Zee Entertainment’s Cash Flow Falls To Lowest In Six Years

Zee Entertainment Enterprises Ltd.'s cash flow fell to its lowest in at least six years as the broadcaster invested more to acquire rights to movies and receivables from group companies spiked.

Its topline rose 19 percent year-on-year on higher advertising and subscription revenue, according to its annual report. Operating income jumped 24 percent.

Yet, working capital requirement rose, hurting cash flow. That came as advances and unsecured deposits to content aggregators rose, something that its auditor flagged as a concern. Receivables from group companies— Dish TV Ltd. and Siti Networks Ltd.—also jumped. The company attributed it to delay in receiving reports from cable operators after the new tariff order.

Zee Entertainment's payments to stressed promoters also rose during the year. Loans, deposits and advances receivable from related parties, including promoters, jumped fivefold to Rs 223.3 crore as of March, according to the annual report—the company had disclosed that last month. These included Rs 175.2-crore financial support to Subhash Chandra-led promoter group entities.

In an emailed response to BloombergQuint, the company, however, said Rs 175 crore is not an advance “but assignment of liability which has been assumed by promoters for an inter-corporate deposit due from a third party. It is not pertaining to movie acquisition”.

Promoter debt has been a concern for investors because the Essel Group offered shares of Zee Entertainment and Dish TV Ltd. as a collateral. The broadcaster's stock tumbled more than 50 percent after the Essel Group decided to sell half its stake in November last year. It has since recovered some of the losses and but is still 18.4 percent down.

To be sure, Zee Entertainment doesn't face such debt issues. Its debt fell in the year ended March to Rs 742.9 crore from Rs 1,145.2 crore a year earlier. The decline came on the back of part-redemption of preferential shares, according to the annual report. The company also has Rs 1,221.8 crore cash and cash equivalents and Rs 857.6 crore investments.

Here are the key highlights from its annual report:

Working Capital

Working capital requirement rose by Rs 1,715.1 crore in the year ended March compared with an increase of Rs 855 crore a year ago. That came on account of a 45 percent year-on-year jump in inventory to Rs 3,850.5 crore as the company invested more in acquisition of satellite, digital and international movie rights. About 66 percent of these will be recovered after 12 months, the annual report said.

Increased focus on ramping up content to boost its television and digital offerings is the key highlight of FY19, according to CLSA. Higher investments in content led to working capital expansion, impacting cash flow. The brokerage lowered its FY20-21 net profit estimate by 3 percent and lowered target price from Rs 535 to Rs 515—still an upside of more than 40 percent.

Advances, Deposits To Aggregators

Zee Entertainment gave advances to aggregators and production houses to ensure content for its streaming app Zee5, and local and international broadcasting business. Such advances stood at Rs 245 crore as outstanding as of March, nearly 20 percent of the total advances to others.

Total unsecured deposits to others stood at Rs 836.2 crore of March 2019. Of this, more than 80 percent were given to the aggregators for 11 months to avoid any potential lack of films.

Macquarie, however, sought clarity on who these aggregators were.

In an emailed response to BloombergQuint's queries, Zee Entertainment said the advances are not given to any related party. “These are advances given in the normal course of business, which we give to production houses or creative studios for production of content/acquisition of movies,” it said.

And the Rs 693 crore deposits were given to aggregators with whom “we have a long standing relationship for acquiring their movie slate, over the next few years”, the company said.

In the annual report, auditor, however, expressed a qualified opinion on internal controls governing advance payments to agencies for acquiring movie rights. Deloitte Haskins & Sells LLP, in its report, pointed out that the advances may have been paid without adequate approvals.

Zee Entertainment, in the annual report, said it's in the process of modifying its systems and processes for film acquisitions.

Cash From Operations

As the working capital requirement rose, cash flow fell to its lowest in at least six years.

While aggressive investments in buying rights impacted the working capital immediately, the revenues will accrue over a period.

The investments in movies and original content for Zee5 will continue, the management said in the report. As revenue from these businesses grows, cash flows will improve, it said.

Macquarie said the net operating cash flow-to-profit-before-tax ratio of the company has declined from 49 percent in FY16 to 5 percent in FY19 because of its investments in content for Zee5.

CLSA underscored a decade-low cash flow from operations-to-Ebitda ratio at 5 percent.

Free cash flows turned negative Rs 150 crore as its working capital days—number days a company takes to convert its working capital to revenue—surged by 28 days to 193 days as of March, CLSA said.

Higher Receivables From Group Companies

Receivables from group companies rose more compared with the increase in revenue from these entities. But the debtor days—average number of days required for a company to receive payment from its customers—remained almost stable for the company at 77 days in FY19 against 76 days a year ago, according to Bloomberg data.

CLSA found the increase in receivables from Dish TV surprising since the debtor days remained stable and lower than the industry average of 100 days. That indicates there's a delay in collection from Dish TV.

In its response to BloombergQuint, the company said after the new tariff order, the company witnessed a delay in collection due to reconciliation issues or late receipt of reports from multiple system or local cable operators. “However, since March 2019, a significant portion of receivables has been collected.”

(Updates an earlier version to incorporate Zee Entertainment's response to queries)