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Highly-pledged Zee jumps 55% in 30 days; analysts see more upside

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Nomura analysts covering Sony and Comcast suggest that a Zee deal could be a strategic fit for both of them.
NEW DELHI: Shares of Zee Entertainment have rebounded over 55 per cent from their 52-week low of Rs 288 hit exactly a month ago, as Dalal Street believes the highly-leveraged company may manage to bring in a strategic partner by the September deadline, in which case it will be able to deter lenders from selling pledged shares.

Analysts see another 20-25 per cent potential upside on the counter.

“We believe chances of Zee’s stake getting sold are high, and this would allay concerns on the pledging front,” say analysts at Nomura.

Zee has gone on record, saying it has signed non-disclosure agreements with foreign media companies for a stake sale in Zee. US players Sony and Comcast are among the firms said to be vying for the stake

Nomura analysts covering Sony and Comcast suggest that a Zee deal could be a strategic fit for both of them. The foreign brokerage noted that Zee has consistently delivered strong profitable growth over last several years, which would mean Sony could leapfrog in terms of profitable growth in India.

Comcast, they analysts said, is struggling for growth in the residential video business and the Zee deal could open up a long-term growth opportunity.

Zee shares came under heavy pressure last month after reports linking the Essel Group to a firm under investigators’ radar for large cash transactions post the 2016 cash ban.

While the company denied any linkage with the firm under investigation for the large cash deposits, the news triggered a selling spree, sending Zee stocks tumbling some 27 per cent on January 25.

The strong selling made a few Zee lenders sell pledged shares in the open market. Zee later secured time till September to strike a deal.

Nomura India said at 20 times FY21 earnings, the Zee stock looks attractive, given its estimate of 18 per cent EPS CAGR over FY19-21F. It has a target of Rs 553 on the stock.

JM Financial in a note said the strategic sale price could be ahead of Zee’s intrinsic value, which it valued at Rs 450 as per its DCF.

But it counted the overhang from a potential sale of pledged shares by lenders, who are not a signatory to the consent agreement and the probability of a domestic telecom major acquiring the company, among the key downside risks. This brokerage has a target price of Rs 550 on the stock.

Zee Chairman Subhash Chandra in an open letter said it was his ‘obsession’ of not walking away from any situation that made him bleed up to Rs 5,000 crore.

“Despite the loss-making projects, we continue to pay interest and principle by borrowing funds against shareholdings in listed companies,” he said.

By the first week of February, 27.82 crore promoter shares were on pledge, accounting for 25.8 per cent of the outstanding Zee shares and 66.1 per cent of total promoter holding.

JM Financial noted that promoters have pledged additional 3.52 crore shares since January 18. In total, 97 per cent of domestic-owned shares have been pledged by the promoters, the brokerage said on February 5.

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