Zee Entertainment Enterprises’ (Zee) FY12 annual report highlights healthy cash profits which have been utilised for acquisition of movie rights and buyback of equity. Dip in standalone entity’s profitability is primarily on account of write down of high cost sports inventory transferred on amalgamation of subsidiary during FY11. Long amortisation period of movie rights leads to front ending of profitability. Included in Zee’s balance sheet are goodwill on consolidation of INR6.9bn, overdue debtors of INR1.2bn, investments in Socrates Money Market Fund (Bermuda) of INR2.6bn and loans and advances other than government authorities and related party of INR3.3bn.
��Long amortisation period of movie rights leads to higher profits
Zee amortises the cost of movie rights over a period of license or 60 months, whichever is lower. We believe the amortisation policy is aggressive since significant portion of revenue will accrue in the earlier years, which will lead to front ending of profits. During the year, inventories (primarily comprising movie rights) increased from INR5.4bn in FY11 to INR7.4bn.
High cost inventory acquired on amalgamation impact SA profits
During FY12, Zee’s standalone revenue increased 1.6% from INR21.7bn in FY11 to INR22.0bn while EBIDTA margin dipped from 36.1% in FY11 to 28.4%. This was primarily on account of increase in operating cost to 46.0% of revenue (FY11: 40.6%), which we believe is due to write down of high priced sports inventory acquired on amalgamation of subsidiaries during FY11. While this has led to transfer of cost/losses from subsidiaries to SA entity, the consolidated performance remains unchanged.
During FY12, operating cost at consolidated level remained flattish at 47.1% of sales (FY11: 47.8%).
Goodwill, overdue debtors, loans & advances continues to be high
Goodwill on consolidation as at end FY12 stood at INR6.9bn (20% of networth). On an aggregate basis, subsidiaries reported a profit of INR997mn during FY12.
Un-provided debtors exceeding six months from due date of payment stood at ~INR1.2bn (FY11 INR 1.8 bn). Loans and advances other than government authorities and related parties stood at INR3.3bn (FY11: INR4.2bn) for which further details are not available.
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