Stock corner: Maintain ‘buy’ on Zee Entertainment with target price of Rs 443

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Published: November 22, 2019 1:31:28 AM

Despite multiple setbacks for the group over the past 12 months (group-level issues, new regulatory framework, ad slowdown), ZEE sustained a strong business performance.

Previously, 96% of the promoters’ stake was pledged in ZEE and the group had ~INR70bn worth of shares pledged. Previously, 96% of the promoters’ stake was pledged in ZEE and the group had ~INR70bn worth of shares pledged.

As per media reports, promoters of ZEE Entertainment Enterprises (ZEE) have sold ~16.5% of their stake in a block deal. The proceeds would go towards paying down the pledged shares and pledging in ZEE to come down sharply from the current 96% to ~20%. The promoters will now hold ~5% of the company and Mr. Punit Goenka is likely to continue to serve as the MD & CEO of the company. We expect ZEE to re-rate given that a key overhang is subsided, undivided focus on business from promoter and possible buyback over longer term. Hence, we are revising the target PE to 20x (18x earlier), which yields a revised TP of INR443 (INR399 earlier). Maintain ‘BUY’.

Following this stake sale, the promoters would get ~INR45.6bn (at INR304 /share).

Previously, 96% of the promoters’ stake was pledged in ZEE and the group had ~INR70bn worth of shares pledged. In our view, the stake sale would remove the overhang related to promoter pledge — down from 96% to 20% (1.1% of company stake). Besides, with marquee investors coming in, corporate governance will get a leg-up and create positive business vibe.

Despite multiple setbacks for the group over the past 12 months (group-level issues, new regulatory framework, ad slowdown), ZEE sustained a strong business performance. It managed to retain market shares in the Hindi and Telugu markets, fended off leadership threats in Bangla and Marathi, and captured the top spot in the Kannada market. Moreover, in its recent announcement, TRAI clarified that no major changes will be made further to the new tariff regime (NTO), which is a source of great relief to the broadcasting industry and is positive for ZEE. With the stake sale behind, top management can have undivided focus on taking the business forward.

Advertising growth in FY21 is likely to pick up owing to anticipated GDP revival, and benefits from corporate tax cut. We are raising the target PE to 20x (18x earlier), which yields a revised TP of INR443 (INR399 earlier). Key monitorable will be on the balance pledging and sale of other group assets. The stock is trading at ~15x/13.5x FY20/21E EPS. Maintain ‘BUY/SO’.

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