Zee Entertainment Enterprises’ stock rallied almost 25 percent in intraday trade on September 14, a day after its two biggest investors sought the ouster of three directors, including CEO Punit Goenka, in a bid to recast the board, a move hailed by analysts.
Invesco Developing Markets Fund and OFI Global China Fund LLC’s move to call an extraordinary general meeting seeking the removal of Goenka was a positive development for corporate governance, experts said.
Fundamentally, the stock looks stronger as corporate governance issues are now being put behind decisively, fund managers said. The stock offers deep value as valuations took a severe beating over the past couple of years because of a combination of factors including governance concerns and loss of market-share, they said.
Zee’s long-standing market position and brand equity places it in a unique position to capture the high growth potential in OTT and the transition to digital, said a fund manager who didn't wish to be identified. The capital-guzzling nature of the digital business makes the transition challenging, but also offers a huge opportunity, something Invesco may be counting on, the fund manager said.
The real returns, however, would be driven by the successful transitioning of the business, recouping the market share and capital efficiency.
"Corporate governance was the biggest roadblock for Zee where the recent development of Extra Ordinary General Meeting for the removal of directors and its promoters is changing sentiments for the group," said Santosh Meena, Head of Research at Swastika Investmart.
The issue had been a big overhang and now they expect a re-rating in the stock. Re-rating means that investors are willing to pay a higher price for shares, anticipating higher earnings.
The stock, which lost 19 percent in the last three months, rallied 24.3 percent to hit an intraday high of Rs 232.15 on the BSE. It was trading at Rs 226.75, up 21.39 percent on the BSE at 10.54 am. Cumulatively, the traded volumes on the BSE and NSE stood at over 8.3 crore equity shares.
Also read: Zee Entertainment boardroom coup: What’s in store for investors?
A big brand and network along with strong operations, Zee’s only concern was its management, Meena said.
"The stock is trading at very attractive valuations and it is one of the strongest and FIIs favourite stocks in the media space. If there will any change in promoter then we may see a big rerating in the counter as we have seen earlier in CG Power," he said.
Likhita Chepa, Senior Research Analyst at CapitalVia Global Research, said appointing new directors would improve corporate governance, provided the new directors have better understanding of the business.
Invesco Developing Markets Fund, formerly Invesco Oppenheimer Developing Markets Fund, and OFI Global China Fund LLC are the largest shareholders of Zee Entertainment Enterprises, together owning 17.88 percent stake in the company.
They have demanded the removal of Goenka, Manish Chokhani and Ashok Kurien as directors of the firm, the company said in a regulatory filing on September 13. Goenka is the son of the company promoter Subhash Chandra.
The company said Chokhani and Kurien had resigned with immediate effect.
The two funds have also sought to appoint six new independent directors, the filing added. The proposed directors are Surendra Singh Sirohi, Naina Krishna Murthy, Rohan Dhamija, Aruna Sharma, Srinivasa Rao Addepalli, and Gaurav Mehta.
Also read: Does Zee need CEO Punit Goenka’s removal, new management?
For Zee, problems started when the Essel Group faced debt pressure. Promoter Subhash Chandra through Essel Infraprojects took loans for which Zee Entertainment shares were pledged which were sold to institutional investors to clear the debt burden in 2019.
A couple of years back the Essel group had a company called Essel infraprojects, which was a personal venture of Subhash Chandra's Essel group, said Atish Matlawala, Senior Analyst at SSJ Finance & Securities. To repay the debt taken by the infra company, promoters pledged Zee Entertainment shares that were sold by the lenders, reducing the promoter holding in Zee Entertainment from 35.79 percent to 3.99 percent, he said.
“Also Zee Entertainment had intercorporate deposits with Dish TV for which it had to take a write-off of around Rs 500 crore," said Matlawala, Senior Analyst at SSJ Finance & Securities.
Shareholders believe the promoters leveraged their holding in Zee Entertainment to fund personal ventures, he said.
"Importantly, promoter holding in Zee Entertainment is minuscule at just 3.99 percent which made promoter vulnerable to this kind of scenario. Also, Zee has not been able to develop new content," he said.
Karan Taurani of Elara Capital said a new CEO would pave way for a new strategy (transition towards short video, investments into large-scale web series, innovation in content offerings), especially on digital, which would help it compete with global over the top (OTT) giants.
"Zee has also seen a sharp de-rating since 1) the announcement of new strategic partner and 2) writeoffs (inventory, receivables, corporate guarantees) and is currently trading at inexpensive valuations of 10x one year forward," Taurani said.
They were waiting for updates but expected a positive bias and re-rating for the company, he said.
What should investors do?
Experts say the stock can rise to Rs 300-350. They advised aggressive investors to bet on the stock now but others should wait for a sizeable correction to pick the stock.
"Zee Ltd has already rallied today but I believe we may see a big upside from here if there will be any change in management, therefore, aggressive investors can bet on this stock but I would suggest avoiding other group companies as there are concerns of poor performance," Swastika Investmart’s Meena said.
Technically, "it is witnessing a breakout of falling channel formation and manages to move above its all-important moving averages where Rs 235/260 are important hurdles; above this, we can expect a move towards Rs 300/350 levels. On the downside, 200-DMA of Rs 205 will be an important support level," he added.
Zee formed a head and shoulder pattern on daily charts but failed to give a breakdown below its neckline, Likhita Chepa said.
"Technically it is indicating a pullback in the near term. However, investors wanting to buy the stock should wait for significant correction before investing," she said.
After touching an all-time high of Rs 619 in February 2018, Zee shares corrected over the next two years to Rs 114 in March 2020.
"In this rally, we have seen the Lower Top and Lower Bottom pattern. From lows we have seen stocks trying to pull back but could not give much of that as compared to other stocks and indexes," said Viral Chheda, Analyst at SSJ Finance & Securities.
The stock, which made a high of Rs 261 in February 2021, had corrected again and was moving in Rs 165-235 range. "We can say it is consolidating here as we can see more volume generating as compared to the previous rally. It has some resistance around Rs 261 and above that, it can move further upside till Rs 300-350 odd level in the next 10-12 months. Support is around Rs 165 and below that, it can slide till Rs 114."Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.