ZEE Entertainment – Fool’s Paradise or Ugly duckling?

While, I have stopped actively looking at Zee entertainment and have not followed its results in detail.  I have been pulled back by a number of messages seeking my opinion after the company Q4FY21 results.

Some of the points that demand a look at ZEEL are:

  • Improvement in cash flows – a key concern of the past.
  • Withholding investments in sugarbox – an unnecessary deviation earlier.
  • Improved receivables from Dish tv. 

But is it all expectations management?

A para from Expectations investing by Michael Mauboussin

Analysts have to guess how much a company will earn each quarter. But a company is allowed to give guidance, about what it thinks its earning will be.  This guidance number usually shows up as the consensus estimates among analysts. If the company’s actual earnings meet or just beat the consensus, both the company and the analysts win:  the stock goes up, and everyone looks smart.  The game might not sound so hard, but it requires a lot of cooperation.  Companies are under pressure to achieve the consensus earnings estimate, while analysts rely on the companies to help them from their earnings expectations in the first place.

Companies have two levers in the game. They can manage expectations, manage earnings or do both.  

Now we all know that ZEEL promoters are pushed to the wall and they are left with only 4% shareholding of the company. Also, the group’s other assets have been sold to pay off.  The only scope for the promoters to get back is through their investments in ZEEL.  They have the maximum incentive to do make things look good.

What has not changed and always been my worry is the ballooning and never-ending investments in inventory which for an outsider is a black hole.  I have earlier shared why the very size of the inventory in books is a bold question mark given the limited size of annual movie rights in India.  While investment in sugarbox was an obvious red flag, the ballooning inventory is a less obvious red flag.  Given the nature of it – an analyst’s ability to judge the quality of investments in that will be always limited.

My final take – I don’t invest in cryptos because of two reasons – I don’t understand and cannot trust.  For ZEEL it’s just the trust. 

And I am not writing a blog on its investment in Radhe – I don’t understand it. 

My previous blogs on zeel:

My First Failed Interview – A blessing in disguise.

I would have not given more than 5 interviews in my life for a Job after campus. The first interview was with Shilpa Krishnan – analyst at Kotak securities. Second – was to Telecom analyst at Merrill known for short temper. The third was for I-SEC in 2007 from where I retired.

My first failed interview was one of the most defining interviews of my career.  Kotak securities in 2005 was one of the best places to work with Sanjeev prasad as Head of Research and Alroy Lobo as Head of Equities.  I had applied for a job as an associate under the Cement analyst – Shilpa Krishnan.  The interview was quick with Shilpa and she cleared me and I was next to meet the Head of research.  Sanjeev Prasad asked me typical questions on DCF and WACC and I would have given reasonable answers which had cleared me for a job. I then met someone from HR and they detailed from me by when I can join.  However, as what seemed to be a formality before confirmation, I was to briefly meet Alroy Lobo. 

Meeting with Alroy Lobo – turned out to be unexpected. I was not aware that Alroy had been an ex-IT analyst.  In my first year at SBI caps – I was an associate to the IT analyst – Pratish Krishnan.  As part of my first report as an associate – we had initiated coverage on a company called Subex systems (now bankrupt) and within a few months, the stock had nearly doubled.  Alroy had read about my coverage in my resume and started to ask me questions on Subex. 

Some of the questions were:

  1. How is the accounting of acquisitions being done by the company?
  2. What is the Cashflow adjusted ROI of the company?
  3. How is the company accounting for revenue from its contracts?

I tried to mumble a few answers. I soon understand that Alroy had gauged into my soul and understood my complete ignorance and superficial understanding.  I knew the end result.

Not getting the job – was the best thing to happen.

I did not get the job but after the interview, I made a pledge to myself to never feel humiliated when questioned.  I started to work 6-7 days at SBIcaps putting in late hours– something that was not regularly done at SBIcaps. All I can say is that failed Interview with Alroy was one of the best things to have happened to me.

I met Alroy a few years later when he was part of Kotak MF as their team wanted to understand the TV18 group.  Their team was told that I was the go-to guy for anything on the TV18 group – despite not having coverage. The meeting which was supposed to last for an hour – lasted for more than 2 hours.  At the end of the meeting – I thanked Alroy for the failed interview in 2005. 

The secret of DMart Success- Hawk Eye focus on costs

(Only for Laughs )

One of the many successful attributes of successful promoters has been their focus on cost control. Azim Premji has been known to own a preowned Mercedes and would be seen switching off lights after employees left. Jeff Bezos’s first desk was made of a wooden door and amazon warehouses are knows for acute cost control. Radheshyam Damani, Dmart Promoter, has known to lead a simple life and seen always dressed in white. However, this changed recently with the acquisition of a Bungalow by him for a meager of Rs 1001cr.   

DMart Sucess Mantra

The reason for Dmart success has been the companies tight focus on costs across operations.  I have been able to put together the below list of cost-cutting measures adopted by Dmart to ensure that they are able to provide their customers – the best value.  Policies of D-Mart:

Employee-funded cafeteria:  All employees are expected to collect 5 sachets of sugar and 2 sachets of sauce, 2 straws, and 6 paper napkins whenever they visit a restaurant and deposit it at the DMart cafeteria. Employees of the rank of Vice president and above are expected to get oregano and chili flakes sachets. Last year, the company was able to have zero budget allocation to the above ingredients.   Some surplus was also generated by selling off excess sugar which was added to the bonus kitty of employees.  

Meal Reimbursement policy: No reimbursements will be done for food during outstation travel. The company has a list of temples that provide free food:  Tirupati, Isckon, Vaishno Devi , golden temple, etc. This list will soon be updated with names of Gurudwaras providing Langar. They are also tying up with Akshaya Patra for across the country free food.   In case of compulsion to go to a restaurant, employees are expected to visit unlimited thali restaurants and the entire group shares a thali.

Outstation hotel accommodation policy:  Travel to outstation for meetings is only be approved for employees who can share details of relatives or friends in that city. So that they can get free accommodation.  Marwari employee’s travel is auto-approved as they have relatives in every city.

Late-night transport:   Company will not be reimbursing late-night transport charges.  They recommend you to place an order for some products from your home for Dmart and take a free ride back with Swiggy, Dunzo, Wefast . 

Nature-friendly meetings:  All client meetings to be done at public parks and at waterfronts. Employees are permitted to be magnanimous and offer snacks like Peanuts/Bhel for clients to consume and in case of big-ticket clients also offer them cutting tea and bun maska. 

Modular Furniture:  All employees should have the same comfort in their office that they get while they are at home. Employees are therefore asked to get their own personal chairs and desks to suit their body needs. 

PS: I am taking consultancy offers for explaining in detail the cost-cutting policies.  The first call I expect is from Azim Premji. 

Book Review #15 of 2021: How I almost blew it.

Incredible lessons from India most successful digital entrepreneurs by Sidharth Rao

A fascinating and must-read book for people who want to get a synopsis of start-ups of India.   The book details the struggles of some of the Indian start-ups and how they almost blew it.  One common theme in the success of all startups was the perseverance of founders and sheer dumb luck of raising capital at opportune times. While The Golden tap by Kashyap Deorah sticks to the Big boys, this book details many entrepreneurs the author was personally involved with. 

One of the reasons I picked up the book was Sanjeev Bhikchandani – the mentor and poster boy for the startup world shared a tweet on the book from Bookmyshow founder. One cannot agree more that the focus of startups should be to like cockroaches and only a few survived the dot-com bust and GFC. 

I have been lucky to have known Sanjeev Bhikchandani professionally.  As a media Analyst, his business was competing with the classifieds section of Indian print and I had to gauge the trends.  Also, because HT media and TOI group had businesses that compete with Infoegde.  Sanjeev Bikhchandani would never miss an ICIC securities conference probably because we were the IPO bankers. I had on multiple occasions the chance to listen to Sanjeev’s views in between breaks and lunch during conferences. Sanjeev loves to talk.  

During the Rahul Yadav – housing.com fiasco, I happened to quiz Sanjeev on what will happen to Rahul and how does he see the situation. While one would expect competitors to enjoy such developments. Sanjeev clearly had kind words to say of Rahul Yadav, how the guy is very competent technically and should be able to definitely start something new. Sanjeev was always focused on profitability and he narrates an interesting incident on how a VC would react saying that “ If you are making a profit then you have a vision problem “

Some interesting quotes:

Investors and business owners compare their relationships to marriage. I believe that their relationship is somewhere between a friendship, marriage, and business relationship.

Rediff.com was to India what Yahoo! Was to the silicon Valley in the nineties. Sadly, both blew up. 

If you want to succeed in China get close to the government, if you want to succeed in India – stay away from the government.

Deep Kalra – Makemytrip – I understood that online stock broking will ultimately belong to a financial institution.  So he chose online travel company.  Time for Deep to Meet Nitin Kamath – Zerodha.

Once you spot the opportunity, acting as fast as cheetah is the only right move. 

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.