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Abneesh Roy on why Edelweiss has a long-term buy on Zee

Zee numbers are exactly in line in terms of revenue and EBITDA.

ET Now|
Oct 18, 2019, 01.15 PM IST
Abneesh Roy-1200
It will be a good growth this month for Zee because the base quarter of the festival was delayed, says Abneesh Roy, Executive Vice President, Edelweiss Securities. Excerpts from an interview with ETNOW.

Compared to results, investors’ focus will be more on the negative operating cash flow in Zee so far this year. Auditors also have not approved that cash flow statement yet increase in receivables, the Rs 170 crore provision for ICD delay are some of the points in focus. How concerned are you about some of these?
Yes, currently, in terms of results, EBITDA was exactly in line with our estimates in terms of subscription growth at 26% (we expected 24%) and in terms of advertising. We expected 2% and it was broadly there. So, yes it was below the EBITDA, where there was a negative surprise.

In the current context, wherein the promoters are in the process of stake sale not just in Zee, but across the other group companies, there is always going to be a doubt whenever such an exceptional item comes.

Coming to the cash flow, Zee has clarified that it is not that there is an issue this quarter. The auditors have clarified that it was last year when it was not required and so the auditors sign is required from this year and that has been done. Last year, it was not done because it was not required. This clarification has been given by Zee.

Coming to the cash flow and the inventory and all that, currently all the broadcasters in India are investing in content in terms of new channels and in OTT platforms. Zee clarified that they are in the process of launching three-four channels in the regional movie space. For that, they would require to build a library and you cannot buy the library when a channel launch has already happened. I would not say cash flow and the inventory are much of an issue because that is part of the business currently in Zee.

Anything materially positive from Zee numbers?
There is no change because the numbers are exactly in line in terms of revenue and EBITDA. Company said that the à la carte pricing offer which is currently on is more of a seasonal festive offer. Most broadcasters have cut the à la carte pricing currently. The Zee management clarified that this will not extend to bouquets because the bulk of the money comes from bouquet. The à la carte pricing is just a festive offer. It is good for that broadcasters are bringing à la carte prices down, because otherwise regulator could even tweak the overall packages.

Change in terms of advertising and subscription is exactly in line. Advertising will depend upon the GDP recovery that we expect from Q4. There is a slight green shoot in rural demand and that is the time when there will be better growth. Festive time is early this year. So, it will be a good growth this month because the base quarter of the festival was delayed.

How do you expect the stock to react in the near term? What is the recommendation considering all the factors that we spoke about?
I would expect slight negative reaction in a near term given below the EBITDA exceptional items which have come. It will also depend upon the broader market.

We have a buy call from a longer term perspective essentially on valuation comfort. It is available at around 12-13 times FY20-FY21, one of the lowest ever. Second, in terms of market share, they are doing well but this stock will rerate conclusively only when the promoter stake and the promoter debt issue and the promoter pledging gets resolved.

It is a long term call. We like the company, we like the space but currently there is no rush to buy because there will be concerns whenever the promoter stake sale gets delayed. It can be both ways, but in the current context of results, near term, there could be a slightly negative pressure.

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