What I can Teach Rakesh Jhunjhunwala?

In Q3 FY21 concall of zee entertainment, Rakesh Jhunjhunwala had a disagreement with mgmt about them being conservative about ad growth forecast.  I have tracked and covered Zee entertainment stock for 15 years. My experience says that an analyst and companies’ ability to forecast industry or company ad growth in any given year has been at best 50% strike rate. A coin toss is equally successful. 

What’s the Dharma on a concall?

  • Analyst Dharma:  If you feel mgmt. is being conservative, temper your own expectations rather than pushing mgmt.  to up their expectations.  Conservative expectations don’t hurt and always remember the mgmt. has far more details and they might not be willing to share their reason for being conservative. 
  • Trader Dharma: If you are invested, then it’s very important for you to expect better guidance and that management show more optimism.  One has to try to make the mgmt. sing your song. 
  • Investor Dharma: Mispricing and different expectations are only an opportunity. In the long-term guidance and optimism do not matter and eventually, actual numbers are all that matters.

Rakesh Jhunjhunwala: You have an economic growth which in the third quarter was, as I see, a breakeven level. Now the predictions of 15% to 16% nominal GDP growth next year. How can the advertising not go up you tell me? When the delta is so high in the economic growth from nearly nil to 15% and after advertising is a product of the total growth in the economy so I don’t understand that how can there not to be a substantial increase in advertising revenue next year. So the GDP grows by 15%, the GDP grows by 15% revenue only, advertisement should grow by at least 20%-25%?

Ad growth for Television lags GDP growth

A look at past trends clearly shows that Ad growth has started to lag nominal growth in the last 3 years. Subscription revenues are doing better during the same time period.  Also, Television growth has been lower than industry ad growth and is projected to remain lower as per KPMG.

Operation leverage at ZEE – Marginal profitability is low

Rakesh Jhunjhunwala: The one-third may not gain but two-third you will gain and there the marginal profitability is very high. In my mind I can be totally wrong but this kind of delta in the economic growth all people whose businesses are high fixed cost based should become very-very profitable.

While, it might seem to be that any significant uptick in ad revenue should lead to margin expansion – as there are no direct costs attached, leading one to believe that marginal profitability is high. However, this is at best a benefit of a quarter.  Higher ad growth has always led to higher investments in content as competition takes over and a key reason for poor cash flow over last 5 years for ZEEL has been the substantial increase in inventory.  Inventory has increased from Rs 13bn in FY16 to Rs 53bn in FY20.

Marginal profitability is good, but focus should always be on cash flows. And more so given the problems of the Essel group.

Concall discussion in Q3 FY21

Rakesh Jhunjhunwala: My first question is that traditionally the IPL is held in the first quarter and this time our large part of the IPL was in the third quarter. How much has the advertising been affected because of the IPL being in the third quarter?

 Punit Goenka: Part of it would have impacted us but it also helps us in a way because the way IPL sells advertising it is category exclusivity so all the competitors or the people who buy IPL actually for share of voice go to competition. So, it also helps us in one way and therefore while there has some impact but also some help to us. Overall from the industry point of view IPL from Q3 would have taken away both on TV and digital put together about, correct me if I’m wrong about 1400 crores of advertising.

Rakesh Jhunjhunwala: What was the total revenue of advertising digital and TV?

Punit Goenka: With both is about 2000 crores.

Rakesh Jhunjhunwala: Total industry-wise revenue?

Punit Goenka: Industry-wise revenue for Q3 is about 8000+ crores.

 Rakesh Jhunjhunwala: That means about 14% to 15% of the revenue which in every quarter wouldn’t go to IPL this time?

Punit Goenka: That’s right.

Rakesh Jhunjhunwala: And everybody is affected to the extent of 10% to 12%?

Punit Goenka: That’s right.

 Rakesh Jhunjhunwala: You have an economic growth which in the third quarter was, as I see, a breakeven level. Now the predictions of 15% to 16% nominal GDP growth next year. How can the advertising not go up you tell me? When the delta is so high in the economic growth from nearly nil to 15% and after advertising is a product of the total growth in the economy so I don’t understand that how can there not to be a substantial increase in advertising revenue next year. So the GDP grows by 15%, the GDP grows by 15% revenue only, advertisement should grow by at least 20%-25%?

Punit Goenka: Mr. Jhunjhunwala you are right. It should grow by that somehow but that will be the advertising growth for the entire industry overall.

Rakesh Jhunjhunwala: You are part of that industry, you may gain some market share, you may lose some market share but if the industry grows at 20%, that should be substantial and your marginal costs are very few, so it will reflect in my rate. So, in my personal opinion your profitability should show fast, greater growth and I don’t understand your hesitation in saying that?

Punit Goenka: Give me a minute to try and explain to you. There are certain parts of the industry which we don’t play, for example the digital side which is not related to video which is a large part of the industry today which is search and display advertising. We have no role to play in that part and that part also grows significantly higher.

Rakesh Jhunjhunwala: Punit, I understand that but how much percentage of search and the other part in which you are not there is a total take in the revenue. It may be 10% of probably advertising revenue. If the industry grows at 20 you may grow at 15 because you don’tparticipate there? I don’t understand if the economy is to grow at 15%-16% nominal then how advertising growth can be less than 20%? You are not in those segments today; your segments have also grown 20%. You are not there in those segments even today.

Punit Goenka: I pray that your bhavishyavani comes true.

Rakesh Jhunjhunwala: My bhavishyavani is based on certain facts. If the growth tapers off, I could be wrong. I don’t think if the growth comes at 15%-16% nominal, advertising growth in your segments can be less than 18% to 20% and as companies prosper more and compete more they tend to advertise more.

Punit Goenka: Sure and also we are coming from a lower base so yes the numbers should be high.

Rakesh Jhunjhunwala: Your marginal profitability should be very high because the content cost doesn’t go up with the advertising revenues?

Punit Goenka: That depends. It will go up because of the other sectors. Television profitability absolutely you are right will go up because the cost will not go up in that same proportion but the investments in other pockets of our business will impact properly.

Rakesh Jhunjhunwala: You may invest; today advertising is a bulk of your revenue?

Punit Goenka: Correct.

Rakesh Jhunjhunwala: So advertising should be 75%-80% of your revenue?

Punit Goenka: It’s about 65%.

Rakesh Jhunjhunwala: 65 is two-third.

Punit Goenka: Yes.

Rakesh Jhunjhunwala: The one-third may not gain but two-third you will gain and there the marginal profitability is very high. In my mind I can be totally wrong but this kind of delta in the economic growth all people whose businesses are high fixed cost based should become very-very profitable.

Punit Goenka: Sure.

Rakesh Jhunjhunwala: I thought it will be better if you, when I don’t know, let’s see time will bear us out.

Punit Goenka: Sure, we will see how it plays out but I can assure you if industry grows at whatever pace we will beat that rate.

Rakesh Jhunjhunwala: I like that attitude. Thank you and once again congrats on a good performance and you are going to make some changes in your Board of Directors so when can we expect that to be done?

Punit Goenka: We have already brought two new Directors onto our board that we had announced last quarter itself.

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