Zee Entertainment Rating – Buy: Stock likely to be volatile in the short term

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Hold “Buy” on ZEE as this is an unlocking game and likely to reclaim market share while addressing board issues.

Major institutional shareholders have called for an overhaul of ZEEL’s board of directors. In our opinion, with promoters holding just 3.99% in ZEE and the stock languishing, it was only a matter of time before the board was reshuffled. In this report, we list the key things to watch out for, provide an overview of the proposed director profiles, and recount the series of events that led to this turning point in the ZEEL saga.

A few days ago, a series of similar events took place on Dish TV. ZEEL’s main investors demanded the removal of Punit Goenka, current managing director, from the board of directors and the appointment of six new directors. Hold “Buy” on ZEE as this is an unlocking game and likely to reclaim market share while addressing board issues.

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Key events to watch out for
A few days ago, Yes Bank, the largest shareholder in Dish TV, demanded the removal of the CEO and other independent directors. The key event to watch at ZEE will be the evolution of its EGM. We understand that the Board must hold an EGM within 21 days of receiving the request. Otherwise, the investors themselves can call an EGM within 45 days. And we also understand that a simple majority could be sufficient for the approval of these resolutions at the EGM. We are waiting for more clarity. Meanwhile, all eyes are on keeping Goenka as CEO or transitioning the leadership.

Telling the sequence of events
In July 19, Invesco had signed an agreement with the promoters of ZEE to acquire up to 11% of the company for Rs 4 2240 million at Rs 400 per share. Invesco has been a financial investor in ZEE since 2002 and had a 7.7% stake in the company prior to 2019. Currently, Invesco Developing Markets Fund and other investors have called an EGM to pass an ordinary resolution on the following: ( i) withdrawal of Punit Goenka; and (ii) the appointment of Surendra Singh Sirohi, Naina Krishna Murty, Rohan Dhamija, Aruna Sharma, Srinivasa Rao Addepalli and Gaurav Mehta as independent directors.

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Outlook: unlock the game and gain market share; maintain Buy
As a company, ZEEL has grown stronger in recent years, through improving disclosure standards and addressing some key investor concerns, such as the deconcentration on investment in Sugarbox and the focus on building a solid content library, accelerating OTT operations and aggressively pricing its offerings. Since the promoter’s stake fell below 4%, the board has been subject to strict performance standards by institutional investors, who now hold a major stake.

The stock is expected to remain volatile given the uncertainty surrounding leadership and media disruption. In the longer term, corporate governance standards would improve. We expect a strong rebound in advertising spending across the industry as consumer companies ramp up their marketing given the holiday season ahead. Improved mobility should contribute to the recovery of advertising spending in all sectors as S2FY22 approaches; keep “Buy” with a target price of Rs 343.

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