The nature of investing in stocks, is taking the risk and reaping a bountiful, if things go right. We are recommending a stock, where if things go right, you could reap plenty.
The problem at Zee Entertainment
The shares of Zee Entertainment have fallen from 52-high of Rs 506 to the current levels of Rs 274. The Essel Group promoted by Subash Chandra has to pay back debt owed to lenders, particularly the mutual funds. The promoters had pledged shares of Zee Entertainment to take a loan, including from mutual funds. Since there was a delay in paying back the loan, some of the mutual funds have sold the promoter pledged shares of Zee Entertainment, resulting in a sharp fall in the shares of Zee Entertainment.
Recently, the promoters of sold around 8.7 per cent stake in Zee Entertainment to Invesco Oppenheimer, to raise money to pay debts. They are in the process of selling other assets to payback the debt.
What if the entire group debt is settled?
If the entire debt is settled by the promoters of Essel Group by selling assets and getting out of the debt mess, the stock of Zee Entertainment could soar. In any case, the debt is not as high as in the case of some other groups, which floundered in paying the debt. Clearly, this is a stock that has the potential to generate good risk reward. The valuations have now dipped, following the fall in the share price and the stock is available at a one year forward p/e of just 13 times. Remember, the company will also be one of the beneficiaries of the proposed corporate tax cut and its earnings outlook could be much better.
Having said that, there is also an element of risk, as far as honoring the debt obligations is concerned. But no reward without risk.