Event update: Zee Entertainment (Outperformer) - Time to look at business fundamentals again!

Event:

Zee Entertainment Enterprises (Z) has announced that the promoter group is planning to sell ~16.5% stake in Z, to financial investors, to raise funds to repay lenders with whom the shares have been pledged. Out of the above, 2.3% will be sold to OFI Global China Fund (subsidiary of Oppenheimer Funds Inc). Post this sale, Essel Group (promoters) will own ~5% in Z (encumbered holdings will fall to a meagre ~1.1%).

Quick Take:

• Issues around pledged shares addressed: At the floor price of Rs277, Essel Group would raise ~Rs44bn from this sale, which will be utilised to repay lenders with whom Z’s shares were encumbered. This would address all concerns pertaining to pledged shares getting sold in the open market. As per an earlier investor conference call, the total LAS of the promoter group stood at Rs70bn out of which Rs~44bn (at the floor price) would be repaid by this sale and rest of the LAS is not pertaining to Z (barring the residual 1.1% pledge) but to other group companies.
• Z promoters to continue to run the company: Recently, Mr. Punit Goenka was reappointed as CEO & MD for the next five years and in the recent past they have not been keen to give up control and hence the share sale was done to financial investors and not to strategic investors. We believe Mr. Goenka is the best person for this role and with their 5% stake they would continue to run Z on a day to day basis.
• Board composition to change? We believe that there is a high likelihood of some changes in the Board composition after the promoters’ stake falls down to 5% and to make the Board more inclusive. If this were to happen, it would give a good signal to the markets as an expanded Board would imply better governance and protection of minority shareholder interests.

Outlook & Valuation:

Z’s market-share of ~19% in Broadcast Entertainment TV, lowest cost content sourcing capabilities, and ability to run a tight ship while expanding in the digital space are key moats which the market was ignoring due to pledged shares issue. With this issue resolving, we believe that the market should start re-pricing the company for its strong fundamentals. Maintain Outperformer (TP Rs416 / 17.5x FY21E EPS). Further upside could possibly come from addressing balance sheet issues such as higher group receivables, investments in exotic mutual funds over the next 3-4 quarters.