MUMBAI: A Motilal Oswal Inquire India Research (MOSt) report dated 28 April 2003 states that Zee Telefilms' FY03 advertising revenues have been stronger than expected and subscription revenues have posted a robust growth. Commenting on the future outlook, the MOSt report states that the stage is set for a brisk performance in FY04 with the strong results reported in FY03.
The MOSt report expects revenues to grow 13.7 per cent in FY04, powered by an eight per cent growth in ad revenues, 24 per cent growth in subscription revenues and 69 per cent growth in other sales and services. MOSt analysts project domestic pay revenue growth of 37 per cent to Rs 2.1 billion from Rs 1.6 billion in FY03.
MOSt analysts estimate Profit After Tax (PAT) after minority interest to grow 24.9 per cent to Rs 3.2 billion in FY04, translating into an EPS of Rs 7.6. At the current price, the analysts felt that the stock is attractively valued with a P/E of 11.5x FY03 and 9.2x FY04E earnings. On the EV/EBITDA measure, the stock quotes at 9.1x FY03 and 6.4x FY04E earnings.
Motilal Oswal media analyst Subhabrata Majumder says: "Zee Telefilms' 4QFY03 results are significantly ahead of the street's and our expectations. While PAT growth before extraordinary items and after minority interest was 55.4 per cent, total revenues grew 16.7 per cent YoY. The balance sheet has been cleaned up through a one-time write-off."
On the stock market performance of the Zee scrip, Majumder adds:"We believe that the stage is set for a rally of 15-20 per cent in the stock price in the short term. The stock has been battered on concerns regarding implementation hiccups of conditional access system (CAS) and the impact on ad revenues due to the World Cup. Both concerns have clearly been overplayed. Following an EPS of Rs 6.1 in FY03, we believe that there would be a spate of earnings upgrades. We recommend Buy with a 12-month price target of Rs110."
The MOSt report also says that other sales and services have got a boost from PTL (Padmalaya Telefilms) consolidation; and that the margin improvement has led to a 64 per cent growth in EBITDA. The report says that the growth in PAT was 30.2 per cent for 4QFY03 and 22.6 per cent for FY03 even after completely excluding Padmalaya Telefilms' (PTL) financials to make the numbers comparable.
The following are some excerpts from the MOSt report:
Advertising revenues: Advertising revenues for the quarter were stronger than expected at Rs1.69 billion, aided by above-par performance in Zee Cinema, Zee News, Alpha channels and Zee English. This is a degrowth of 15.7 per cent YoY and a marginal degrowth of 1 per cent QoQ. There were widespread fears that ad revenues for the quarter would come under severe strain due to shifting of ad revenues to competing channels for the cricket World Cup.
Subscription revenues: Subscription revenues continued their growth journey, both on the domestic as well as international fronts. Domestic pay revenues registered a robust growth of 32.5 per cent QoQ to touch Rs 501 million compared to Rs 378 million in 3QFY03. After a quarter of flattish growth, domestic pay revenues got a leg up due to the rate hikes undertaken in January 2003 (price increased from Rs 37 to Rs 50 for the Zee Turner bouquet) and a marginal increase of 5 per cent QoQ in paid connectivity to 4.6 million homes in 4QFY03.
MOSt analysts expect domestic pay revenue momentum to be sustained in FY04 with a 40 per cent growth led by a bouquet rate hike to Rs 55 per sub per month (already effective starting April 2003) and increase in paid connectivity to 5.5 million homes by March 2004.
International subscription revenues continued their strong growth to touch Rs 550 million in 4QFY03 compared to Rs 470 million in 3QFY03.
On a YoY basis, international pay revenues posted a growth of 43 per cent. The number of international subscribers posted a growth of 4.9 per cent QoQ to reach a total of 771,000 as at March 2003 vis-?-vis 735,000 subscribers as at December 2002. MOSt analysts expect international subscription revenues to grow by at least 30 per cent in FY04.
Other sales and services get a boost from PTL (Pentamedia Telefilms) consolidation: 
Zee recorded income of Rs 672 million from other sales and services, out of which Rs 516.5 million was contributed by PTL. The PTL acquisition has been made effective from 1 September 2002 and Zee results have been consolidated for seven months' operations of PTL.
After stripping the PTL numbers, there is a sequential growth of 26.7 per cent in other sales and services revenues. This is largely due to an improved performance at the education unit, ZILS that registered a YoY growth of 50 per cent in revenues. At the current level of operations, ZILS has achieved near cash break even from a position of substantial losses two quarters ago.
Operating expenses grow by a marginal 2.6 per cent:
Programming, transmission, education and other direct operating expenses fell 7.5 per cent YoY. Transmission costs have remained stable while programming costs have registered a decline of 9 per cent YoY. Staff costs showed a sharp decline of 5.9 per cent YoY on the back of major cuts in employee base.
Zee's total workforce (excluding ETC and PTL) has been curtailed at 1,450 as at March 2003 down from 1,800 as at September 2002. This would lead to continued savings in staff costs over the next two quarters. Administrative & selling costs rose 24.3 per cent YoY although this was primarily on account of the ETC and PTL acquisitions.
Margin improvement leads to EBITDA growth:
EBITDA margin improved to 32.5 per cent in 4QFY03 compared to 31.4 per cent in 4QFY02. EBITDA grew 63.5 per cent YoY to Rs 1.2 billion compared to Rs 732 million. 
Other income has risen marginally YoY but sharply on a QoQ basis to Rs 238 million from Rs 175 million in 3QFY03. Net interest cost has fallen significantly on a QoQ basis to Rs 155 million in 4QFY03 from Rs 227 million in 3QFY03. This is ostensibly on account of a repayment of debt, forex fluctuation registered in 3QFY03 and other gains.
Profit before tax registered a sharp increase of 63.4 per cent YoY and 24.1 per cent QoQ. PAT registered a sharp growth of 75.2 per cent YoY and 19.2 per cent QoQ to Rs 925 million. Excluding PTL numbers completely, the growth works out to 30.2 per cent YoY and flat QoQ.
Lower receivables; reduced debt:
Total receivables have been curtailed at Rs 5.6 billion as at March 2003 as against Rs 6.3 billion as at March 2002. This translates into receivable days of 171 as at March 2003 compared to 213 days as at March 2002. Receivable days have now been brought down further to 155 days of sales.
Due to the strong growth of 52.5 per cent in subscription revenues compared to ad revenue degrowth of 5.3 per cent in FY03, the debtors share of the advertising business has fallen, which MOSt analysts believe is a welcome change. Further, the company disclosed that the aging profile of the debtors outstanding has improved with a fall in the share of older receivables.
MOSt analysts expect receivable days to fall to 140 days by June 2003 and to 130 days by March 2004. Zee has repaid long-term debt of Rs 1.1 billion in FY03 most of which was taken in 4QFY03. With this, total debt outstanding is Rs 7.4 billion as of March 2003 compared to Rs 8.5 billion as of March 2002. MOSt analysts expect total debt to fall substantially to Rs 4.8 billion by March 2004 with improved cash flows from operations and lowering of receivable days.
Cash on the balance sheet stood at Rs 1.5 billion as at March 2003, down from Rs 2.7 billion as at March 2002.
Write-offs clean up the balance sheet:
Zee has taken a one-time write-off of Rs 386 million on account of subsidiaries writing-off inventory, advances, deferred revenue expenditure, etc. These write-offs relate to the operations for years prior to FY02. Following the writeoffs, the management claims that the current assets position of the company becomes fully representative of its current financial condition.