Event update: Zee Entertainment (Outperformer) - Pledge at 90%+ of promoter holding; promoters confident of resolving the issue in a quarter…

Zee Entertainment Enterprises (Z) hosted a conference call to clarify the recent announcement of VTB Capital’s encumbrance creation on Z shares (~10.7% of equity) and give an update on the status of various promoter-level deleveraging initiatives.

Key Takeaways:

• VTB encumbrance was created in September 2017 and was a structured pledge on Z’s shares. The same has been disclosed now as new SEBI regulations (issued on 7 Aug’ 19) mandate all direct/indirect encumbrances to be disclosed. VTB’s loan matures in 1 year from now.
• Post invocations and Oppenheimer stake sale (8.7% sold as on date), Z’s promoter shareholding stands at 22% as of October 4, 2019. Out of this just over 90% is pledged. Another 2.3% stake sale to Oppenheimer expected to conclude in Q3FY20E.
• Loan against shares (LAS) currently stands at ~Rs70bn, down from ~Rs135bn in January 2019. ~Rs20bn is held by VTB and the balance by domestic-based lenders.
• Mr. Punit Goenka, CEO & MD, is committed and hopeful of managing Z’s day to day affairs regardless of the residual promoter holding in the company, after the pledged shares issued is sorted out.
• Z remains open to partnering with a strategic partner.
• Debt repayment schedule of the promoter begins from March 2020 and lasts till the end of 2021. Z’s promoters are hopeful of resolving the pledged shares issue in a quarter from now through monetisation of both Media and non-Media assets.

Outlook & Valuation:

We have kept the faith in the management for a long time now and continue to believe in the business fundamentals and intrinsic value of Z’s assets. However, currently the market is overlooking fundamentals and penalising Z for the promoters’ pledge issue. Mr. Punit's commitment to resolving this issue and his wish to continue as the MD, even if left with miniscule stake, bodes well for the long-term future of Z. We believe that at the current stock price, there isn't much to lose fundamentally and if some strategic investor were to come in, it could lead to significant upside as strong business fundaments would start getting reflected again. We update our financials to account for recent tax cuts, retain our OP rating but cut our multiple to 20x FY21E (vs 25x earlier).