Merger with Sony to rerate Zee stock, address governance issues: IIFL Securities report

Merger with Sony to rerate Zee stock

The proposed merger of Zee Entertainment Enterprises Ltd with Sony India will not only largely address Zee’s corporate governance issues but also improve its reach and scale, according to an IIFL Securities report.

Moreover, the merged company’s $1.8 billion cash balance after the equity infusion from Sony Group—which will own a majority stake in the combined entity—will be used to step up investments, the report said.

“With the significant rerating that the consummation of the deal is likely to entail, we see a reasonable chance of the deal getting shareholder approval,” IIFL Securities said, putting a buy call on the stock.

Indeed, the biggest merger and acquisition (M&A) deal in India’s media sector brings cheer to the shareholders of Zee Entertainment, which has been facing shareholder activism and concerns over its corporate governance.

Zee Entertainment’s share price has shot up nearly 80% in the last two weeks. This has given some respite to its shareholders, who had seen the stock suffer for the past several months after the debt-laden promoters, Essel Group, all but lost control of the company. This had even prompted Zee’s institutional investors to call for removal of the CEO Punit Goenka, son of Essel Group head Subhash Chandra.

IIFL Securities said the merger may take six to eight months to consummate. It pegged a 50% probability of the deal going through. Based on that, it has set a new target price of Rs 406 a share, almost a fifth higher than Zee’s current market price. Its actual equity valuation of the merged company is even higher.

The target price means there could be still some steam left in the stock even after the sharp run-up over the past couple of weeks.

“We estimate +10% EPS accretion in FY24 on synergies and, based on 25x target PER, Sep-2022 equity value per share could be about Rs 490,” the report said.

The brokerage also said there are significant synergy benefits from the merger as Sony has considerable strength in sports, the kids’ genre and English content while Zee is strong in regional content and movies.

Risk elements for the Zee and Sony deal

To be sure, there is no surety that the deal would be executed as there are several factors that needs to be there for it to see the light of the day. Besides regulatory approval, 75% of the voting shareholders need to give their nod to the proposal that has been structured in a way that doesn’t give them the benefit of a mandatory open offer. The securities norms give exemption to deals struck via amalgamation or mergers.

On the flip side, the deal envisages special or differential treatment to Essel group with Sony giving a non-compete fee to Essel through stake that would allow it to retain 4% stake. This may raise concerns at the table of the authorities.

Then again, the deal envisages continuation of Punit Goenka as chief of the merged company. Key shareholders have been calling for removal of Goenka and it is not clear how the deal would progress if large institutional investors stick to their stand that they want him out.

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Nifty 50 PE ratio still below 5-year average, despite index climbing new highs

Nifty 50 PE ratio still below 5-year average

The Indian equity markets are scaling new highs on the back of expected faster economic recovery and accelerated vaccination drive. However, as the Nifty and Sensex today breach new highs every day, many stock market participants debate on whether it is over-valued or not. Nifty price-to-earnings (PE) ratio is one indicator to calculate market valuation, even though there are multiple factors to be considered to reach at an ideal conclusion.

Statistically, the Nifty price-to-earnings (PE) ratio today stands at 27.34 multiples even as the Nifty 50 share index is trading near its all-time high of 17,853.20. Many market commentators believe that the Nifty 50 index is over valued at 17500 levels and a crash is impending, but the PE ratio seems to suggest something else. Let us understand more. 

Nifty 50 PE ratio still below 5-year average

Nifty PE ratio at 27.34 is still significantly lower than the 5-year high of 42 multiples and slightly lower than the 5-year average of 27.45. The Nifty PE ratio is also lower than the 1-year average of 33.23 and 2-year average of 29.87. Nifty PE ratio is a key indicator to read while understanding the valuation of Indian stock market. PE is short for the ratio of a company's share price to its per-share earnings. To calculate the P/E, you simply take the current stock price of a company and divide by its earnings per share (EPS). P/E Ratio = Market Value per Share/Earnings per Share (EPS). Nifty PE ratio moved between a high of 42 and low of 25.21 during the past one year. While on a 5-year basis, Nifty 50 PE ratio moved between a high of 42 and low of 17.15, data from Trendlyne showed.

Does Nifty 50 PE ratio indicate just valuation?

Many market watchers use the Nifty PE ratio to decide on whether the market is overvalued, cheaper or just right. In that sense we have seen a high Nifty PE ratio of 42 in February 2021 when the index reached 15000 levels for the first time. Since then, Indian companies have seen good growth on earnings, and we see the Nifty PE ratio more reasonable around 26 multiples. There is also a methodology change in the calculation. Now Nifty PE ratio is calculated based on consolidated earnings of companies from standalone EPS earlier.


At this stage the market watchers are divided on whether Nifty PE ratio indicates just valuation. Many believe, accelerated economic recovery and ample global liquidity will help both markets and companies to see positive upside. The other camp believes that from now onwards there will be moderate returns from Indian markets and in case of any global risk off event liquidity will dry up.

Investors should not consider Nifty PE ratio as the only indicator to calculate market valuation but rather look at multiple factors and ratios while deciding on Nifty 50 valuation.

Many old timers quote historical chart and say that Nifty is in the oversold zone when Nifty PE ratio is below 14, while it is overvalued when PE ratio crosses 22. However, in the last 17 months the markets have rallied in a different circumstance and a higher sustained PE remained acceptable on hopes of economic recovery and company earnings besides healthy capital inflows.

But, Nifty PB ratio is near 5-year high

Another indicator Nifty price-to-book (PB) ratio at 4.47 however near all-time high of 4.48. In the last 5 years it moved between a range of 2.17 and 4.48. The Nifty price to book or Nifty PB value measures the enterprise value of the company. Many consider Nifty PB value to be more stable than Nifty PE ratio when the market is volatile. Higher PB ratio also indicates that one is paying more in case the value goes down. From a historical perspective Nifty is seen to be in the oversold zone when Nifty PB is below 2.5 and overvalued range when PB ratio is over 4.


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Top swing trading ideas you should not miss!

by 5paisa Research Team 27/09/2021

Price and volume are two of the most prominent inputs used by traders across the world while swing trading. When used in isolation, they reveal very little but when used in conjunction, they help us to sort the wheat from the chaff. So, this swing trading system is based on the deadly combination of price and volume percentage surge, which helps us to discover high probability swing-trading candidates.   
So, here is the list of stocks that fulfil the criteria of volume and price surge and as a result, they flash in our swing-trading system:  

HDFC Bank: Banking heavyweight HDFC Bank was the top-performing stock from the banking index and it was also the top contributor in the Nifty index on Friday. The stock opened with a gap-up and it traded in a range for the first couple of hours. But it picked up pace in the second half of the trading session along with a surge in volume, which indicates the enthusiasm of the buyers. Moreover, the volume for the day was greater than the 10 and 30-days average volume, which resulted in meeting the norms of the swing trading system. The stock has the potential to touch an all-time high of Rs 1641 in the near term with immediate support placed at Rs 1572. 

JB Chemical & Pharmaceuticals: The stock of JB Chemical & Pharmaceuticals has jumped nearly 5% on Friday and with this, the stock recorded its highest single-day gain in the near term. Moreover, the stocks' daily range on Friday was twice its 10-days average range. Additionally, the stock witnessed volume over 5-lakh shares which is greater than its 10 and 30-days average volume, so it meets the rules of our defined swing trading system. The stock has support placed around Rs 1740, while on the upside the resistance is seen around the zone of Rs 1930-1937.  

Gujarat Alkalies & Chemicals: The stock of Gujarat Alkalies & Chemicals jumped more than 10% on Friday. The stock witnessed a perfect trend day as there was expansion in the daily trading range. Testimony of this is that the stock daily range was greater than its 10-days average range. Furthermore, the stock’s opening and closing are near opposite extremes. The second parameter which we analyze for swing trading is volume. The volume witnessed on Friday in the stock was greater than its 10 and 30-days average volume. Hence, swing traders can keep this stock on their radar and should not miss this stock as the stock has the potential to touch levels of Rs 648-660 in the near to medium term. 


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Does Bharti Airtel’s rights issue discount open an entry window for new investors?

by 5paisa Research Team 27/09/2021

Bharti Airtel Ltd, the country’s second-largest telecom operator, has set the pricing for its upcoming rights issue that aims to raise as much as Rs 21,000 crore ($2.85 billion).

The company said it is offering shares to its investors at a price of Rs 535 a share, a 26% discount to the market price of the stock on Thursday.

Rights issues are essentially a tool for publicly listed companies to raise funds by issuing fresh shares to existing shareholders at a discount. By agreeing to pick up the shares entitled to them, an existing investor can bring down the cost of ownership of shares.

At the same time, the company gets to raise equity capital in a manner that gives an option to the promoters to avoid stake dilution.

Bharti Airtel’s rights issue

Bharti Airtel has fixed September 28 as the record date for determining shareholders who would be eligible for subscribing to the rights issue. The right issue opens on October 5 and will end on October 21.

The rights issue announcement, originally made on August 29, has seen the company’s share price rise over 20% since its board decided on the fundraising plan.

The company is offering one share for every 14 shares held by an investor as on the record date. This means a person holding 140 shares as on September 28 will be entitled to buy 10 shares of Bharti Airtel at Rs 535 apiece.

As a result, if a person buys 140 shares of the company today at the current market price, spending around Rs 1.03 lakh (before accounting for fees and taxes), she/he would be able to bring down the average cost of purchase from around Rs 738 to Rs 692, or about 6% lower.

Stock triggers

The company’s stock price has risen partly due to the right issue announcement but there have been a set of other positive triggers.

Telecom stocks at large got a booster call last week with a favourable move by the Indian government that approved a relief package for the cash-strapped sector, which included a four-year moratorium on adjusted gross revenue (AGR) dues.

Bharti Airtel’s stock also got a boost from a positive outlook by rating agencies earlier this month. Moody's affirmed Bharti Airtel’s Ba1 corporate family rating (CFR) and senior unsecured rating and changed the outlook to ‘stable’ from ‘negative’, citing better profitability at its Indian mobile business and staggered payment to clear AGR dues.

S&P also maintained Bharti Airtel's credit rating of ‘BBB-’, and upgraded the outlook to stable from negative, indicating the company’s better financial status and ability to pay back debt.

Some brokerage houses, including ICICI Securities, Motilal Oswal and Emkay, had previously pegged their price targets in the Rs 700-740 a share, which has already been breached.

Last week, global research firm CLSA had retained a buy call and raised the price target to Rs 825 per share. CLSA based its decision on a jump in data usage and rising average revenue per user (ARPU) that it expects to move even higher as inactive subscribers at key competitor Reliance Jio and reduced tariff discounts by the bigger peer has lowered the risk of disruption.

At this price target, an investor entering the stock now may still get to see a 20% upside after factoring in the rights issue discount.

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PVR, Inox shine as theatres to open before Diwali, but picture ‘abhi baaki hai’

Cinema stocks to benefit
by 5paisa Research Team 27/09/2021

Publicly listed multiplex operators were among the hardest hit from the Covid-19 pandemic as lockdowns and social distancing virtually put an end to the business with the government forcing theatres to put down the shutters.

But the business was also significantly impacted as producers, who draw a large part of their revenues from theatrical releases, decided to postpone their releases as digital premiers need not make up for large production budgets of big starrers. The pipeline of releases was also shaken up as social distancing meant more staggered filming schedules in Bollywood as also for international flicks.

While several states had allowed opening of theatres over the last few months, the state of Maharashtra, the home of Bollywood, had continued with the temporary ban on cinema chains. The state government said during the weekend they would allow cinema operators to restart business from October 22. This would mean multiplex theatres would be open in the run up to the key festive season of Diwali in November first week.

Picture abhi baaki hai

Although detailed rules for the opening are yet to be made public but it is expected that to begin with the state is likely to allow cinema chains to open with only 50% capacity to maintain social distancing.

The pent-up demand from consumers mean that those slots are likely to be fully booked as fear of the pandemic slowly recedes with better vaccination drive.

Not surprisingly, stocks of two listed multiplex chains, PVR and Inox Leisure, soared on Monday on the back of the development. Both the stocks touched 52-week highs during intra-day trades.

Interestingly, both the stocks had hit their all-time highs in February 2020 and lost half their value in the subsequent month as the lockdown affected business.

The stocks have been trying to break out as the impact of the pandemic subsided after a brutal wave in north India in April-May. PVR is now up over 60% in the last four months and Inox has climbed over 40% in the same period.

The sharp run-up has made some analysts cautious and they feel that while momentum moves may help traders to still make money if they invest in the stocks, one may look at entering the stock if there is some correction.

For one, the multiplex operators are not going to get back to pre-pandemic business level anytime soon. Besides the expected limited opening of theatres, the concern about the pandemic wave re-emerging remains.

What experts say

According to Avinash Gorakshkar, head of research at Profitmart Securities, feels it is still two to three quarters more when these theatres will start operations at 100% strength.

He says that these stocks are available at discounted price and market is keeping this discount till FY23 so one should buy these stocks keeping long-term time horizon in mind.

However, since both PVR and Inox shares have soared, one should wait for profit-booking and then take fresh position in the counters, Gorakshkar added.

Sumeet Bagadia, executive director at Choice Broking thinks one can initiate momentum buy in PVR share at current market price for the short-term target of Rs 1,750 maintaining stop loss at Rs 1,480 apiece.

On Inox shares, he feels that one can buy and hold the counter at current market price for short-term target of Rs 400-425 apiece maintaining stop loss at Rs 350 levels.

Nirmal Bang Institutional Equities said that Hindi film producers are ready to release fresh big-budget films, though they were reluctant to release them when screens opened up in November 2020 after the first wave.

“Hindi content in a typical year delivers 60-70% of multiplex revenues. Disney in early September 2021 announced that all new movie releases in 2021 – no commitments beyond 2021—would go to the theatres first and then to other distribution platforms after a window of 30-45 days or more. This should assuage concerns around OTT eating into the theatrical business.”

The brokerage has lowered its estimates for FY22, as opening up of theatres has been delayed from its earlier expectations, leading to likely weaker-than-expected December quarter.

It has raised the target price for PVR from Rs 1,561 to Rs 1,934 while Inox Leisure’s target price has been raised from Rs 381 to Rs 492. “If the second half 3QFY22 sees solid recovery, we expect cash bleed of both the companies to come to a halt," Nirmal bang said.

Brokerage house Sharekhan expects a sharp increase in movie releases by large movie studios. "Given the huge content line-up, we believe PVR is well-placed to capitalise on the strong pent-up demand and is expected to report strong revenue growth for FY2023E,” it noted.

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KJ Somaiya group flagship Godavari Biorefineries files DRHP for IPO

Godavari Biorefineries IPO
by 5paisa Research Team 27/09/2021

Godavari Biorefineries Ltd has filed its preliminary documents with the capital markets regulator Securities and Exchange Board of India to raise funds through an initial public offering (IPO).

The IPO comprises a fresh issuance of shares worth Rs 370 crore and an offer of sale of 65.58 lakh shares by its promoters and investors, according to the draft red herring prospectus (DRHP).

The company may also consider a pre-IPO placement of up to Rs 100 crore. If it does raise a pre-IPO round, it will reduce the size of the fresh issue proportionately.

A bulk of the offer for sale will be done by Mandala Capital, a private equity investor, which plans to offload 49.27 lakh shares. Other sellers include Samir Shantilal Somaiya and Somaiya Agencies, who plan to divest 5 lakh shares each, and Somaiya Properties and Investments, which will sell 1.31 lakh shares.

Godavari Biorefineries plans to use money raised from the fresh issue to repay debt, fund capital expenditure for sugarcane crushing expansion and the potash unit, and for general corporate purposes.

Godavari Biorefineries’ business

Godavari Biorefineries is the flagship company of the Somaiya Group. The group also runs educational institutions, a holiday resort, book stores and biotech research labs.

The company is one of the leading producers of ethanol and ethanol-based chemicals in India. Its diversified product portfolio comprises bio-based chemicals, sugar, rectified spirits, ethanol, other grades of alcohol and power.

Citing a report by Frost & Sullivan, the company said in its DRHP that it operates the largest integrated bio-refinery in India. It is also the largest global manufacturer of the enzyme MPO, one of only two manufacturers of natural 1,3 butylene glycol globally and the fourth-largest manufacturer of ethyl acetate in India. It is also the only company in India to produce bio ethyl acetate.

The bio-based chemicals that it makes are used in various industries, including agrochemicals, cosmetics, flavour and fragrance, food, fuel, paints and coatings, and pharmaceuticals. It sells the ethanol it makes to oil marketing companies and also find applications in the beverages, pharmaceutical and chemical industries.

The company plans to expand its capacity to manufacture ethanol from 380 kilo litres per day as of June 30, 2021 to 570 kilo litres per day. It is also evaluating the prospect of manufacturing of second-generation ethanol and energy cane to improve the availability of feedstock for its distillery segment.

Its customers include marquee players such as Biocon, Cipla, Deccan Fine Chemicals, Dr. Reddy's Laboratories, Hershey India, Hindustan Coca-Cola Beverages, International Flavors & Fragrances, Privi Speciality Chemicals, Sun Pharmaceutical, United Spirits and Varun Beverages.

Godavari Biorefineries’ financials

The company’s consolidated revenue from operations had fallen during the year through March 2020 to Rs 1,459 crore from Rs 1,552 crore the year before. However, revenue bounced back during 2020-21 to touch Rs 1,538 crore. Ethanol accounts for a fifth of the revenue while bio-based chemicals make up a third.

Earnings before interest, tax, depreciation and amortisation (EBITDA) followed a similar trajectory. EBITDA fell to Rs 116.97 crore in 2019-20 from Rs 146 crore the year before, but rebounded to Rs 165.8 crore in 2020-21.

Consolidated profit after tax for 2020-21 soared to Rs 27 crore from Rs 4.06 crore in 2019-20 and Rs 5.5 crore the year before.