Zee Entertainment Enterprises might face repercussions from penalty and legal proceedings, warns Elara Securities, as the company contends with Sony over non-compete fees. Ongoing legal battles involving various creditors of the Essel Group, such as Axis Finance and IDBI Bank, add to the challenges. The report also notes a dishonoring of the contract with Disney related to sports rights sub-franchise (ICC tournaments) on linear TV.
The report estimates potential annual losses of Rs 15.2 billion in FY25E and beyond for Zee due to hefty content costs, lower sports ad revenue, and the availability of cricket content on OTT platforms for free. The company, with a meager cash balance of Rs 6 billion against a potential contractual obligation of Rs 40 billion per year, might struggle to fulfill its commitment.
The stalled merger with Sony could lead to a sharp de-rating in P/E valuation for Zee's broadcasting business, possibly dropping to at least 10x one-year forward or lower. The merger, seen as a key valuation driver in the past two years, faces challenges such as the convergence of linear TV growth, limited potential for scaling up OTT offerings in a competitive market, and lower profitability (EBITDA margin). Any further write-offs on inventory or issues with creditors and not honoring sports contracts with Disney add to the concerns.
Ashwin Patil, Senior Research Analyst at LKP Securities, points out that Sony terminated its JV/merger/acquisition with Zee due to various issues including legal, leadership, and compliance, causing a significant fall in Zee's share prices. Zee also faces operational challenges like subdued advertising business, diminishing viewership in key markets, competitive pricing in the subscription business, and slow growth in the OTT sector. The report anticipates a potential rebound in Zee's stock after a further decline.
(With Agency Inputs)