Brokerages Concerned About Zee’s Worsening Balance Sheet

Multiple brokerages cited concerns about Zee Entertainment Enterprises Ltd.’s balance sheet as the company’s profit for the quarter ended March failed to meet estimates.

The media company’s balance sheet for the financial year 2019 witnessed a sharp increase in inventory due to aggressive acquisition of movie rights and scaling up of activities for ZEE5, the company’s on-demand entertainment portal. Current assets rose by Rs 1,160 crore as the company gave interest-free deposits and advances to content aggregators for movie library acquisition.

All of this points to worsening cash generation and suggest deviation in strategy, Citi Research said. Zee’s working capital worsened by Rs 1,550 crore in financial year 2018-19 which could raise investor concerns, said Nomura.

Zee Entertainment incurred an exceptional loss in the March quarter. The company’s advertising revenue for the quarter stood at Rs 1,217.5 crore, a growth of 16 percent over last year. Its subscription revenue rose 3.9 percent to Rs 565.3 crore.

The company’s controlling stakeholder, Essel Group, is in the process of selling half its stake in the company to a strategic partner. On Jan. 25, Essel Group companies had come under massive selling pressure. Shares plummeted up to 33 percent and suffered a combined market cap erosion of Rs 13,352 crore. A day later, the group’s Chairman Subhash Chandra said his company is in a financial mess and blamed the loss on aggressive bets on infrastructure, which has gone out of control since the IL&FS crisis, and the acquisition of Videocon’s D2H business.

Here’s What Brokerages Have To Say About Zee Enertainment:

Citi

• Downgrade to ‘Neutral’ from ‘Buy’; cut target price to Rs 415 from Rs 515.
• Balance sheet overshadows a steady profit and loss.
• Q4 ad growth was strong, despite the tariff-order related volatility.
• Worsening cash generation coupled with promoter group issues can weigh on stock.

Credit Suisse

• Downgrade to ‘Neutral’ from ‘Buy’; cut target price to Rs 390 from Rs 560.
• Decent quarter in a tough environment, but balance sheet concerns surface.
• Expect both ad and subscription could be muted in FY20 on TRAI tariff order.
• Slowdown in consumption could result in FMCG holding back on advertising.

CLSA

• Maintain ‘Buy’; cut target price to Rs 535 from Rs 580.
• Encouraging advertising revenue growth drives beat.
• Ad growth despite TRAI’s tariff order implementation reflects network’s viewership gains.
• Binding agreement for strategic stake sale by July.

Nomura

• Maintain ‘Buy’; cut target price to Rs 522 from Rs 553.
• Q4 better but balance sheet worsens.
• Strong traction in ad revenue; promoter stake sale key catalyst.
• Cut FY20-21 EPS estimates by 2-3% on lower other income.

SBICAPS

• Maintain ‘Buy’; cut target price to Rs 525 from Rs 550.
• Weak Q4 adversely impacted by implementation of tariff order.
• Cut target price to reflect rising content and marketing costs and impact of tariff order.

Macquarie

• Maintain ‘Outperform’ with target price of Rs 540.
• Resilient Q4 on higher domestic ad growth.
• Balance sheet under scanner.
• Cut FY20/21 EPS by 4-5% due to lower subscription revenues and other income.

BofAML

• Maintain ‘Neutral’ with target price of Rs 445.
• Q4 numbers are better than expected.
• No real update on strategic stake sale.
• Liabilities increased; investments to continue in ZEE5.