Zee Entertainment good to buy as concerns over corporate governance will be put to bed after management change, say analysts

• Shares of Zee Entertainment Enterprises gave 40% returns in one trading session and today the stock is up 4% as analysts turn positive on the stock.
• Analysts believe resignations of independent directors have brought back investor confidence and triggered the stock for good.
• Moreover, talks of potential takeover of the company have also added to the optimism around the company’s stock.

After resignations of two independent directors, thousands of investors picked up Zee Entertainment’s stock, on Tuesday, including marquee investor Rakesh Jhunjhunwala. This is because resignations of independent directors brought focus back to the company's growth and an end to concerns over corporate governance.

Moreover, talks of potential takeover of the company have also added to the optimism around the company’s stock.

Post the resignations, several brokerages that were negative on the stock or had recommended a sell or reduce rating turned positive. This sudden change in the investor mindset boosted the company's stock by 40% in one trading session.

All this, after the broadcaster’s largest shareholder Invesco, which holds 7.7% stake in the company, demanded resignation of Ashok Kurien and Manish Chokhani along with that of the managing director Punit Goenka.

This was followed by a report from proxy advisory firm Institutional Investors Advisory Services (IIAS) that highlighted concerns over the managing director’s increasing salary and asked shareholders not to vote for re-appointing independent directors Ashok Kurien and Manish Chokhani on the company's board. Reportedly, Punit Goenka’s salary was increased by 46%, higher than what was approved by shareholders in the 2020 annual general meeting. At the same time, employees were not given any raise for FY21.

"We have persistently highlighted in our notes of potential change in management, improvement in cash flows and traction in digital business as key re-rating triggers. With one of the key triggers getting activated we upgrade our target multiple from with the target price of ₹328 (vs. ₹204 earlier) and rating to BUY (from Reduce)," said Dolat Capital according to media reports.

Zee Entertainment Enterprises may attract more investors if the concerns raised by Invesco get addressed, said Abneesh Roy of Edelweiss Securities in an interview with CNBC-TV18.

However, Roy thinks Zee shares going back to ₹600 apiece currently looks difficult as volatility continues, while valuation re-rating will happen and shares will go beyond the target price of ₹343. He expects further improvement in market share for Zee next quarter onwards.

Karan Taurani, senior vice president-research analyst, Elara Securities said that if the new management does come in, we do see a re-rating trigger here, which means stock price would rise.

“Looking at the peer comparison in terms of growth and valuations, Zee as a company has not done that bad. The performance metrics have deteriorated in the last two and a half to three years because they would always outperform the industry growth rate but now, they are coming almost at par with the industry growth rate,” said Taurani.

Analyst Jaykumar Doshi at Kotak Institutional Equities has upgraded the stock to BUY (from REDUCE). “Zee’s valuations have been constrained by governance concerns and structural risks. The market has ascribed negative value to ZEE5 due to a lack of confidence in the management. Irrespective of how this plays out, we expect a re-rating,” he said.

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