Zee Entertainment reported a dismal set of March quarter numbers on Friday, with one-off expenses resulting in a net loss. Besides the routine operating numbers, some other items need a closer look.

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Inventory levels have been rising and so have been receivables (money owed to the company). At the same time, Zee's cash balance has been falling.

Investors will also be discomfited by the auditors flagging the comfort letter Zee had issued to its subsidiary over a put option worth around Rs 400 crore.

Profit and loss review

The 3.4 percent decline in revenue was not as bad as analysts and investors were expecting, but the company reported an EBITDA loss of Rs 289 crore, the first time it has done so.

Adjusting for one-offs, EBITDA declined 44 percent year-on-year.

There were two reasons for the EBITDA loss:

-One-time accelerated amortization of inventory of Rs 260 crore

-One-time provision for balances related to ad, subscription and other assets for Rs 343 crore. This also included Rs 41 crore of provisions on ad and subscription revenues because of the impact of COVID.

All put together, Zee reported a net loss of Rs 765 crore, compared to a net profit of Rs 293 crore during the same period last year.

There were other write-offs as well

- Goodwill write-off of Rs. 114 crore related to digital publishing business

- Provision of Rs 171 crore related to Inter Corporate Deposits (ICD)

The P&L also included a loss of Rs. 384 crore in overseas investments (MTM loss as shown as fair value adjustment).

The saving grace was the 41 percent growth in subscription revenues, which cushioned the 15 percent decline in ad revenues.

Balance sheet review

At the end of FY20, the company's inventory rose roughly 40 percent to Rs.5347 crore. This was due to the company acquiring satellite and digital rights of movies across languages and ramp up of ZEE5 originals.

Receivable days increased by 10 to 94 days due to delay in payments by one key distribution customer and the amount increased by 14 percent to Rs.2084 crore.

Cash, loans and other investments were down 56 percent at Rs.1011.5 crore

Auditor's qualified opinion

In FY16, ATL Media (a fully-owned subsidiary of Zee) wrote a put option to Living Entertainment Ltd for buying out LEL's 64 percent stake in Veria International for $52.5 million.

LEL assigned raised debt from Yes Bank against this put option. In May 2016, Zee issued a ‘Letter of Comfort’ (LOC) to Yes Bank in connection with a borrowing by LEL.

During FY20, LEL defaulted on loans and Yes Bank exercised the put option, and is seeking payment from ATL. Following this development, ATL accused LEL of misrepresentations and rescinded the put option. Later, it filed a case against LEL in Mauritius Supreme Court.

While the matter is sub-judice, the auditors have flagged this.

Highlights from the management concall

* Expects 25-30 percent decline in ad revenues for FY21 in worst case scenario

* Subscription growth levels have been stable in Q1

* New Tarriff Amendment Order unlikely to affect subscription growth

* Expects to generate free cash flow in FY21 as well

* Expects content cost quarterly run-rate to normalize to earlier quarter levels from Q1 onwards

* Sees market share at 18.3 percent vs. 22 percent last year

* Will strive to regain lost ground in Hindi GEC, Tamil, and Telugu markets

* Movie investments largely complete; original content investments to continue

* Margin in FY21 likely to be under 30 percent; expect it to recover by FY22