Long-term swings

SMARTSHARE

On December 1, Zee Telefilms closed trading at Rs 149.9. On December 15, it hit an intra-day high of Rs 188 before profit-taking pulled the price back.

The end-session, December 16 mark of Rs 172 meant net gains of 15 per cent, which comfortably exceeds the corresponding Sensex return of 3 per cent. Traders said that there was a massive block trade at Rs 178 with an FII buyer.

Consolidated revenues and profits for the first half of 2004-05 increased by less than 8 per cent. If one annualises the unaudited consolidated HY earnings of Rs 3.45 or so per share, the stock is trading at a PE of about 25.

Overall debt has been reduced by about Rs 400 crore and, instead of a net interest outgo of Rs 69 lakh in FH 2003-04, ZTL had a net interest income of Rs 9.29 crore.

The rich valuations and FII interest are signs that the market doesn't consider these rather tepid results indicative of ZTL's likely performance circa 2005-06. The stock is riding several developments that the market sees as positive. In early December, long-term Times Group loyalist Pradeep Guha was appointed CEO and it's reckoned that his presence could make a big difference.

A recent Trai ruling makes ZTL optimistic that channel bouquet prices will be "unfrozen", providing a boost to subscription revenues. It would then be able to cash in on the Sony-Star bouquet. If DTH gains ground after the recent broadband policy, ZTL stands to gain through its Dish TV services.

There is optimism in Zee circles that it has a strong legal case in the battle for cricket rights. Prasar Bharati generated Rs 100 crore in ad-revenues from 31 days of cricket broadcasting for which the government entity paid BCCI Rs 85 crore. Analysts are suggesting that ZTL could see a boost of 25-35 per cent in net profits if the cricket row is settled in its favour.

Is the market being over-optimistic? Perhaps too much depends on favourable policy rulings and favourable legal judgements. Zee could win the cricket case and still be left in trouble if an Enforcement Directorate (ED) claim against the company is upheld. The ED claims repatriation of $618.84 million (roughly Rs 2,800 crore) for an allegedly unauthorised transfer of shares abroad. But Zee appears confident of a favourable outcome to the ED claims also.

If all this pans out as expected, the current valuations aren't that rich. We could see a big jump in 2005-06 EPS. Meanwhile, it can be safely predicted that the ZTL stock will always exhibit big price swings. It has a huge float and multitudes of individual investors "" more than any other stock placed outside the F&O segment.