NCLT's nod to ZEE-Sony India merger will trigger stock re-rating: Analysts

Shares of Zee Entertainment Enterprises soared as much as 20 per cent on the BSE in Thursday's intra-day trade after the National Company Law Tribunal approved the company's merger with Sony India

The National Company Law Tribunal's (NCLT's) approval to Zee Entertainment-Sony India's merger will potentially trigger a re-rating in the Punit Goenka-led company's stock, believe analysts. 

Besides, earnings growth visibility post April-June quarter (Q1FY24) results aid upside in the stock from current levels, they said.

"The NCLT ruling brings a substantial sense of comfort to Zee Entertainment Enterprises (ZEEL), considering the merger's uncertain status over the past couple of years. This juncture is likely to usher in a shift in perception regarding Zee, with attention now directed towards its prospective future growth and the potential utilisation of funds for digital investments and more. This development appears highly favorable, and our stance on the company remains optimistic and supportive," said Jinesh Joshi, research analyst at Prabhudas Lilladher.

On Thursday, August 10, the NCLT approved the merger of Zee Entertainment Enterprises with Culver Max Entertainment (formerly Sony Pictures Networks India). The tribunal’s Mumbai bench also dismissed all objections against the proposed merger, paving way for a potential $10-billion media giant, with the combined entity owning over 70 TV channels, two video streaming services (Zee5 and SonyLiv), and two film studios (Zee Studios and Sony Pictures Films India). It would be the country’s largest TV network company with a 26 per cent market share, as per industry estimates. The combined media and entertainment entity's standalone revenues could be $2 billion.

NCLT's approval could be the final nod needed for the merger which was announced in September 2021. The deal has already received approvals from the stock exchanges, Securities and Exchange Board of India (Sebi), and the Competition Commission of India (CCI).

"The NCLT approving the merger of Zee Ent. (Zee) and Culver Max Entertainment (SPNI) is a major shot in the arm for Zee, also dismissing all related objections. We await the detailed judgment for ascertaining details. With Punit Goenka's case with Sebi still ongoing, the issue of who will be at the helm of the merged entity persists. Nonetheless, we believe that promoters’ proceedings are unlikely to derail the merger. We reinstate our previous targeted EV/ EBITDA (broadcasting) of 9.5x (from 8x), with merger completion now in sight and improving business outlook; we also remove our merger-uncertainty discount of 10 per cent to arrive at a revised target price of Rs 335," said a note by Emkay Global. 

At the bourses, shares of Zee Entertainment Enterprises Ltd (ZEEL) soared as much as 20 per cent on the BSE in Thursday's intra-day trade to Rs 290.5 -- also its 52-week high. The shares settled 18 per cent higher at Rs 285.5 apiece as against 0.47-per cent dip in the benchmark S&P BSE Sensex at 65,688 levels.

That said, analysts underscore decisions regarding the appointments of the top management of the merged entity, strategy around investments in sports and a possible risk of losses due to the recent deal with Star on linear broadcasting rights for ICC events, aggressive investments in Zee5 (digital) and strategy ahead, and sluggish advertising income as key monitorables.

"The valuation band for a traditional TV business is 10-12X P/E, whereas a future-proof business with a good steaming platform can command 25X+ P/E. At present, Sony-Zee’s positioning in OTT is weak, and we are not sure about the investment strategy and execution of the merged company. Our target price of Rs 275 (for Zee) values the merged entity at 17X Sep-25E P/E. Stock performance/re-rating from hereon would be a function of execution and external factors," said Jaykumar Doshi of Kotak Institutional Equities in a co-authored note with Umang Mehta and Praneeth Reddy.

The brokerage gas downgraded the stock to 'Reduce' from 'Add'.

Q1FY24 result analysis

On the financial front, analysts believe ZEEL's earnings may remain under pressure in the near-term due to soft advertising revenue and higher investment across broadcast and digital platforms. Further operational losses from Zee5 would be a drag on margins. However, Ad recovery seeing some green shoots from late June and July onwards, benefits of new tariff order (NTO) 3.0 on revenues playing out, and improved reach across provides comfort from a medium-term perspective.

"Though we cut our FY24E EPS estimates by 19 per cent amid weak performance in Q1-FY24, our FY25 earnings per share (EPS) estimate is broadly intact as radual recovery in ad-spends, accrual of full benefits of NTO 3.0,a nd loss moderation in ZEE5 is likely to aid earnings," said Prabhudas Lilladher.

We expect sales CAGR of 8 per cent over next two years with Ebitda margin of 12.4 per cent/18.1 per cent in FY24/FY25, and retain 'BUY' with a revised target of Rs 276 as we increase our target multiple to 22x (earlier 19x).

The broadcaster posted a consolidated net loss of Rs 53.42 crore for the first quarter ended June 30, against a profit of Rs 107 crore a year earlier. Total income rose 6.4 per cent to Rs 1,998 crore, while expenses jumped nearly 17 per cent, driven by higher operating, employee as well as marketing costs, the company said in a filing.

Although a soft start to the quarter and IPL capped ad-revenues for ZEEL in Q1-FY24, the management has indicated that a pick-up in ad-spend towards quarter end. Improved advertising and promotion (A&P) spend by FMCG companies, festive season, and ZEEL's improved viewership share should support the recovery.

An 18 per cent YoY growth in subscription revenues, driven largely by price hike, bodes well for both growth visibility as well as margins, analysts said. 

Against this, JM Financial has conservatively maintained TV subscription revenue at Q1 levels through FY24 as they anticipate some subscription churn.

"But even that is good enough for a double digit growth in subscription revenue. Absence of International Leagure T20 (ILT20) and bunching up of revenues from Telcos resulted in sequential decline in Zee5. However, we see that more as an aberration and expect growth to resume. Management indicated no let up in content investment. Besides, they are looking to plough back part of improved growth in SG&A to drive growth. We like ZEEL’s growth over margin ploy," they said in a report.