Shares of Zee Entertainment Enterprises rebounded after falling 14 percent intraday on October 7 amid increase in promoters’ total pledge to 90 percent along with loan liability of Rs 7,000 crore.
The stock has lost half of its value in the last one year. It was quoting at Rs 238.25, up Rs 1.45, or 0.61 percent, on the BSE at 1224 hours.
After the company’s conference call with media and analysts, Motilal Oswal retained neutral stance (with a target price at Rs 265) on Zee despite its strong performance in the recent past, primarily due to three reasons.
The first is the risk of the promoter group losing management control as the current value of the shareholding stands at a meagre Rs 5,000 crore versus loan against pledged shares at Rs 6,500 crore (post 2.2 percent sale to Oppenheimer). This is important as Zee remains the only consistently profitable company in the broadcasting space spearheaded by the current promoter group.
Second, the value of the other non-media infra assets, too, is worsening, holding Rs 12,000-crore debt (as of January 2019) in the operating companies. This could only reduce the fund-raising possibility but also create further debt woes in the operating companies, the brokerage said.
The inline valuation compared to Sun TV is the third reason. “Peers like Sun TV, too, are valued at P/E of 12x on FY21E, in line with Zee’s valuation of 11x on FY21E, and therefore, overall industry valuation has reduced making Zee less attractive compared to peers,” Motilal Oswal explained.
Here are the highlights of Zee managing director Punit Goenka’s concall:
The total loan against promoter pledge stands at Rs 7,000 crore, which includes the Rs 2,000 crore/Rs 5,000 crore liability towards VTB/ domestic lenders. This has reduced from Rs 13,500 crore in January 2019 and will further reduce by Rs 500 crore after additional 2.2 percent stake sale to Oppenheimer (part of the 11 percent stake sale announced earlier).
The promoter shareholding stands at 22 percent (after accounting for 11 percent stake to Oppenheimer). VTB loan has 10.7 percent indirect encumbrance; therefore, the promoter pledge now stands at a little over 90 percent.
To reduce the pledge, Essel group is engaged in non-media (infra) asset sale. (a) Expect sale of solar assets, which has a binding agreement to be completed by end-December 2019; and (b) the company also has binding agreements for part of road assets’ sale.
Essel group infra asset value provided in January 2019 ie enterprise value of Rs 20,000 crore (out of which Rs 12,000 crore is debt, while the rest Rs 8,000 crore is equity value), may not hold true as markets have worsened.
Decline in share prices will not require any incremental top-up pledge of shares. None of the loans against pledged shares have reached maturity; the period for maturity is from end-Q4FY20 to FY21.
Post the debt resolution, promoters would be happy to continue managing operations of Zee, irrespective of their residual holding left in Zee, according to the new investor agreements.
Zee Entertainment continues to operate on strong fundamentals and is expected to post good results in Q2FY20. The recent corporate tax cut announced by the Indian government is expected to lead to savings of Rs 300 crore.
IDFC Securities has maintained outperform call on Zee Entertainment, with a target price of Rs 416 per share, implying 76 percent potential upside from current levels.
“Market is overlooking fundamentals and penalising company for promoters’ pledge issue. At the current stock price, there isn’t much to lose fundamentally, though we cut our multiple to 20x FY21e versus 25x earlier,” the brokerage said.
It said VTB encumbrance was created in September 2017 and was a structured pledge on company’s shares. The company’s debt repayment schedule will begin from March 2020 and last till 2021-end, and promoters are hopeful of resolving the pledged shares issue in a quarter from now, it added.
Source : http://tiny.cc/3z52dz