The share price of Zee Entertainment closed over 40 percent higher to Rs 261.50 Tuesday after Invesco, the largest shareholder of Zee sought an Extraordinary General Meeting to remove three directors, including Punit Goenka, the current MD & CEO and to appoint six independent directors. Now, what does the future look like for the company? Should investors buy this stock? Experts talk to CNBC-TV18.
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Mehraboon J Irani, Market Expert: Zee being what it was and I believe that with the new management as and when it comes into place, I think the valuation possibly, even if you give it a valuation 15- 17-18 times, and earnings of around Rs 16 which is the consensus earnings for a broadcaster like say a 50 percent growth over the next two years is definitely possible. I think the stock has definitely room for an upside above Rs 300 in the near future, maybe over the next six months.
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Hetal Dalal, President & COO, IiAS: We have been sort of concerned about the way the company has been performing over the past few years. Last year, we recommended shareholders not support the reappointment of Punit Goenka and this year we have recommended not supporting the reappointment of Manish Chokhani and Ashok Kurien. I think we fundamentally believe the board has failed at the discharge of its fiduciary responsibilities. The issue last year was pointed out if you just look at what is there in the annual report, there have been concerns over internal financial control. There have been concerns over related party transactions. Independent directors have resigned, citing concerns over governance practices. All of the same through the board had recommended reappointment of Punit Goenka in the last year. Then at that point in time, they come up with a salary recommendation or remuneration recommendation, which they have now breached this year. So what shareholders approved last year is you are approved but the payout this year is significantly higher this year. This year the board comes back and tells shareholders that sure things are consolidating, employees got zero raise in pay, the logic the board puts out is the COVID crisis, that the company has done a 15 to 50 percent cut in pay, but employees are not given any cut in pay. And therefore, they should be grateful for that. But for Punit Goenka, we are going to give him a 46 percent increase in pay. Mind you, there are still open issues around some of the related party transactions, these are still not being closed and the company's performance may have sort of improved and cleaned out a little bit if you don't take away from the discussion. But by and large, we think a lot more needs to be done to pull the company out of where it is and therefore as we believe fundamentally that there needs to be a change at the board level.
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Dipan Mehta, Director, Elixir Equities: It is a step in the right direction, the present management has significantly diminished the value of Zee, it has been a massive underperformer and maybe it is high time we should have a change of management. Getting new faces, new ideas can take the stock price higher. End of the day, Zee is a very strong brand and it has got a good network and is very strong in terms of its operations. But maybe the right type of management is what is missing over here. So, I am all in favour of a change of management. End of the day, I think that the valuations in Zee are attractive at this point in time, any such corporate action could trigger upward movement in the stock price. So, I think if this move is going to be really serious and we are going to have new faces, new CEO that too someone who is an industry veteran then the stock price can significantly move up from these levels. It has got a lot of potential in terms of OTT platform and content creation and all of that which should do very well as well as advertising revenues, which have been subdued because of COVID-19 - those should also pick up. If there is a change of management, our view would be positive on Zee Entertainment.
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Karan Taurani, senior VP-research analyst, Elara Securities: Prima facie, if you look at the situation and if the new management does come in, we do see a rerating trigger here. The entire overhang was around the corporate governance and some new write-offs that could probably be coming for the company. Looking at the peer comparison in terms of growth and valuations, Zee as a company has not done that bad. The performance metrics have deteriorated in the last two and a half to three years because they would always outperform the industry growth rate but now, they are coming almost at par with the industry growth rate. On the valuation multiple fronts, they are not doing too bad because there are other companies like Sun TV and other broadcasters which are probably trading at a multiple of almost 14-15 times one-year forward P/E and Zee as an entity, despite reporting a growth in-line with the industry average, their multiples are almost 9.5-10 times. So that is the area to look at.
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Sandeep Parekh, founder, Finsec Law Advisors: I would put this in the corporate governance category rather than a hostile takeover. A hostile takeover is when somebody wants to acquire control, here, these are all passive shareholders who are unhappy with the current state. They are not trying to run the company, they just want competent people, professionals to run the company.
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Jaykumar Doshi, Kotak Institutional Equities: We expect the stock to re-rate and the gap between Zee’s market value and intrinsic value to narrow notwithstanding the evolving situation. We expect any one of the following three scenarios: (A) Change in Board followed by a change in management. This scenario assumes the appointment of a new CEO by the new Board. There is also a possibility that the new Board receives interest from strategic/financial investors to acquire a majority stake and management control, (B) Change in Board with continuity of management. This scenario assumes that the new Board continues with the existing management (Punit Goenka as MD & CEO) but seeks better cash generation and tighter control on capital allocation, and (C) Continuity of management with a new set of investors. This case assumes shareholder churn and a new set of investors/shareholders backing Punit Goenka as MD & CEO.
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Jaykumar Doshi, Kotak Institutional Equities (II): We upgrade the stock to BUY (from REDUCE) with a revised FV of Rs250 valuing Zee at 12X core business earnings. Zee stock currently trades at 11X Sep-23E PE and 6.5X EV/EBITDA and 9X/5.25X core business earnings/EPS. Zee’s valuations have been constrained by governance concerns and structural risks. The market has ascribed negative value to ZEE5 due to a lack of confidence in the management. Irrespective of how this plays out, we expect a re-rating.