Double digit advertising growth difficult in FY12: Zee

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Zee Entertainment announced its second quarter results for FY12. The company's Q2 consolidated net profit was up 23% at Rs 160 crore versus Rs 130 crore. Its consolidated net sales were up 2.86% at Rs 718 crore versus Rs 698 crore.

Zee's advertising revenue was down 4% to Rs 395 crore (YoY) and up 2% (QoQ), and the subscription revenue was up 6% to Rs 291 crore versus Rs 274 crore and down 4.6% (QoQ).

Atul Das, president of corporate strategy and business development doesn't see any signs of normalcy in the advertising trends in the third quarter of FY12. Moreover, he feels that it would be difficult to achieve double digit advertising in FY12.

According to Das, there could be some impact on margins going forward. He also indicated that the cable digitisation will prove to be positive for the company. In addition, Das maintains a guidance of Rs 100-crore loss in sports business in FY12.

Here is the edited transcript of his interview. Also watch the accompanying videos.

Q: Concerns are rising in the long-term strategy of the company with respect to the advertising revenue, which is tepid for the past two quarters. What is your outlook for the advertising space and the expectations for this fiscal?

A: It is too early to talk about FY12 because the ad environment has not become stable. As we started FY12, we saw a slowdown or softness in ad spends.

In the first quarter, we recorded almost negligible growth. In the second quarter, we recorded fairly decent single digit growth on a non-sports basis, but they are nowhere near normal.

As we enter into the third quarter, we are not seeing any signs of normalcy. They are still growing, but they are nowhere near normalcy. If the third quarter goes well, we should see the entire fiscal 2012 ending up on a single digit growth.

In the last few years, we have not seen a continued weakness in ad spends scenario for two years at a stretch. As we go into FY13, we should be able to see some kind of growth.

Q: What do you expect to do by way of advertising revenues? How would it pan out for the industry? Will you be outperforming the industry trend?

A: Double digit looks very difficult at this stage for fiscal 2012. As far as our market share is concerned, we have done well so far. We would not gain market share this year, but it all depends on how the third quarter goes. We should be either at par on the market or maybe at a very marginal loss because we have seen some changes and shifts in the market share.

Q: There has been some concern that your market share is slipping. What was it standing at in Q2? What are your plans to pull it up?

A: In the Hindi GEC segment, in the top segment of channels, we had almost 20% market share. We have lost a bit there and we are working towards correcting the situation.

At the beginning of the third quarter, we have launched a couple of new shows - two shows in the non-fiction genre (Dance India Dance [DID] Season 3 which should do well and Star Ya Rockstars) and two serials in the fiction genre (Afsar Bitiya and Hitler Didi).

With these four shows, we expect to come back on track on the market share front. As a company, we are very resilient to changes in market share on one single genre because of the breadth and portfolio of 27 channels.

While there may be some losses in some genres, we have also gained in several other genres. We have done very well in Zee Bangla in the Bangla regional market. We have done well in Kannada. Otherwise, we also continue to be very stable in other genres.

We have also gained in the cinema space. We are not impacted only by one particular performance in a particular genre, but we definitely hope to get the market share back on track.

Q: As much as 29% stellar margins stood out in this quarter. Are these margins are sustainable? What's your outlook for this fiscal year?

A: Probably, there would be some impact on the margins because we are planning to increase our investments in the content space. We have seen some of those investments in the first half and much of those will come into the second half.

There will be some impact on margins, but those will be more in the temporary phase. As we get the shows on air and they start getting traction with our viewers, we should be able to monetize them better and then subsequently increase margins as we go along.

We would see some contraction in margins in the medium and short-term. And then, we will be back on track around 27-28% levels.

Q: For the subscription revenue, ex-the accounting changes undertaken this quarter, what does it look like? What is your guidance on that?

A: Subscription revenues have been very robust. If we split our subscription revenues into two - international part and domestic part - the international revenues have not been growing so well and we have seen some very marginal decline on a YOY basis.

On the domestic subscription revenues front this quarter, we reported Rs 195 crore revenues, which were up 11.6% YOY. These revenues in our business do not get swayed by sentiments in the economy or performance of the economy as they are very secular revenue streams.

With the government passing the ordinance for digitisation last week, our subscription revenue streams have been among the strongest in the industry and are bound to take up a better shape. We would deliver better returns on the subscription revenue going forward.

Much of it depends upon the pace of digitisation. While the government's ordinance or terms within that are pretty ambitious, but if they are implemented, some degree of it will be very positive for all broadcasters. It would definitely improve our revenue streams as well as our margins as we go forward.

Q: What is your expectation from digitisation? Will it be possible to adhere to that March 2012 deadline? What impact will it have on your unit media pro as well as on zee entertainment?

A: On the digitisation front, we are not a participant in rolling out the digitisation as a company. It would be done by the television distribution companies, whether it is on the cable or DTH side.

It will be very difficult for us to make a prognosis as to how many digital homes would we see by the end of March 2012. While it looks ambitious, it depends on how the industry takes up the entire process of digitisation. It will be much better than what it would have been had the mandate not come through.

We will have to see for six months to get some sense of pace of digitisation, but it will be definitely positive. The media pro business will create a lot of value for us, including our partners, in the business and it comes with a certain lag of three-four quarter.

In the subscription business, some contracts may have been signed and when they come up for renewal, that is when media pro strength for better revenues will come through. It is a matter of time, but subscription revenues are going on the right track for Zee.

Q: On the sports business, you said that the losses have been contained to Rs 22 crore this quarter. Should we expect that your guidance of Rs 100 crore losses for the current year stands? When do you expect that unit to break-even?

A: We are on track to reach the loss of Rs 100 crore maximum on the sports business in FY12, which will be a huge improvement over fiscal 2011 where we reported Rs 208 crore losses.

While the first half looks larger in that comparison, we will have even far lesser degree of losses in the third and fourth quarter. Therefore, we should be able to keep our losses within the Rs 100-crore number that we guided at the start of the year.

The problem with sports business is on the generic basis because of lack of monetisation given the current cable environment. With the same benefit accruing to the sports business, we hope that sports business performance will also improve quite substantially.