Management control key trigger for Zee Entertainment; stock gains over 12%

The stock of Zee Entertainment gained over 12 per cent on Thursday to touch the Rs 345-level. This followed the announcement of a stake sale to the tune of 16.5 per cent by its promoters on Wednesday. After the transaction, the promoter holding will reduce to 5 per cent. 

While 1 per cent of the promoters’ holding will still be pledged, analysts believe issues related to promoter debt will come to an end. The risk for investors was the worry that part of the pledged shares could be sold in the market, thus depressing share prices.

If the sale price gets close to the Rs 300-level, it will fetch about Rs 4,500 crore, which is over 64 per cent of the promoter debt of Rs 7,000 crore. Analysts believe the promoters are unlikely to sell any more of the 5 per cent of their shares, and may consider the sale of non-media assets, including solar infrastructure, for repaying the remaining part of the loan (around Rs 2,200 crore). 

The two key issues of management control and operational performance will be the main triggers for the stock hereon. Analysts at CLSA say the low promoter holding of 5 per cent (down from 42 per cent in December 2018) increases the risk of a hostile takeover. 

If the change in management is led by long-term investors, there could be some stability. However, if majority is in control of hedge funds, Edelweiss Research believes it could lead to some volatility. 

Another possibility is of a gradual increase of promoter control once the share pledge is completely taken care of. 

Zee’s financials, especially cash flows, which could come under scrutiny once a new management takes control, is another cause for worry. On the operational front, advertising growth and the pace of subscription revenues in the current quarter are key. 

While Zee reported better-than-industry advertising growth and healthy subscription uptick in Q2, aggressive investment in movies and regional content, and the deterioration in the balance sheet, may weigh on the stock. The ability to improve revenue share from digital investments (Zee5) is also critical, given the competitive nature and investments made in that medium.

Most brokerages have upgraded the stock on news of the stake sale and attractive valuations. The stock is trading at close to 15x its FY21 estimated earnings, which is much lower than its peak valuation of 25-30x. 

Given the target price of Rs 400, there is still an 18 per cent upside from its current levels. Investors, however, should refrain from taking exposure, considering uncertainties regarding management control, balance sheet stress, and business growth on account of the over-the-top digital threat. 

The stake sale will come as a relief to MFs, who had lent money to promoter entities. Sources said Aditya Birla MF, HDFC MF, and ICICI Prudential MF could get Rs 250-850 crore from promoters. Investors who had invested in schemes that had exposure to Zee entities will see their asset value improve.