Kotak upgrades Zee Entertainment after Invesco calls EGM for removal of MD, directors

Brokerage Kotak Institutional Equities has upgraded its rating on Zee Entertainment to ‘Buy’ after Invesco, the largest shareholder of Zee with a 17.9% stake, sought an extraordinary general meeting to remove three directors including Punit Goenka (MD & CEO) and to appoint six independent directors. Following the development, shares of Zee Entertainment rallied 25% to Rs 23.50 at around 11.52 am (IST). On the other hand, the benchmark BSE Sensex traded 0.36% higher at 58,384.

Kotak raised the fair value of Zee Entertainment to Rs 250 from Rs 200. Earlier, it had a ‘Reduce’ call on the media and entertainment firm. “This turn of events is likely to result in an end to governance concerns, improvement in cash generation and a possible change in management. This development calls for a valuation re-rating,” Kotak Institutional Equities said.

Invesco Oppenheimer has sought an EGM to pass the resolutions including the removal of Punit Goenka (MD & CEO), Manish Chokhani and Ashok Kurien (independent directors), and the appointment of six new independent directors (Surendra Singh Sirohi, Naina Krishna Murthy, Rohan Dhamija, Aruna Sharma, Srinivasa Rao Addepalli and Gaurav Mehta).

Manish Chokhani and Ashok Kurien have already tendered their resignations. “We expect the Zee Board to call an EGM within three weeks failing which investors may themselves call an EGM within three months. A reconstitution of the Board as proposed by Invesco needs a majority (51% votes out of the total votes) to be passed at the EGM. The promoter family owns 4% of the company,” Kotak said.

Kotak expects the stock to re-rate and the gap between Zee’s market value and intrinsic value to narrow notwithstanding the evolving situation. It sees any one of the three scenarios: (A) Change in board followed by a change in management. This scenario assumes the appointment of a new CEO by the new Board. There is also a possibility that the new board receives interest from strategic/financial investors to acquire a majority stake and management control, (B) Change in board with continuity of management. This scenario assumes that the new Board continues with the existing management (Punit Goenka as MD & CEO) but seeks better cash generation and tighter control on capital allocation, and (C) continuity of management with a new set of investors. This case assumes shareholder churn and a new set of investors/shareholders backing Punit Goenka as MD & CEO.

Among other Zee group stocks, Zee Learn surged over 16% to Rs 15.08, while Zee Media Corporation jumped nearly 5% to Rs 10.44.