THE Economic TiMEs Markets What should investors do with ZEE stock post Sony-Zee agreement? Karan Taurani answers Las dtc hg 272026, 085500 PM IST ‘Synopsis ‘And I hin there are triggers to reach that margin. you look atthe losses in ZeeS, they have been cor efficiencies around employee cost, technology cost, other expenses put together, ferging. lf you look ata lot of “We have not factored in any kind of a big negative impact of this on our estimates because they have litigations under process. But net-net, I think yes, you will see a re-rating in terms of valuation because of this issue being resolved,” says Karan Taurani, Elara Securities, Is this a big sigh of relief that they have signed an agreement with Sony, settling all the iron-on disputes? We still do not know what they had to do to sign this agreement, if there is any gronnvrorcssendvoer = gyancial implication at all but at least that overhang goes away? wren xmenaveoresi'3s Raran Taurani: So, I think this is definitely a big relief for the valuation multiples. If you look at Zee in terms of PE multiples, they are trading at sub-10, If you look at the core broadcasting forward PE, which is phenomenally low and the reason for that is the overhang around these kind of issues, so one is the issue with Disney, wherein they kind of dishonoured the contract because of the merger being called off on the sports TV right. Second was this issue with Sony, wherein there was a penalty which could have been imposed. And third is the issue with the NCLT on the creditor side, with IDBI and some other banks which are there. So, I think this is one of the thingswhich is kind of getting resolved and definitely will provide a big respite to the valuation multiples. We have not factored in any kind of a big negative impact of this on our estimates because they have litigations under process. But net-net, I thinkyes, you will see a re-rating in terms of valuation because of this issue being resolved. But does it become a buy Zee? Karan Taurani: Yes, in terms of execution, the performance of the company has definitely improved, So, I think we have a buy rating on Zee with a target price of 210, We have seen quarters, they had kind of reached levels of 8-9% on EBITDA margin. Today, they are at about 12-13% EBITDA margin and they have given a very strong guidance of 18-20% EBITDA margin over the near to medium term. And I think there are triggers to reach that margin. If you look at the losses in ZeeS, they have been converging. If you look ata lot of efficiencies around employee cost, technology cost, other expenses put together. So, I think if this kind of momentum continues, you will see margin improvement. And as and when the margin improves, you will see more and more respite for the valuation multiples as well. And secondly, I think on the growth front as well, you will see acceleration in the growth as well because Q3 will be strong this year around. Because last year, you had the Cricket World Cup, so a lot of the ad spend actually moved towards sports as a genre. But this year, GEC might make a comeback and Zee could be a beneficiary of that. Plus, FMCG as a vertical is starting to look good in terms of ad spend. So, I think putting everything into perspective, if you see better growth rates on a consistent basis with an improved margin because of the cost-cutting initiatives that the company has taken, you will constantly see a gradual re-rating on the stock Was this an issue at all? Frankly, because everybody knew that this is more like an issue which ina sense did not require Zee to make any kind of a contingent liability provisioning. Also, it was not having an impact on the business per se? Karan Taurani: Yes, absolutely. As I said, we have not pencilled in any kind of negative impact because of this litigation because it was status quo for now and it does not change earnings estimate but the fact you have to watch is that the PE multiples have come down very sharply. As a stock Zee had come back to that 135-140 levels which I think is very compelling. So, at these kind of very low valuation multiples any kind of respite will be a positive trigger for the stock. What other things are still in overhang? What are the things that we should be watchful of? Just that so much has transpired with Zee that we have lost track of the monitorables. What is the other important overhang that you are watching out for? Karan Taurani: As I said in terms of overhang there are still a lot of these NCLT based creditor issues which are there. ‘There are also concerns on the balance sheet being heavy with high inventory. There are some kind of concerns that youcould see a potential write-off or something of that sort like a one-time expense or extraordinary item which is there which we have seen historically in the past from Zee. So, hoping that most of these issues are resolved with time because only that will kind of provide a valuation re-rating for the stock. And I think in terms of margin as well I think the execution has been very-very good over the last two quarters as I said. It has seen a sharp improvement until about a year ago they were at sub-10% EBITDA margin. So, think on margin front, on growth front, as and when we see things coming ack you will see the stock moving up gradually as well. (You can now subscribe to our ETMarkets WhatsApp channel)