ZEE shares at rock bottom, may double in 12-24 months, says CLSA

Shares of Zee Entertainment Enterprises Ltd climbed 5 per cent in Thursday's trade after CLSA said the stock is at rock bottom at 8 times and that it has potential to double over the next 18-24 months. The foreign brokerage believes advertising-led growth may trigger rerating on the counter, as it suggested a target price of Rs 170 on the stock.

The stock rose 5.18 per cent to Rs 105.40 on BSE. ZEE's ad revenue in the past faced the heat from a subdued macro environment with the urban slowdown particularly affecting FMCG companies, but analysts believe ad spends should improve for media companies in FY26 with falling crude prices increasing the wallet share towards ad spends.

"ZEE stock has slumped 55 per cent since the Sony merger was called off in January 2024 and is trading at arock bottom valuation of 8 times PE. Zee's forward PE has not only moved 50 per cent below the level seen prior to the merger announcement (Sep2021) during the second Covid wave, but is even 25 per cent below the level seen during the promoter share pledging crisis of 2019," CLSA said.

It said ad revenue-led growth will propel ZEE to rerate back to 12 times PE, on which it base its target of Rs 170.

"The stock could even double under our optimistic scenario. In 2003, at Zee's corporate governance low, the stock traded at 8 times PE (in 1HCY03) but subsequently rerated to an average of 14 times led by the core business," CLSA said.

ZEE's Ebitda margin has improved 9 per cent from low and even after assuming 6 per cent year-on-year (YoY) ad growth, ZEE may deliver 22-23 per cent growth in Ebitda and profit after tax in FY26-27 compounded annually, CLSA said. Besides, ZEE's market capitalisation to sales of 1 time is at 60-80 per cent discount to Reliance Disney joint venture and Sun TV Ltd, CLSA said.

"Given ZEE's sector positioning and improving profitability, the stock correction is overdone, in our view. Since Zee's listed peer Sun TV is regional, we have conducted a valuation comparison to the recently sealed US$8.5bn JV of Reliance Disney Star which is the sector leader. At a MCap/Sales of 1x, ZEE is currently valued at a 60-
80% discount to 2.6-5.3x for Reliance Disney Star and Sun TV. We believe ZEE's stock could double (Figs 1-4) on an ad growth revival over the next 12-24 months," CLSA said/

Recently, the promoters of Zee Entertainment bought 27 lakh shares worth Rs 27 crore through the open market. Promoter’s stake in ZEE has moved to 4.28 per cent from 3.99 per cent earlier. Nuvama in a report this month said the quantum of this acquisition shows belief in the long-term prospects and growth potential of the company. This shall boost the confidence of minority investors, it said.

"ZEEL's subscription revenue remains strong with seven consecutive quarters of expansion in Q3FY25. Ad revenue—though currently weak—could start recovering Q2FY26 onwards led by urban demand recovery and higher gross margin for FMCG (weak crude oil prices). On the valuations front, the stock is attractively trading at 10x P/E (versus 14x one-year average); maintain ‘BUY’," it said.

Nuvama said ZEE has reduced its dependence on national brands. FMCG still contributes 60 per cent, but within that chunk, local FMCG is attaining a reasonable size and these locals are willing to pay a 50 per cent premium over national counterparts.

"ZEE expects to make good strides on the margin front. Key focus growth area will be investment, movie launches and revenue. ZEE aims to reach Ebitda margin of 18–20 per cent by FY26E. The next tranche of FCCB is slated for Aug-25. Subscription revenue growth shall continue for a couple more quarters along with further price hikes. Rural local advertisement spends have improved. The language market is making a comeback and retail is large thereof," Nuvama said on March 3 adding that the stock is oversold and at attractive valuations.