that the rate increase will become effective only after 4-5 months,” said an analyst with a domestic brokerage.

Das, however, refuted this, saying the company has so far not seen any significant reduction in ad spends on its general entertainment channels.

Instead, its consistently strong position in terms of gross ratings in genres like Hindi general entertainment, movies, and some regional general entertainment channels, has given it some additional pricing power.

Disclaimer: Zee Entertainment is part of Zee Group, which is co-owner of Diligent Media Corporation that publishes the DNA