Much of Tuesday’s investor enthusiasm built up around a possible cleaning up of the business after the company’s largest investor, Invesco Oppenheimer, pushed for an ouster of Goenka, the elder son of the company’s founder Subhash Chandra Goenka.
Even ace investor Rakesh Jhunjhunwala, through his investment firm RARE Enterprises, put in a large bet on the development by purchasing some 50 lakh shares.
ZEE investors have weathered many a storm over the past three years, with the latest adverse development being allegations of fresh corporate governance issues at the company.
The company’s promoters had earlier admitted to making strategic mistakes by investing in unrelated businesses and gave up their majority holding in India’s leading media house to try and reduce a large debt pile that was choking up the business.
There were also allegations about the group’s dealings with a company that was under the radar of investing agencies for serious frauds in the past, something that the Zee group has vociferously denied.
For ZEE minority investors, Tuesday’s big rally came as a much-needed relief. At the company’s AGM on Tuesday, a shareholder did not hide his enthusiasm over the wind of change and said the stock market’s reaction to the developments was ‘telling’.
But the question is, will it lead to Goenka’s ouster, and if Invesco — being the largest shareholder — succeeds in its bid, will it end the stock’s misery. ZEE shares are still down 55 per cent from their hay days in 2018!
“With promoter holding at just 3.99 per cent and the stock languishing, it is only a matter of time before the board gets revamped,” analysts Abneesh Roy and Amritasai Sista of Edelweiss wrote in a note.
The latest turmoil surfaced after the company’s largest shareholder sought the removal of Goenka and two other members on the board of directors. Disclosures released to BSE did not say why.
The demand came after proxy advisory firm Institutional Investor Advisory Services (IIAS) raised corporate governance concerns in the company, asking shareholders to vote against reappointing two directors — Manish Chokhani and Ashok Kurien.
IIAS alleged Kurien and Chokhani, who were on the nomination and remuneration committee (NRC), were accountable for a 46 per cent surge in Goenka’s remuneration for FY21, which was higher than what shareholders had approved at the 2020 AGM.
IIAS said Kurien was a co-founder and while he was later classified as non-promoter, no regulatory filing or shareholders’ approval was sought for that. Both Kurien and Chokhani have since resigned.
“This is a situation where wisdom comes to people very late in life. Given the timing of the resignations, it is difficult to believe the two were unwilling to extend their terms. So the timing of Invesco’s notice and the resignations are no coincidence. It is simple that the two did not want to face the ignominy at the EGM,” said JN Gupta, Founder & MD at proxy advisory firm SES.
All eyes are now on Goenka.
Weakening of Grip
Goenkas’ grip over the media firm has loosened ever since Subhash Chandra’s Essel group in November, 2018 first announced plans to sell half of its 41.6 per cent stake in the company. By then, 59 per cent of promoter stake had been pledged; 17 per cent was unencumbered.
Before the company’s hunt for a strategic investor yielded result, Chandra in an open letter on January 25, 2019 admitted to making strategic mistakes in unrelated infrastructure business that led to a spike in debt and share pledging at promoter levels.
The admission to piling up a Rs 11,000 crore debt was enough to spoil the stock’s prospects. Reports of Essel Group’s alleged dealings with Nityank Infrapower and Multiventures, a company that was probed by Serious Fraud Investigation Office (SFIO), only added to the woes.
Later that year, Essel group sold an 8.7 per cent stake to Invesco Oppenheimer. Chandra sold another 16.5 per cent stake in the firm the same year before stepping down as the chairman of the company that he had founded in 1992 .
This August, Chandra claimed about 91 per cent of the debt with 43 lenders had been repaid. But that came at the cost of his majority stake in the crown jewel.
What lies ahead?
Analysts said the ZEE board now needs to hold an EGM within 21 days of the receipt of the requisition. Else, investors themselves can call an EGM in 45 days.
“We also understand that a simple majority might be enough for approval of these resolutions at the EGM. We await more clarity. Meanwhile, all eyes are on whether Goenka continues as CEO or a leadership transition happens,” Edelweiss said.
Gupta said retail investors do not have any say at an EGM and it is generally institutions that vote. “The likelihood of success (of the move to remove the MD & CEO) is high,” he said.
Gupta, however, said Chandra’s family is a bit different from others. He said, while he does not have a soft corner for them, he does appreciate the fact that the family did everything it could do, selling their fortunes to get rid of the debt, and make the company clean.
“I agree the governance is bad. But the question is, is the company also being run badly. We as proxy advisors do not have domain expertise and we cannot comment. Investors know better,” he said.
Earnings & Goenka
ZEEL reported a seven times jump in June quarter profit at Rs 213.80 crore compared with Rs 30.40 crore a year ago. The numbers, though, were below market expectations, as the second wave of Covid-19 impacted the recovery. Thanks to Covid, the media firm’s advertising revenues fell to Rs 3,748 crore in FY21 from FY20’s Rs 4,681 crore.
But during the same period, subscription revenues jumped to Rs 3,243 crore from Rs 2,887 crore in FY20. Overall, ZEE’s sales fell 4.9 per cent during the Covid-hit FY21, even as profit rose 51.2 per cent over FY20’s low of Rs 524 crore. Over the last five years, the company has managed to pare its debt while increasing its net worth.
ZEE’s cumulative shareholder payout stood nearly 60 per cent of total profit over FY15-21. The stated dividend policy suggests a payout of 25-30 per cent of consolidated profits or 33 per cent of standalone profits, whichever is higher.
Edelweiss said Goenka has been a decent MD and has addressed most of investor concerns. He was seen as a person focussed on the core business as he exited loss-making channels such as Sports, launched successful TV channels in the regional space and was aggressive in channels of future — OTT.
“The management did try to address concerns such as defocussing on Sugarbox, quarterly disclosures about related-party transactions and key balance sheet numbers every quarter such as inventory, ZEE5 numbers. A recent instance of insider trading by the IR Head was, though a personal issue, a negative,” it said.
Edelweiss said the stock is likely to stay volatile given the uncertainty around leadership and disruption in media, but felt corporate governance standards in the firm would improve in the long run.
“We expect strong recovery in ad spends industry wide with FMCG companies ramping up marketing for the forthcoming festive period. Improving mobility should help recovery in ad spends across sectors, as we move into H2FY22,” the brokerage said.
Kotak Securities said the turn of events is likely to result in an end to governance concerns, improvement in cash generation and a possible change in management. Kotak said the gap between Zee’s market value and intrinsic value should narrow, notwithstanding the evolving situation and pegged the fair value for the stock at Rs 250.