The tendency in the market today is that even if there is a slight adverse news, stocks are relentlessly punished. The Zee Entertainment stock is no exception, as the shares have fallen from levels of Rs 500 to Rs 250.
The problem at the Essel group
Zee Entertainment is a part of the The Essel group promoted by Subhash Chandra. The group ran into problems, due to unrelated diversifications and has amassed debt. It has loans that are payable to mutual funds in particular.
The promoters of Zee Entertainment had pledged their shares to mutual funds in order to pay loans. Since they could not pay-off the loans on the due date, some mutual funds sold the pledged shares, triggering a heavy sell-off in the stock.
Now, there are a few more mutual funds that have given the promoters until March 31, 2020 to sell assets and pay-off their debts.
The promoters of Essel Group are looking at selling off various assets to back lenders. They recently sold some power assets to the Adani Group.
However, it is not going to be easy to sell off infrastructure assets, given the current economic scenario.
Should you buy the Zee Entertainment shares?
If you look at Zee Entertainment in isolation, the business is solid. Even for the quarter ending June 30, 2019, the company reported a robust performance. It has a dominant position in its areas and has grown its business over the years.
Now, there are one or two scenarios that could work out. If the company finds a strategic buyer for the sale of the promoter holding in Zee Entertainment that would be a big boost for the stock. Also, if the promoters by March 31, 2019 are able to pay-off a significant portion of their debt, the stock could easily gain 30 to 40 per cent from these levels.
As we mentioned the beauty of Zee Entertainment lies in the intrinsic value of the business. Even if the promoters manage to substantially sell-off their holding, the question remains on how the business would be run in the future.
The stock of Zee Entertainment is trading at near 12 times one year forward earnings. We have not seen such poor multiples for the stock in many years. In fact, it may have never happened in the past.
An element of risk
There is always an element of risk with situations like this. However, if the promoters do manage to come out of the debt mess, the stock should soar. The good thing as we mentioned earlier is that the company has solid intrinsic value and in that context Zee Entertainment looks good. What is also important is even as the promoters look to sell assets, mutual funds may need to be a little patient and not sell the promoters pledged holdings. This would only add to pressure on the stock. All in all, it looks a very tricky situation at the moment. Investors who are willing to take the risk, could reap a bountiful if things go their way.