Brokerages Optimistic As Zee Group Tries To Allay Investor Fears

Brokerages maintained buy ratings on Zee Entertainment Enterprises Ltd. after the management tried to allay investor concerns following a nearly Rs 14,000 crore erosion in the market capitalisation of group companies.

Shares of the Zee group entities tumbled after a report said that promoter Essel Group’s name emerged in a probe linked to large deposits made after demonetisation. The Serious Fraud Investigation Office is probing a company—Nityank Infrapower (formerly Dreamline Manpower)—for deposits of over Rs 3,000 crore made just after Prime Minister Narendra Modi outlawed old Rs 500 and Rs 1,000 notes in November 2016, news website The Wire reported. Its investigation showed that Nityank Infrapower and a group of alleged shell firms had carried out financial transactions that involved a few firms associated with the Essel Group of Subhash Chandra between 2015 and 2017, according to the report.

Here's what the Zee Group said, according to CLSA, Deutsche Bank and Nomura brokerage reports:

Link With Nityank

It’s an independent company and does not belong to either Zee or the Essel group, the management said. Zee Entertainment said it’s not involved in the ongoing SFIO investigation into Nityank, and the company denied any wrongdoing.

Speculation About Pledged Shares

There might have been some invocation by lenders, the management said. It, however, added that the group was not in the know nor does it have details on the sale of pledged shares. The management also said the decline in the group stocks was majorly driven by futures and options trading as delivery percentages were around 25 percent of the volumes traded on Jan. 25.

Talks With Lenders

Zee group's corporate team is in talks with lenders to reach an amicable solution. The management didn’t give details on if and what quantum of additional margin money was called for.

Promoters’ Stake Sale

Zee Entertainment Enterprises had earlier said that its promoters, Essel Group, will sell half their stake. The group is in active dialogue with two strategic partners, one being domestic, the brokerages quoted the management as saying. While its preference would be to have a foreign strategic partner, mainly for access to international markets, it is in talks with all interested parties, it said.

Talks are at an advanced stage, and management is confident of meeting the deadlines of April 2019. It said the current stock price is not likely to impact deal valuation of Zee Entertainment.

Group’s Asset Sale

Of the three infrastructure assets, one deal is through and funds are expected shortly, the management said. Solar and road asset deals too should see consummation in three to six months, according to the brokerages.

The enterprise value of the three assets is upwards of Rs 20,000 crore with an equity value of Rs 8,000-9,000 crore. The sale will release a significant part of the pledged shares, the group said.

Here’s what the brokerages said about the flagship Zee Entertainment:

Nomura

• Maintained ‘Buy’ with a target price of Rs 671, an upside potential of 111 percent.
• Sees Zee Entertainment on track to deliver 17 percent and 13 percent annualised growth in advertising and subscription revenue, respectively from FY18-21.

Deutsche Bank Research

• Maintained ‘Buy’ with a target of Rs 575, implying a return potential of 81 percent.
• Buy rating premised on multiple fundamental reasons; expect annualised earnings growth at 19 percent over FY19-21.

CLSA

• Maintained ‘Buy’ with target price of Rs 670, suggesting an upside of 110 percent.
• Business operations remain on a strong growth trajectory.
• Zee’s valuations compelling on sharp fall; see 19 percent earnings CAGR over FY19-21.

About 69 percent of analysts tracking the stock under Bloomberg coverage have a ‘Buy’ rating on the stock with a average return potential of around 70 percent.