Corporate: ZEE Beams Fuzzy Signals

CORPORATE: BALANCE-SHEET
ZEE Beams Fuzzy Signals

Bears ran amoke as analysts questioned the company's controversial sale of intangible assets to its subsidiary, ATL, to boost its bottomline.

By Nita Jatar Kulkarni & Suveen Sinha.

It was probably the most uncomfortable interview for the street-smart V.G. Jindal, Managing Director, Zee Telefilms Ltd (ZTL). On May 10, 2000, badgered by a barrage of sensitive questions pertaining to ZTL's annual results, which were announced the previous day, Jindal's telephone link with CNBC India's Bazaar programme got terminated abruptly. Well, Jindal did come back on the line to clear the doubts. However, there were few takers for the clarifications, as the bears hammered down the scrip price by 32 per cent to Rs 480 over the next three sessions. This after the price had shot up by 12 per cent the day the results were announced.

The reason for the adverse sentiment: the perception that ZTL had exaggerated its revenues and net profits for 1999-2000 by including the Rs 185-crore income through the sale of software from its programming library to its fully-owned subsidiary, Asia Today Ltd (ATL). Explains Subhabrata Majumdar, 25, Analyst, First Global: ''If one excludes this income, the growth in net profits during the year was 34.20 per cent, and not 180 per cent, as stated by the company.'' But, more than that, some analysts perceived the move as unethical since the revenues from the sale was not classified as Extraordinary Income.

Indeed, analysts had a field day on the cnbc channel while discussing ZTL's financials. ''I can't understand how the realisation of Rs 185 crore is a cash-flow,'' questioned Ramdeo Agarwal of Motilal Oswal while being interviewed on the channel. And Sandeep Shah, an analyst at SPS Securities, added that the company should have included the accrual ''below the bottomline rather than putting it as a part of net profits over the line.'' However, ZTL justified the move since ATL had actually paid the money, and the sale of software was not merely a book entry.

Zee's motive for the sale

Senior managers in ZTL that BT spoke to clarified that the sale was prompted by the fact that the company had to pay $153.11 million to star TV-apart from issuing 1.61 crore shares (face value: Re 1) at a premium of Rs 399 to the latter. That consideration was a part of the deal-finalised last year-that envisaged the buying out of Star TV's 50 per cent stakes in SitiCable, Winheath (the holding company for ATL, the broadcasting firm for all the Zee channels), and Programme Asia Trading Co. With the deal being clinched, ZTL's holdings in each of the three companies is now 100 per cent.

Still, the convoluted route that the deal took has raised many questions which remain unanswered. One, whether ATL has capitalised the outgo or shown it as expenditure in its balance-sheet. Two, did ATL take a loan of $50 million against the software that was sold by ZTL in order to repay the latter? For, if ATL has capitalised the expense and the answer to the second question is yes, then it, too, can be said to have inflated its bottomline. In 1999-2000, ATL's revenues went up to Rs 520 crore from Rs 414 crore in the previous year, while net profits jumped by over 42 per cent to Rs 84 crore in the same period.

In addition, ZTL had compelling reasons to sugar-coat its financials. In January, 2000, Goldman Sachs Investment Mauritius bought ZTL's warrants that were converted into eight million shares (face value: Re 1) at a premium of Rs 999 per share by April 20, 2000. With the scrip price crashing from Rs 1,180 on January 3, 2000, to Rs 630 on May 8, 2000, ZTL's management thought that excellent financial results could perk up the scrip price, and satisfy the foreign institutional investor. In fact, the scrip did go up the day the results were announced on May 9, 2000. Not to forget that ZTL also had ambitious plans to raise $1.50 billion through an American Depository Receipt (ADR) issue during the year.

Zee's investment plans

However, when the bears hammered down the scrip price the day after the announcement of the financial results, ZTL's Chairman Subhash Chandra met analysts on May 11, 2000, and scotched rumours that the sale of intangible assets to ATL was linked to the ADR issue. He maintained that the ADR issue was ''under review,'' and ZTL was exploring the option of raising cash by divesting a part of the promoters' stake in SitiCable. ZTL's hunger for cash stems from the fact that the company requires to invest Rs 2,000 crore in expanding its cable network and Rs 855 crore in developing its content over the next two years.

The bulk of this investment will be done by SitiCable and, thus, Chandra now feels that it makes sense to raise the money through that company, rather than ZTL. In fact, investments will catapult further since the Zee Group has projected its group turnover to rise from Rs 1,200 crore in 1999-2000 to Rs 10,000 crore in 2004-05. Net profits are estimated to increase ten-fold, from Rs 333 crore to Rs 3,000 crore in the same period. These projections will translate into reality only if the proposed plans in areas like Net services and publishing take off.

For Chandra-and ZTL-the truth is that his companies need to consistently show high growth rates. And the current controversy has led to apprehensions that ZTL can boost the bottomline through sale of assets in its library, which was re-valued at Rs 2,644 crore just before the recent deal with ATL. Especially if its ambitious plans get delayed or stuck for some reason. Clearly, after a dream bull-run that ZTL's scrip witnessed last year, a few wrong signals seem to be emanating from the company's headquarters.

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