Zee Entertainment Leads Rally In Essel Group Stocks As Brokerages Welcome Investor Activism

Shares of Essel Group companies surged after two directors of Zee Entertainment Enterprises Ltd. stepped down.

Zee Entertainment, in an exchange filing, disclosed that in a letter dated Sept. 11, two institutional investors—Invesco Developing Markets Fund and OFI Global China Fund LLC—had requisitioned an extraordinary general meeting of shareholders to vote for removal of Punit Goenka, Manish Chokhani and Ashok Kurien as directors. In a separate filing on Sept. 13, the company said Ashok Kurien and Manish Chokhani, both non-executive, non-independent directors at the broadcaster, resigned with immediate effect.

The reconstitution of the board, as proposed by Invesco and OFI Global, requires a majority of 51% votes cast at the EGM.

Here’s what analysts have to say...

Kotak Institutional Equities

• Upgrades Zee Entertainment stock to ‘buy’ from ‘reduce’; hikes target price to Rs 250, an implied return of 33.69%.

• The shareholder activism is likely to result in an end to governance concerns, improvement in cash generation and management change.

• Expects the shareholder activism to trigger re-rating in the stock, irrespective of forthcoming developments and identified three possible scenarios:

1. Change in board followed by a change in management.

2. Change in board with continuity in management.

3. Continuity of management with a new set of investors.

Macquarie

• The renewed shareholder activism is an important development in the company’s affairs and it needs to be monitored closely.

• An abrupt removal of CEO from day-to-day operations without a proper contingency place in place could impact the near-term operations.

Elara Capital

• The resignations, if fructified, could be a mild positive for the company.

• The brokerage, however, underlined the near-term challenges arising out of transition to the new management.

• The appointment of a new chief executive officer will pave the way for new digital strategy and help in competing with global OTT giants.

• Some of the major challenges for Zee Entertainment in its digital transition could be high content costs, below par user experience versus peers and the issue of distribution (the shift from business-to-business to business-to-consumer).

• While the company’s business performance remained strong under the current CEO (Punit Goenka), the outperformance versus the industry average converged sharply due to loss of market share in regional genre amid rising competition as well as the poor performance in Hindi general entertainment channel segment.

DART Research

• The resignation of directors is a positive and provided scope for multiple rerating of the stock.

• Noting that IiAS had recommended shareholders for removal of Manish Chokhani and Ashok Kurien, the brokerage expects a business disruption for Zee Entertainment if Punit Goenka resigned from his position as director and CEO.

• Still, the PE multiple would get upgraded, irrespective of whether Punit Goenka stepped down as MD and CEO as his resignation as director looked imminent.