MOSL: ANNUAL REPORT THREADBARE (ART) | ZEE ENTERTAINMENT FY17-Earnings to cash conversion deteriorates

ANNUAL REPORT THREADBARE (ART) | ZEE ENTERTAINMENT FY17: Earnings to cash conversion deteriorates

Zee’s FY17 annual report highlights weak earnings to cash flow conversion of 79% with increase in cash conversion cycle to 267 days (FY16: 231 days). This is primarily due to (i) increase in inventory (primarily movie rights), which increased from INR13.2b in FY16 to INR16.8b, and (ii) higher advances of INR8.6b, 13% of net worth (FY16: INR5.6b). Zee’s aggressive accounting on amortization of media content continued. We believe aggressive investment in movie rights acquisition will result in higher front-ending of profits. Non-core assets stood at INR41.7b (63% of net worth), yielding returns of 4.6%, which dragged RoCE to 26.7% despite high RoIC of 40.8%.

Revenue growth slows; margins rise

Revenue grew 11% to INR64b, with (a) advertisement revenue growing 9% (FY16: 26%) due to industry slowdown and subscription revenue rising 11%. EBITDA margin increased 390bp to 29.9%, but PAT margin (adjusted for gain on Sports business) remained flat at 15.5% due to fair valuation loss on financial instruments of INR2.2b.

Tax rates may remain high

Adjusted for profit on the sale of the sports business, the effective tax rate increased to 40.5% (FY16: 39.1%). This is primarily on account of fair valuation loss on preference shares, which is non-tax deductible. We believe Zee’s tax rates may remain higher than the marginal tax rate until these preference shares are not redeemed.