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 increase in inventory, primarily movie rights, which increased from Rs 13.2bn in FY16 to Rs 16.8bn, and higher advances of Rs 8.6b, 13% of net worth , FY16: Rs 5.6bn. Zee’s aggressive accounting on amortisation 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 Rs 41.7bn, 63% of net worth, yielding returns of 4.6%, which dragged RoCK to 26.7% despite high RoIL of 40.8%.
Revenue grew 11% to Rs 64bn, with 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 Rs 2.2bn.
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.
We believe a higher amortisation period leads to front-ending of profits, as significant revenue is realised on initial telecast. Zee has made high investment in programming rights, primarily movies, during FY17.
As at FY17, non-core assets stood at Rs 41.7b, 62% of net worth, including proceeds of Rs 18.4b on the sale of sports business; generating a yield of 4.6%. Of this, Rs 4b was invested in Poseidon Opportunities Fund, Rs 0.4bn in Morpheus Media Fund, and Rs 1.3bn in 17% NCCD of SSGD; Rs 26.1bn was held as cash. High investment in non-core assets dragged RoCK, which was maintained at 26.7%.