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Here's what may trigger re-rating of ZEEL stk post 94% YoY dip in Q1 profit

ZEEL's total income in the period tumbled 36.6 per cent to Rs 1,338.41 crore
Shares of Zee Entertainment Enterprises gained 15 per cent to Rs 200 per share on the BSE on Wednesday despite the broadcaster's net profit plunging 94 per cent in the June quarter of FY21. The company logged a consolidated net profit of Rs 29.28 crore for the quarter ended June, down 94.5 per cent, as against a net profit of Rs 529.76 in the same quarter last year.

ZEEL's total income in the period tumbled 36.6 per cent to Rs 1,338.41 crore, from Rs 2,112.03 crore reported a year ago. Meanwhile, its advertisement revenues dropped 64.5 per cent to Rs 421.06 crore, from Rs 1,186.71 crore posted last year.

"The impact on the results for the current quarter is primarily due to restrictions caused by the Covid-19 on the business activities... The Company has assessed the impact of this pandemic and the same has been incorporated in the plans going forward. In accordance with Government directives, restrictions have started to relax, enabling content production to commence. This is expected to result in increase in business activity for the Company," it said in a statement.

The stock settled 13.2 per cent higher at Rs 197 per share, as against 0.22 per cent rise in the benchmark S&P BSE Sensex. A combined 149.7 million shares changed hands on the counter on the BSE and NSE in today's session. The stock had hit an intra-day low of Rs 169.35, thereby clocking an 18 per cent gain from the day's low.

"ZEE’s consolidated revenues declined 35 per cent YoY to Rs 1,310 crore, which is 16 per cent above our expectations, led by strong beat in advertisement revenues. Ad revenues plunged 65 per cent YoY to Rs 420 crore. Subscriptions grew 5 per cent YoY to Rs 740 crore, majorly driven by OTT platform – ZEE5. Revenues from sales/services grew 30 per cent YoY to Rs 150 crore on movie sale rights to the OTT platform," analysts at Motilal Oswal Financial Services noted in a post-result report.

The brokerage, however, remains cautious on ad growth, which it believes is a lagging indicator to economic growth and remains challenging in the current environement. Further risk of margin pressure remains from over Rs 150 crore quarter loss in OTT investments. "However, since 4QFY20, management has highlighted that it is highly committed to bring in increased governance/higher transparency toward investment in financial assets, working capital and high governance (including a robust and independent board)... We continue to remain watchful of the evolving business situation and governance measures, including the admission of new board members over the next few months and increase in financial disclosures for investors," it noted. The broekrage has 'Neutral'call on the stock with a target price of Rs 190.

Meanwhile, analysts at Kotak Institutional Equities have 'Reduce' rating on the stock with a fair value price of Rs 185. The brokerage believes re-rating of the stock can be triggered only when the company appoints representative of key institutional shareholders to the Board, when it cancels Sugarbox project in view of weak macro and Jio’s plan to launch 5G sooner than later, brings transparency around movie buying, and offers a firm FCF guidance. Separately, a key event to watch out for is shareholder approval for re-appointment of Punit Goenka as MD & CEO at the AGM next month, it said.

"We believe that ZEEL is taking the correct steps, by trying to improve its corporate governance policies. Improved disclosures, potential strengthening of the company’s board and the reporting of ZEE5 financials paint a positive picture. However, given the underperformance in the recent past, we await consistent delivery and transparency...  Given the hyper-competitive nature of the OTT space, we believe that it would continue to see investments for sustainable growth, especially with the presence of numerous global players" said Emkay Global Financial Services in a result review report.

The brokerage, too, believes multiple re-rating of the stock will happen along with the changes in Q1 and consistency in balance sheet improvement, with FCF generation providing further re-rating in the ensuing quarters. "Underperformance in the past and balance sheet deterioration should fade away over time with consistent delivery," it said.

Significant improvement in cash generation and balance sheet, quicker-than-estimated ad revenue recovery, sustained double-digit subscription revenue growth; and monetization of ZEE5, however, remains key risks, it added with a 'Hold' rating on the stock with a target price of Rs 190.

Global brokerage JPMorgan, too, has upgraded the stock from 'Underweight' to 'Neutral', and has raised target price from Rs 140 to Rs 190.

"Incremental disclosures on balance sheet/ZEE5 coupled with management commitment towards improving FCF and further strengthening of the Board are steps in the right direction, implying downside protection from the current depressed levels. Further we believe the stock can re-rate significantly (trading at 10x F22E P/E vs past 1yr median of 15x), if management delivers on the stated commitments," it said in a report dated August 19.


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