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Last Updated : Jan 28, 2019 10:57 AM IST | Source: Moneycontrol.com

'Don’t tune out Zee from your portfolio, could give up to 100% return in 1 year'

Most global brokerage firms are of the view that Zee Entertainment is on track to deliver strong double-digit growth in the near future, and the recent correction seen in the stock price has made risk-to-reward ratio favourable for investors.

 
 
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The fall in Zee Entertainment — nearly 30 percent last week and by about 45 percent since January 2018 — has made many investors to reconsider their decision of holding onto the stock for long term.

Last week, the stock hit a 44-month low weighed down by concerns over probe against the promoter group, the risk of promoter share pledge being invoked, as well as stake sale concerns dented sentiment.

The management, in an investor conference call last week clarified that they have not been investigated by any agency over such alleged fraud.

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They assured investors that business fundamentals remain intact and progress is on track over the promoter’s stake sale and the Essel Group’s stressed asset sale. The words of management will give investors a sigh of relief but the strong commentary from global brokerages will also lift sentiment.

Most global brokerage firms are of the view that Zee Entertainment is on track to deliver strong double-digit growth in the near future, and the recent correction seen in the stock price has made risk-to-reward ratio favourable for investors.

Nomura which has the most aggressive target of Rs 671 which translates into an upside of 110 percent from Friday’s close of Rs 319 for the ZEE Entertainment is of the view that the company is on track to deliver 17-13 percent CAGR in ad/subscription revenue over FY18-21F.

Digital revenue would be an upside risk to our numbers. Zee trades at 16.5x FY20F EPS of Rs 19, which is very attractive compared with its past 10-year average trading multiple of 25x, given our forecast of ~18% EPS CAGR (FY19-21F) and potential upside from Zee5, it said.

Also, various media report suggested that Subhash Chandra’s Essel Group has reached an understanding with lenders having a pledge on Zee Group promoters’ stake that a steep decline in the shares of group companies will not lead to a default.

Zee promoters/Essel Group in Nov-18 had also announced plans to sell up to 50% of the 42% ownership in Zee Entertainment to a strategic partner which should further aid deleveraging at the group level.

Zee’s CEO said active talks on reaching a binding agreement with a potential partner remains on track and is expected to be closed on or before the stated deadline of April-19. Zee’s preference in this potential stake sale remains a strategic and foreign partner.

“Essel Group has high pledging across group companies. Zee’s CEO said the group is working on selling three infra assets (one deal is almost done) and deals are expected to realise Rs 20,000 crore of EV and Rs 8000 crore of equity value which will drive deleveraging at the group level,” CLSA said in a report.

Here is what other brokerage firms are recommending for ZEE Entertainment after the management call:

CLSA: Buy| Target: Rs 670

Zee Entertainment’s stock corrected sharply on market fears/risks of pledge on promoter shares being invoked. Zee promoters/Essel Group have pledged 59 percent of their 42 percent ownership in Zee to group lenders.

While promoter pledging of Zee’s shares is not new, its rise from 42 percent five years ago to 59 percent in Dec-18 and Zee’s stock price fall has exacerbated the risk of pledges being invoked.

Zee’s business operations remain on a strong growth trajectory with 19 percent YoY increase in revenues for 9MFY19 and we forecast 19 percent earnings CAGR over FY19-21CL. With a sharp 26 percent correction in Zee’s stock today and current valuation at a wide 45% discount to 10-year average PE.

CLSA maintains buy and Zee promoters’ potential deal to sell up to 50 percent of their 42 percent holding to a strategic partner is a key catalyst for re-rating of the stock.

Deutsche Bank: Buy| Target: Rs 575

Deutsche Bank maintains a buy call on Zee Entertainment with a target price of Rs 575. The global investment bank values Zee at 28x Mar '20e earnings, a 15 percent discount to its five-year average trading multiple, and arrive at a target price of Rs 575.

It modeled earnings CAGR of 19 percent over FY19-21. It trades at c.22x one-year-forward P/E multiple, some two standard deviations below its five-year average, which provides downside support.

Key takeaways from ZEE Entertainment conference call as highlighted by Deutsche Bank:

■ Zee's comment on the article: Zee's management stated Nityank is an independent company and does not belong to either Zee or the Essel group. Zee is also not involved in the ongoing SFIO investigation into Nityank.

■ Action against 'The Wire': Essel group has initiated legal action and filed a defamation case against 'The Wire'. It mentioned it will pursue the same aggressively. It also plans on pressing criminal charges against 'The Wire'.

■ On speculation of a sale of pledged shares during the day: Zee mentioned there might have been some invocation by lenders, however, it was not in the know nor does it have details on the sale of pledged shares. Management believes the sale was majorly driven by Futures and Options, as a delivery percentage was c.25% of volumes traded today. Promotor holding: 41.62%, pledged shares last reported were c.60%.

■ Talks with lenders: Zee's corporate team is in continuous dialogue with lenders to reach an amicable solution. Top management did not have any details on if and what quantum of additional margin money was called for.

■ Promoter's stake sale: Zee is in active dialogue with two strategic partners one being Domestic. While its preference would be to have a Foreign strategic partner - mainly for access to international markets, it is in talks with all interested parties. Talks are at an advanced stage, and management are confident of meeting the deadlines of March/April ' 2019. Zee also highlighted the possibility of an early announcement.

■ Impact on stake sale: The management highlighted they have not had discussions with interested parties post the sharp fall in Zee's stock price. They believe today's stock price movement would not have a bearing on the stake sale process as fundamentally nothing has changed in the company.

■ Update on the Group's asset sale: Of the three Infra assets, one deal is done (expect funds to come in very shortly - weeks/months). Solar and Road asset deals too should see full consummation to happen in 3-6 months.

EV of the three infra asset sale is upwards of INR 200bn, Equity value Rs 80,000-90,000 crore. The sale of the Infra assets would remove a significant part of the pledge, only a small amount would be left to take care of.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
First Published on Jan 28, 2019 10:53 am
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