How was ZEEL’s financial performance in FY18?

In FY18, ZEEL delivered yet another year of industry - leading growth. During the year, advertising revenue growth was negatively impacted on account of the implementation of GST. The monetisation of newly digitised areas did not scale up as expected due to uncertainty over implementation of TRAI’ s tariff order. Despite these factors, the company has delivered a 15.2 % revenue growth YoY(adjusted for sale of Sports business). Besides some loss of revenue on account of the above factors, the cost base for the year was elevated. Our extensive brand refresh campaign, marketing spends for the launch of ZEE5, and spends on events related to the 25 th anniversary added to the costs. In this context, EBITDA margin of 31.1 % highlights the underlying profitability of the business. The consistent strong revenue growth is attributed to the rising viewership share of television network, ramp - up of the new businesses and industry tailwinds. The company’ s growth momentum was consistent with the performance over the last five years - 13 % revenue CAGR(16 % adjusted for sale of Sports business) and 17 % EBITDA CAGR over FY13 - 18.

How did television ad spends grow in FY18? What would be the impact of GST on ad spends in the medium term?

Similar to the previous fiscal, ad spends in FY18 were impacted by a policy initiative. Implementation of GST tampered with the ad spends growth even as the industry was recovering from the impact of demonetization. ZEEL started the year on a normalised growth trajectory but was hurt by the scaling back of ad spends during the transition to GST. After these twin setbacks, the industry witnessed a broad-based recovery as advertisers stepped up their spends on existing products as well as new launches. ZEEL’s second half ad revenue growth of around 23% YoY (on a comparable basis) was driven by viewership gains and partly aided by a low base. For fiscal 2018, company’s domestic ad revenue grew by 15.9% YoY (adjusted for sale of Sports business and acquisitions), which was ahead of the industry growth. While the implementation of GST and demonetization had a negative impact for a brief period, in the long run these will give a fillip to ad spends, as organised businesses, which spend a larger proportion of their revenues on brand building, will be the beneficiaries of these policies.

Domestic subscription revenue growth in FY18 decelerated. What are the reasons for this and what is the medium-term outlook for the same?

ZEEL’s FY18 domestic subscription business witnessed a growth of 11.8% YoY (adjusted for the sale of Sports business). The growth was a tad lower than the initial expectations on account of two factors. Firstly, due to uncertainty related to TRAI’s tariff order, revenues from the recently digitised markets grew slower than expected. Secondly, during the year, exit of one of the DTH players led to some loss of revenue. The tariff order, presently under litigation, can affect the way contracts are structured between the broadcasters and distributors. A strong competitive position in most of the genres should help the company drive the subscription business even under the new regulatory regime. If the regulation is implemented by all the stakeholders as envisaged, it could lead to an increase in the ARPU for the industry. That said, at present, there is limited clarity on when and how the tariff order will be put into effect. Its implementation could have some transient impact on the subscription revenue growth, however, the medium-term growth outlook remains unchanged.

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What has been the trend for content cost inflation, especially after the entry of global digital players who have pushed up content costs in several markets?

Content cost inflation is in line with the past trends. Compared to peers in most other countries, Indian broadcasters have a different model for production of original content. In India, broadcasters provide creative support to producers and own the entire risk associated with content creation. Since the risk lies with the broadcasters, they retain intellectual property rights of the show. Producers make a reasonable profit and there are additional pay-offs linked to the success of the shows. Thanks to this unique model, the increase in per-hour content cost is in line with inflation for most of the shows. That said, the total content cost growth will be ahead of inflation as the company continues to increase programming investments across businesses.

What is the growth and investment outlook for new businesses and initiatives?

Over the past few years, ZEEL has invested and scaled up new businesses, viz. digital, movies and live entertainment. These businesses are at various stages of development and have different investment needs. In FY18, ZEEL launched its next-generation digital platform, ZEE5, with over 1,00,000 hours of content and has plans to launch around 90 original shows on the platform in FY19. The platform will also need marketing support to stand out in the crowded OTT space. Zee Studios, the movie production business, has successfully scaled up operations. During the year, it released nine movies and has built a strong slate for FY19. Zee Music Company has become the number two player in the industry in a short period. As movies and music business has already scaled up, it requires limited investment. A large part of investments in new businesses would be towards the digital strategy. Meanwhile, investment in domestic broadcast business will continue as it prepares to enter a new market. A large part of these investments would be on content and marketing, which are expensed above EBITDA. Despite these investments, the company expects to maintain healthy margins.

Why is the effective tax rate for ZEEL much higher than the normalised tax rate?

ZEEL’s effective tax rate for FY18 was at 41.4%, higher than the marginal tax rate. During the year, the company received ₹ 7.82 billion from its foreign subsidiaries, which attracted a dividend distribution tax of around 17% as per the Indian laws. Due to this, the company paid ₹ 1.35 billion as tax on the amount received, which is part of the current tax line item in the P&L statement. As per the Indian Income Tax Act, the tax paid dividend received from foreign subsidiaries is reduced from dividend (equity dividend, preference dividend, and redemption of preference shares) for calculation of dividend distribution tax payable. Accordingly, despite the higher tax rate there is no impact on cashflow at the consolidated level. Excluding the effect of tax on amount received from foreign subsidiaries, ZEEL’s normalised tax rate for FY18 was 34.8%.

ZEEL’s free cash flow in FY18 was lower than its profit. What was the reason for the same?

The primary reason for lower free cash generation relative to profits is investments for growth in three areas. Firstly, company’s increased focus on acquisition of movie rights for television and digital businesses led to a higher working capital. Secondly, the company acquired RBNL’s broadcast business and the balance stake in India Web Portal Limited. Lastly, capital expenditure was higher than maintenance capex due to investments in several growth opportunities and creating infrastructure for the future. Going forward, the investments in movies will continue but at a reduced pace. As far as acquisitions and growth capex are concerned, the investments will depend on the kind of opportunities that are available going forward.

Working capital has seen a sharp increase in past two years. What is driving this increase?

The increase in working capital is primarily attributable to the company’s strategy of creating a strong movie library. Movies is one of the essential genres of entertainment for Indian consumers and ZEEL’s domestic broadcast business has been progressively expanding its movie offering. Currently, movies portfolio consists of 12 channels in four Indian languages, and the expansion will continue in some of the other regional markets as well. Movies are also an integral part of the content mix of ZEE5 and will be an important driver for the platform. In line with the company’s focus on movies, investments in the acquisition of both satellite and digital rights of movies have increased significantly. It also includes advances for rights of movies under production or movies whose rights will be available at a future date. A part of the increase in working capital is also attributable to the ramp-up of the movie production business. Though the peak intensity of these investments has passed, the working capital may increase in the near term before it begins to normalise.