Brokerages see more upside for ZEEL stock amid easing investor concerns

Though the stock has gained 35% over the past month, given that target prices of brokerages range between Rs 410-Rs 450 a share, there is still an upside of over 37% likely from the current levels

The stock of the country's largest listed broadcaster, Zee Entertainment Enterprises (ZEEL), was up nearly 17 per cent in trade on Thursday. The gains came after Invesco, its single largest shareholder, decided not to press for an extraordinary general meeting (EGM). The global investment management firm had in September last year asked for an EGM to remove three directors, including MD Punit Goenka and reconstitute the board by appointing six independent directors.

Invesco group (Invesco Developing Markets Fund and OFI Global China Fund LLC), which owns 17.88 per cent in ZEEL, highlighted that the reconstituted board of the merged entity (ZEEL and Sony India) will achieve the objective of strengthening the board oversight. The group reiterated that the deal in its current form has great potential for Zee shareholders. While this is positive, the firm indicated that it retains the right to requisition for a fresh EGM if the merger with Sony India is not completed in the current form.  

Abneesh Roy of Edelweiss Research believes that Invesco's support for the Zee-Sony merger as currently proposed is a significant positive for ZEEL. The brokerage had earlier pointed out that there was little risk for the Zee-Sony merger as the deal addressed key points of Invesco in terms of an independent board, strategic partner among others.

With most brokerages expecting the deal to go through, investors will focus on the medium- to long-term benefits of the combined entity and the near headwinds given the slowdown in advertising revenues. With a combined revenue of Rs 13,300 crore (FY21) and a network market share of 27 per cent, the entity would be a dominant player in the broadcasting space. It will also be able to capitalise on the growth in the advertising segment slated to rise by 11 per cent annually over 2020-23.

The larger entity will also be able to spend in the digital space and become a relevant player. Say Aliasgar Shakir and Harsh Gokalgandhi of Motilal Oswal Research, "With a warchest of Rs 11,300 crore (capital infusion from Sony post-merger) and a steady annual operating profit generation capability of Rs 5,000 crore, the combined entity could certainly leverage the large-scale opportunity in the digital entertainment space."

The movement in advertising revenues and growth will be a key factor in the near term. Revenues from this segment were up 16 per cent sequentially in the December quarter and 25 per cent y-o-y for nine months of FY22. Growth trends could slow down if there are lower spends by consumer companies, who dominate the advertising revenue pie.

Though the stock has gained 35 per cent over the past month, given that target prices of brokerages range between Rs 410-Rs 450 a share, there is still an upside of over 37 per cent likely from the current levels.