Global brokerage firm Morgan Stanley has upgraded Zee Entertainment Enterprises (Zee) to 'equal-weight' from 'underweight' and has raised its price target to Rs 340 from Rs 248 earlier after the media firm announced that its promoter Essel Group is planning to sell 16.5 percent stake in the company to financial investors.
The group has already sold 15 crore or 15.72 percent shares via block trades to financial investors at Rs 304 per share against the floor price of Rs 277 per share, raising Rs 4,560 crore.
Following the stake sale, the promoter holding would come down to 5 percent, of which 1.1 percent will be encumbered. The process of divesting non-media assets is also currently underway.
According to the Morgan Stanley report, the heightened stock volatility in the past few months could be largely attributed to the sale of pledged shares and uncertainty with respect to the sale of remaining pledged shares.
With the 16.5 percent stake sale announced, a large portion of the promoter debt (Rs 7,000 crore, as stated in the Q2 conference call) could be taken care of, the report noted.
"This significantly removes the risk of pledged shares held by the lenders hurting the stock price. It also provides more clarity on the management structure," it added.
The brokerage said that the stake sale could bring down the promoter debt to anywhere between Rs 1800 crore and Rs 2600 crore (assuming no tax impact).
Moreover, potential proceeds from some of the non-media assets could further pare down the promoter debt and allow management bandwidth to be rechanneled towards business performance, it added.
The brokerage presents a base, bear, and bull case scenario:
base case scenario, the target price for the stock is at Rs 357. The probability weighting for this scenario has been increased to 70 percent from 50 percent. In this case, the brokerage assumes, the company has a) steady growth in traditional business in the next few years, after which share of TV ad spending comes down and b) margins decline to 30 percent over the next few years compared to 32.3 percent in F19 because of investments in OTT business.
bear case scenario, the target price of the stock has been reduced to Rs 173. The brokerage has assigned a probability of 20 percent to this scenario, down from 45 percent earlier as the sale of 16.5 percent stake to financial investors provides more clarity with the current management potentially remaining at the helm. However, competitive dynamics in the OTT video industry are changing and well-funded global players are accelerating investments to gain mindshare. In their bear case, it assumes that EBITDA margins trend lower than 30 percent primarily because of slower growth in the traditional business and higher investments in Zee5.
bull case scenario, the target price has risen to Rs 550 per share. The brokerage has increased the probability of this scenario to 10 percent from 5 percent earlier. The likelihood of this scenario has increased with the management focus turning towards business with the diminishing overhang of pledged shares, said the brokerage.
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