MUMBAI: A Kotak Securities report dated 29 July 2003 says that the firm has retained its 'in-line' rating for Zee Telefilms Ltd at a target level of Rs 97 
The Kotak Securities report maintains its EBITDA and net income forecasts for Zee at the earlier estimated levels of Rs 4.4 billion and Rs 2.48 billion respectively in anticipation of better subsequent quarters despite modest year on year (yoy) growth in June 2003-04 quarter.
The report mentions that Zee Telefilms has notched 19 per cent and 21 per cent yoy growth respectively in EBITDA and net income for the June quarter. However, after including the results of its subsidiaries, which have now been consolidated with retrospective effect in Q1FY03 (corresponding quarter in the previous fiscal), both EBITDA and net income register a very modest growth of 1.4 per cent and 7.3 per cent respectively, states the report.
The Kotak Securities report however points out that even though the EBITDA margin was flat at 31 per cent. It adds that the EBITDA estimate of Rs 4.4 billion may be achievable if advertisement revenues and post CAS domestic pay TV (plus cable) subscription revenues improve sharply. This, claims the report, would be a more likely scenario considering that advertisement revenues are expected to pick up in the coming months as normally the second-half is better compared to the first-half.
The revenue seesaw

The report also mentions concern over the sharp 20.6 per cent yoy decline in advertisement revenues to Rs 1.21 billion in the current quarter even as it states expectations of better growth in domestic subscription revenues.
The report says that its estimate for FY04 advertisement revenue is Rs 6.6 billion, which represents a 6 per cent growth over FY03 advertisement revenues. The Kotak Securities report is positive on the management information from Zee that it had achieved 42 per cent upfront booking of its annual advertising target without committing to any guaranteed ratings.
Outlining the related issues, the report emphasises the following points:
Improving debt situation
The report states that Zee is steadily addressing the receivables issue as receivables at June end declined to Rs 4.85 billion vis-?-vis Rs 5.6 billion at March end 2003. Although the absolute number still remains high, the declining trend is encouraging.
The report points out that Zee's net debt increased moderately to Rs 4.5 billion (gross debt of Rs 5.81 billion less cash of Rs 1.32 billion) at June end 2003 versus Rs 4.1 billion at March end 2003. However, the report says that with the promoters paying off dues related to Buddha Films Ltd, net debt is expected to decline in the current September quarter.
All round quarter on quarter (qoq) growth in subscription revenues
The Kotak Securities' report gives a positive nod to the qoq growth in subscription revenues, especially since seasonal movements are not an issue for this revenue stream.
Zee's subscription revenues increased by 41 per cent yoy and by 8.3 per cent qoq to Rs 1.43 billion. Domestic pay TV revenues grew by 2 per cent to Rs 510 million, cable subscription revenues (Siti) by 25 per cent to Rs 300 million and overseas subscription revenues by 11 per cent to Rs 620 million. The number of overseas subscribers in the four key markets of UK, USA, Middle East and Southeast Asia has increased by 35,000 to 495,000 - adds the report.
Other developments-cable distribution/DTH
The report points out that the Zee management has expressed confidence about capturing a 30 per cent plus market share over the next 12 months in the wholesale cable signal distribution business through its innovative headend-in-the-sky (HITS) project.
Even so, the pace of growth in cable revenues would depend on the actual rollout of CAS (conditional access system) in India, which at present has been limited to four metro cities. It would also depend on the acceptance of CAS by consumers and Siti's revenue share arrangements with local cable operators and broadcasters.
The report claims that the Zee management has also indicated that the DTH project would be financially independent of Zee Telefilms. Given the regulatory issues of 20 per cent equity ownership and 49 per cent foreign ownership, a group company will own and operate the DTH license. However, Zee would be involved in the content and marketing aspects - adds the report.
Overview
All in all, despite concerns over flat EBITDA and net income as also decelerating ad revenues, the report expresses confidence in the ability of the management to control the debt situation. The all round quarter on quarter growth in Zee's subscription revenues has also found favour with Kotak Securities.
With balancing factors at play, the Kotak Securities report reiterates its in-line status for Zee.