Impact of digitization will be reflect in the revenues from next financial year, Mihir Modi, Chief Finance & Strategy Officer at Zee Entertainment told CNBC-TV18.
The company expects stable advertisement revenue growth this year, Modi said, adding that regional and new channels like &TV and Zindagi have done better than national channels.
Zee reported a 25 percent advertisement revenue growth in the first quarter. Modi said margins will be subdued at 25 percent in FY16, but will improve with increased sales in &TV.
With focus on regional business, the Zee recently approved the acquisition of leading Odiya channel, Sarthak. The all cash deal of Rs 115 crore is awaiting regulatory approvals, Modi said.
The event-based sports business will continue to incur losses in the current year, he said.
Below is the transcript of Mihir Modi’s interview with CNBC-TV18's Anuj Singhal and Sonia Shenoy.
Anuj: Your ad revenue growth really again stunned the market - 25 percent growth. What contributed to this kind of growth and is it sustainable?
A: We are very satisfied with the 25 percent ad revenue growth. I would break it down into two parts. Firstly, is it comes from the new channel launches that we have had in the last 12 months, which mainly consist of &TV that we launched in March and Zindagi, which was launched in June of last fiscal.
Those two were not fully realised in the last quarter or rather the same quarter of last year. That has indeed added to the growth. Having said that even on our existing businesses, particularly the regional channels have done very well and on those channels, we have grown ahead of market. So, overall the growth has come from a well balanced portfolio mix and as desired.
Sonia: So, is this growth rate sustainable at these levels?
A: Our endeavour will constantly be to grow ahead of market. We will need to see how the market pans out, but there is nothing one time in this growth yet. So, I would like to believe that we would want to get there sustainably over the next few quarters as well.
Q: The margins, we understand, came in lower year on year because of high content costs of &TV. Could you give us some colour on the expenditure on content and do you see margins improving in the following quarters?
A: The way we would like to talk about the &TV content cost is with reference to a pre-launch EBITDA margin. Before we launched &TV in March this year, our EBITDA margins were in the range of 27 percent. In the quarter of launch, which is the January, February, March quarter of FY15, the margins went down to about 20 percent and now as the sales picks up for that channel along with its viewership our margins will creep back up again.
Our underlying business is healthy and continues to do what it was doing pre-launch and the remaining effect will be predominantly because of &TV costs that are built in. As we go ahead, we may make decisions relating to adding more content to &TV and that would also be available in the public domain to see and therefore, you can do your math accordingly.
Sonia: You had guided FY16 margins to be subdued at 25 percent; when do we see them going back to the earlier levels of 28-29 percent?
A: What we have guided early on is that for FY16 we may be at a 25 percent kind of margin for the full year and at this stage we believe that is the number we will end up at. Hopefully in the year after we should get back to the normal levels of margin as the margins on even our base businesses would contribute to margin improvements.
There are two ways to look at this. First one is that when will this channel break even. Clearly channel of this size and stature and genre breaks even in about three-four years timeframe. We definitely want to do it sooner and post that of course the margin built up will happen, but in meanwhile our other businesses, other channels which are in the investment phase will also add to the margin improvement.
Therefore it is kind of safe to assume that next year is when we should be there. But it is too early to talk about it, I would be more comfortable talking about what we have guided for FY16, which is around 25 percent margin.
Q: Your yearend guidance for subscription of revenue stands at 11-12 percent; would you increase it, or is digitization actually slower than expected?
A: The impact of digitisation may not fully come in this year because the phase three deadline is only December 31 of this fiscal which means that the real work will start happening from January 1 and in the next three months January, February, March which are a part of this fiscal you may not see revenues accruing on account of the digitisation process.
There is clear momentum that we see on the phase one and two Average Revenue Per User (ARPU) increases. So, that should help us keep this at 11-12 percent of growth on the subscription side.
Also there is another variable that has been unfolding and will unfold even more over the rest of the year which is the RIO pricing. How that shapes up the revenue remains to be seen and Star has already announced their RIO for the last six-seven months and we are learning from their experiences and there will be some variables unfolding on that account which will also decide how the growth looks.
Sonia: You guided for a loss in your sports business for FY16; this quarter we have seen a gain of around Rs 1.5 crore; so can we expect losses in subsequent quarters?
A: On a full year basis, we do expect losses. Sports is an event based kind of a property or a channel and therefore, we see these fluctuations quarter on quarter. For the full year we have indeed guided a loss if and when we believe there is a change in what we expect on the sports side we will again guide accordingly, but at this stage the full year will again be a loss on the sports business.
Q: Let us go back to advertisements then, again I keep going back to the 25 percent number but where do you see the ad growth coming from; national channels or regional channels?
A: Both are doing very well, but I must say the regionals are doing a wee bit better than the national channels at this stage.
Q: And that explains this decision to acquire Sarthak, the Odia channel and if you could give us some more details in terms of the acquisition?
A: In line with our regional strategy and the success that we got there, Orissa was the next in-line market in terms of opportunity available there. It is about 50 percent in terms of size of households and viewership compared to West Bengal and the market there is very small relative to West Bengal. That was a natural extension for us and while we were evaluating the regional expansion strategy we came across this opportunity.
Sarthak TV is the leading channel, it is a GEC in Orissa. It has about 25 percent viewership share there and it is a channel/business which is already profitable. So, from that perspective, we believe it is going to be a very good fit for us with almost no impact on the P&L.
We have the approval from the board for a maximum consideration of Rs 115 crore for 100 percent of equity. So, it will be an all cash deal and once the regulatory and other approvals come off we will start consolidating it. Net-net we believe it is going to be an accretive acquisition from our shareholders perspective.
Q: So by when can we expect this channel to breakeven then?
A: This made sense for us and for the existing promoters. We would rather do it all cash than dilute the equity of our existing shareholders.
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