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:

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.

Lessons from Zerodha – What business are you in?

Nithin Kamath, Founder and CEO of Zerodha, made a few innocuous-looking tweets yesterday which should send the entire broking industry, promoters, and investment bankers into some soul searching.  I had recently read in Simon Sinek book “Start with why”- while most companies are able to articulate what business are they in and how they are going to achieve it, the reason for “Why are you in business” is soon forgotten.  

A quick search in Google “Why Icici Direct”, “Why Motilal Oswal” or “Why Edelweiss” will reveal that they claim their the largest or have the best research or simple platform.  However, Nithin changed the entire discourse by saying that our entire focus is “customer profitability”. We are in the business to ensure higher profitability for the customer. Only when this is your focus can you have “nudge” like functions that reduce trading and revenues for Zerodha but are right for the customers.  One of the nudges that help me is that the software highlights which options are illiquid and does not let me place a market order.  (ICICI direct had been shameless and fraudulent in squaring of my illiquid options despite margins citing covid urgency (causing me unwanted loss), I approached NSE but that’s a strenuous, time taking battle)

Nithin is forthcoming in saying that what is right for investors is hardly ever right for consumers. Zerodha employees do not have any revenue targets. Whereas all other brokers are largely focused on revenue targets.  I regularly get unwanted emails and calls from inexperienced relationship managers from ICICI direct trying to advise me when they hardly understand that my experience in markets is 5x of theirs.   Zerodha surprisingly does not sell me any advice nor makes any stock recommendations.

Can you trust bankers to give you the right advise?

I have been part of many investment banking pitches. And one of the sections of the pitch is why the timing is right to raise money in markets.  This section talks about rising markets, high FII interest, and recently successful IPOs.  There is no section which talks about “Why the company does not require money” or “what are the costs of raising equity”.  The cost of return on capital of freshly raised money, the pulls and pressures of quarterly estimates, etc.  Most Indian promoters believe that the cost of equity is zero and bankers let them leave in fool’s paradise.

I am a happy Zerodha customer since Dec-2020 and I am not using Zerodha because it’s cheap. It’s because the product, interface, and platform are much superior. And like one of my friends said give me 3-4 more promoters like Nithin whom I can invest in and I am sorted for life.

Things to remember:

Investment bankers have revenue targets – they are worst suited to advise you on the timing or need of IPOs.

If you are in short-term game – your targets are more brokerage from customers. If you are in for greatness, its more profitability of customers.

Equity capital is one of the most expensive capital.

PS: Note to self – convert 10 family members to Zerodha this year.

What Credit Suisse can learn from Santa Banta?

Credit suisse to reveal losses from Archegos ; estimate $7.5 bn losses. ( Article)

If any of you have ever played live poker with me, you are bound to hear a specific joke of Santa Banta from me -Slipping over a banana peel. The joke goes like this: Once Santa Slipped over a Banana peel and fell. Later he saw another banana peel and cried out ” Oops! I have to slip again”. This joke I immediately say after I see a repeated dumb play from a poker player where he ends up gifting most of his stack.

Credit Suisse is going to potentially take $7.5 bn loss in Archegos. The reason I see the loss of credit Suisse and other bankers as dumb is based on past record of Bill Hwang. In 2012, Bill Hwang had pleaded guilty to insider trading and agreed to a $44mn fine to SEC. The SEC said Hwang and his business had short-sold three Chinese bank stocks based on inside information—borrowing the shares, selling them high, and aiming to buy them back low and pocket the difference.  There are a lot of crooks in financial markets, but based on the SEC’s description of Hwang’s actions, he was less a garden-variety fraudster than a triple-crown winner of financial cheating: an insider trader who got unfair market discounts and tried to manipulate prices through other means.

Goldman Sachs which had blacklisted Hwang till 2018, also gave in to the greed of commission. The same year, Goldman was embroiled in a corruption scandal related to 1mdb. The greed among investors is so high that they somehow always forget very recent history and repeat the dumb mistakes. While there are no records of any wrongdoing here prima facie and being seen as a case of just margin call, I am pretty sure that leverage standards were bypassed.

I have seen a very similar behavior among Indian investors supporting companies that have earlier short-changed investors. There were enough people backing companies like Deccan Chronicle and Manpasand Beverages despite enough data of wrongdoing.

I wish someday people can learn from Santas mistakes and not slip again.

Types of Equity Analysts – Encounters of the Worst Kind

The Management Pet:  Always starts with “Great quarter guys!” and is always first to ask. . The analyst wants to show everybody that he is the most experienced analyst with a Strong BUY recommendation and that’s why his question was taken first.  So, my question is “How were you able to deliver such a strong quarter”.

Micro Guidance seeker:  Is focussed on getting precise guidance.  Questions are like – Will you be closer to the upper end or lower end of your guidance of 6.6-6.9% growth? You have said growth will be in teens – will it be high teens or low teens? I know you do not give guidance but can you help us if you will beat industry growth or lag?  Also, what will be the industry growth?

Monthly forecaster:  How has been your growth this month / this fortnight. How is the current quarter looking? Has the quarter-to-date growth higher than last quarter?  (Such analyst own forecasts are never close but will never leave the pursuit of monthly forecasting)  

Late entrant: Sorry I logged in late, can you repeat everything you said.  (Basically, such analyst doesn’t own a watch and are begging the mgmt. to gift them one)

Endless questions inquirer:  Sir I have basically 2 questions – one on the balance sheet and another on the income statement.  On the Balance sheet, my question has 3 parts…. On the Income statement, my question has 4 parts and the 4th part has 3 sub-parts.

(Operator- participants please limit the question to 2, so that everybody can get a chance)

 Class participation:  Most/all of my questions have been answered.  These are analysts who need to record their attendance to the fund managers.

(Operators – please press 02 to remove yourself from the question queue is never understood)

The attention-to-detail Analyst:  Can you help me understand the nature of “other revenues”. They are now 0.3% of all revenues as against 0.15% last quarter.   Also, why is your tax rate up by 30 bps?   (Announcing to the world my excel models are very detailed)

The stock pitcher Analyst:  I have a 3-part question are on the new business/acquisition (like Dunkin Donuts). Do you think your new business can be the biggest growth driver for your business? Second, would you say that the new business margins will be overall margins accretive? Third, do you think stock markets are not giving you full credit by not doing a sum of parts valuation?  ( Please help me – as I am the only one doing SOTP valuation)

The Meeting seeker:  Can you explain to me the accounting difference leading to the variable tax rate, depreciation, and amortization vis-à-vis peers? Can I take these answers offline in case you don’t have them handy?

The color seeking analyst:  Can you give some color on the nature of growth expected for the year?  Mgmt. – the color is baby tomato pink.

Attention seeker:  That was my associate dialing in.  This is senior writing analyst XXX here.  My question for you is ….?  (To announce the world, I have an intern/associate)  

The Student Analyst:  Can you please explain how do you calculate same-store sales growth (SSSG)? Also, can you explain what is your unit economics?  Mgmt. – Please read past 10 years’ transcripts.

PS: Even I have been guily of the worse behavior on a occasion or two.