Behind the Stock: Why Zee’s filmy umeedein get no takers on D-Street

Behind the Stock: Why Zee’s filmy umeedein get no takers on D-Street

Zee Entertainment Enterprises is facing a backlash from investors, and this time, it has nothing to do with the company’s corporate governance issues or promoter’s excessive share pledges for investment in failed infrastructure projects.

It’s about movies and a little known startup.

Zee Entertainment’s success during the time of its erstwhile founder-chairman Subhash Chandra was centred around the company’s television business – a generator of steady stream of subscription and advertisement revenues.

During the quarter gone by, both the subscription and advertisement sales showed sharper-than-expected revenues as the re-opening of the economy helped business prospects.

Yet, for some time now, the company has stated that its future lies in a different path.

Zee’s biggest bet towards becoming a company of the 21st century is its over-the-top platform ZEE5, which has continued to bleed cash as it struggles to cope with user conversion at a rate that peers at Netflix, Hotstar and Amazon’s Prime Video have done so far.

Zee believes the lack of conversion is a function of low original content on its OTT platform. The company also recently launched ‘Zee Plex’, an online pay-per-view platform during the lockdown months, to capitalise on the trend of simultaneous movie releases on OTT and theatres.

“We have to course-correct as we go along. Our original content and movies are the USP and the key drivers for the subscription income for the platform,” Chief Executive Officer Punit Goenka had said in a November conference call.

The company has set itself ambitious targets. It plans to rapidly increase its investment in film production next year and release 35-40 movies instead of 8-10 currently. The company’s investment in content will hit a decade high in 2021-22, analysts’ projections showed.

The strategy, though, is unable to make fans out of investors and analysts. The stock fell 14 per cent after its Q3 numbers and the management call and nearly 4 per cent during the week gone by. Why?

The movie production business is volatile and at the same time, it generates low margin, much lower than what the television business does. It is like taking risks attached to investing in a Bitcoin, but expecting returns of only a fixed deposit.

Zee Entertainment’s capital investment in the movie business is being seen as misallocation of capital. Investors believe that the company could be better off in further growing its subscription business instead of going for the glamour of the movie production operations.

Adding to this problem is the company’s large investment in the online on-demand video startup Sugar Box. Investors are not convinced that it will generate any meaningful returns for the company.

“Yes, movie production does provide content to its network but it is volatile. We are not fans of investment in Sugar Box,” said Avneesh Roy of Edelweiss Securities.

The investments in both the movie business and Sugar Box will crimp the company’s margins as well as return profile. After the tumultuous past two years, investors of the company yearn for predictability in earnings and returns.

Zee Entertainment wants to go all guns blazing into the Wild West that is India’s OTT market. Investors wish it rather not.

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