Shares of Zee Entertainment Enterprises Ltd (ZEEL) fell 10% intraday on Friday as issues around promoter debt remain a big overhang despite the company reporting a profit in the September quarter.

The stock was at 250.10, down 5.5% on the BSE. During the day the stock fell to 239.85 a share. Analysts still have a buy rating on the stock as they find valuations of Zee Entertainment attractive.

Edelweiss Securities Ltd expects ZEEL to be key beneficiary of new tariff order (NTO) given its strong viewership countrywide. "While we expect Zeel to gain in the new tariff regime, near-term ad growth is likely to be subdued. Though festive season could offer some respite, material growth is likely to resume once demand from FMCG, auto, among others, revives. In our view, though the valuation is attractive now, resolution of promoter’s pledged shares remains key trigger for the stock," said Edelweiss in a report on 17 October. Edelweiss maintains its target price to earnings (PE) of 18 times.

ZEEL on Thursday said it was forced to make provisions worth 170 crore in the quarter ended 30 September, due to delay in the recovery of a loan to an outside entity. In a stock exchange filing, Subhash Chandra’s flagship company also said that a bank where ZEEL maintained a 200 crore deposit adjusted the sum against the dues of certain other related parties.

The company recorded a revenue of 2,122 crore in the September quarter, up 7.4% from the year-ago period, while profit grew 6.9% to 413.2 crore. The growth was driven by the strong performance of domestic broadcast and digital businesses, the company added.

According to JM Financial Institutional Securities Ltd, the bigger issue remains promoter debt overhang, which means further sell-down of Zee stock. "Our estimates are unlikely to change significantly, and we maintain buy on ZEEL given its robust media franchise and undemanding valuations that are close to historical lows— forward pricing to earnings (PE) is 11 times versus 10-year low of 10 times," the brokerage firm said in a note on 17 October.

JM Financial expects lower near-term free cash flows and emergence of a long-term discount to fair value due to likelihood of low promoter stake (around 10%) post resolution of debt overhang.

"The balance sheet continues to weaken with delayed recovery of inter-corporate deposit (ICD), increase in receivables, inventories and other current assets. Net cash has fallen to 1480 crore in Q2FY20 vs 3300 crore in Q4FY18 due to sustained working capital increase," said Emkay Global Financial Services Ltd in a note on 17 October.

Emkay has cut the earnings per share (EPS) of ZEEL by 10% each for FY20/21 incorporating higher programming cost. It said a resolution on the share pledge was a key as balance sheet was also losing strength.

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