The stock of India’s largest listed media company lost 26.4 per cent on Friday and, since its highs over the past year, has shed about half its market capitalisation.
The stock fell on worries that promoter pledges had been invoked by lenders and a report on The Wire, which had alleged links between Essel Group and a company currently being investigated by the Serious Fraud Investigation Office (SFIO) for deposits of over Rs 3,000 crore made just after demonetisation. The company, Nityank Infrapower, was also involved in a large business deal between Venugopal Dhoot’s Videocon and Essel Group in November 2016.
The company denied on Sunday it had any such links and said Nityank Infrapower was an “independent company” and it “did not belong to the group”.
Deepti Chaturvedi and Akshat Agarwal of CLSA said the stock at 15.6 times its FY20 net profit or earnings estimates was at a 45 per cent discount to the company’s 10-year average price-to-earnings estimates of 28 times. Zee’s business operations remain on a strong growth trajectory with 19 per cent year-on-year increase in revenues for the first nine months of FY19, they added.
The analysts forecast net profit will grow by 19 per cent annually over FY19-21.
The key near-term trigger for the stock would be a deal that will see a strategic partner being brought into ZEEL. The company’s promoters, Subhas Chandra and family, are seeking to sell up to 50 per cent of their 42 per cent stake to a strategic partner. The management indicated that access to US and European markets remained an important criterion for the deal.
The company says the plans to complete the stake sale process in or before April this year is on track.
Mihir Shah of Deutsche Bank says the induction of a strategic partner will be a positive for minority shareholders. While the management has indicated that of the three infra assets one deal is done and the other two will be done over the next six months, after which a significant part of the pledge could be removed, any further selling pressure could aggravate the situation for the promoters.
In such a situation they have will have to pledge even more of their stake in the stock. About 59 per cent of the promoters’ 41.62 per cent stake in Zee Entertainment is pledged. While the management has indicated that valuations for inducting the strategic partner will not change, given the business fundamentals, analysts say an early deal cannot be ruled out.