Zee's share price zooms 40% as Rakesh Jhunjhunwala buys stake, but can it bring back FIIs?
Zee Entertainment Enterprises Ltd’s shares soared 40% on Tuesday after its two biggest foreign institutional investors called for a change of guard and as ace stock market investor Rakesh Jhunjhunwala bought a stake. The media company’s shares jumped by their maximum daily limit of 45% to touch a 52-week high of Rs 270.85 apiece before cooling off to end at Rs 261.50 on the BSE.
During the day, Rakesh Jhunjhunwala’s Rare Enterprises bought 50 lakh Zee shares at Rs 220.44 apiece, totalling Rs 110 crore.
Also Read: Rakesh Jhunjhunwala's Portfolio
Why did Zee Entertainment Share Price Surge?
The surge came after Invesco Developing Markets Fund and OFI Global China Fund LLC called an extraordinary general meeting of shareholders to seek the removal of Zee CEO Punit Goenka. The Invesco fund owns a 7.74% stake in Zee while OFI Global China Fund holds 10.14%. Both funds are part of the US-based asset management giant Invesco.
The asset manager had increased its stake in Zee in November 2019 by buying shares from the promoter Essel Group, which needed money to reduce its debts. Essel Group is led by media tycoon Subash Chandra, father of CEO Goenka. While Chandra had resigned as Zee chairman in November 2019 itself, Goenka has been leading the company since then even though the promoters now own just 3.99% stake in Zee.
Zee Entertainment, the country’s most valued publicly listed media and entertainment company, has been facing calls from institutional investors for a change of guard as the stock has been a rank underperformer. In fact, after the 40% jump Tuesday, the stock is now at the same level it was in November 2019.
This underperformance is possibly also the reason why foreign institutional investors (FIIs)—the driving force of Indian stock markets—have been exiting Zee. FIIs cut their stake from 64.1% to 57.4% in Zee Entertainment during the quarter ended June 30.
Moreover, almost 42% FII shareholders exited the company during the April-June quarter. Zee Entertainment counted as many as 524 FII shareholders as of March 2021. This dropped to 306 FIIs as of June.
In fact, Zee Entertainment saw the most distinct selloff during the quarter by offshore investors, which cut stake in around a dozen large caps or companies that currently have a market capitalisation of Rs 20,000 crore or more.
On the positive side, fund managers say the company can now put corporate governance behind as it recasts its board after the resignation on Monday by Manish Chokhani and Ashok Kurien, and if the investors manage to oust Goenka and bring in a non-promoter CEO.
SREI Infrastructure seeks debt recast to attract survival capital. Can it recover?
Kolkata-based infrastructure and equipment financier SREI Infrastructure Finance Ltd has sought a faster green signal from its lenders to recast its debt pile and parallelly asked for regulatory approval to bring new investors on board.
SREI Infrastructure had seen a sharp pop in its stock price in June when its share price more than doubled, but it has retraced its steps since then. On Wednesday, the company’s stock price shot up 5%—the maximum daily limit—despite reports that its CEO Rakesh Bhutoria had put in his papers. The company is yet to make any formal comment on the matter.
However, it has been facing a mass exodus as employees have jumped ship due to pending salary dues. Nearly a sixth of its 1,500 employees have quit over the past 10 months, as the company’s finances came under the control of the lenders. The lenders had put a cap on the salaries. While this was lifted in April, there are still arrears.
The debt-laden company has asked its lenders to clear the debt restructuring plan, a move that could help it steer away from the current impasse.
The lenders remain cautious on proceeding with restructuring of its debt that is estimated to be around Rs 28,000 crore. They are likely to decide the next course on the basis of an ongoing forensic audit.
The Reserve Bank of India (RBI) had executed a special audit last November of the company and its subsidiary Srei Equipment Finance. In April this year, the company hired KPMG and DmKH & Co as forensic auditors as per the advice of its lenders and independent directors.
Investors for survival capital
The company is believed to have attracted interest from close to a dozen global investors including Cerberus Capital for its arm SREI Equipment Finance. It later received non-binding term sheets from Arena Investors and Makara Capital Partners.
SREI has sent the documents related to the proposed investments into the firm to its lenders that include Axis Bank, UCO Bank and State Bank of India, as also the RBI.
Notably, even the proposed fund infusion into the company is dependent on the ongoing forensic audit and the RBI’s word on the fit and proper criteria.
What went wrong at SREI?
SREI had been facing stress due to the pandemic as it hit recoveries for its own lending activities as the hard lockdown and disruption in business activity affected its borrowers. Over half of its borrowers sought a loan restructuring at their own end.
The company had knocked on the doors of the National Company Law Tribunal for a moratorium on coupon payments and postponement of redemption dates until it completes a proposed merger of two group companies.
The Kolkata bench of the NCLT awarded a six-month moratorium on all loans of SREI and had asked creditors not to classify its loans as bad. It also asked the RBI not to take any action against the group and directed rating companies not to revise ratings during this period.
But the National Company Law Appellate Tribunal has now overruled the NCLT order and allowed banks to classify SREI Group’s loans as non-performing assets, multiple media reports said.
FIIs have cut stake in these 12 large caps. Do you own any?
Indian stock indices have scaled new highs and are now consolidating near their peak but are now seeing a rush of money towards large cap counters as investors, anticipating a correction from these levels, are looking at some comfort factor rather than betting on high-beta mid- and small-cap stocks.
Foreign portfolio investors (FPIs) and foreign institutional investors (FIIs) have become more cautious about investing in India but looking at their behaviour it seems they have been bullish about large caps for the last few months.
Quarterly shareholding data shows they pushed up their holding in as many as 83 listed companies that have a valuation of $1 billion or more. At the same time, they also snipped their stake in as many as 23 companies.
Top large caps that saw FII selling
FIIs cut stake in around a dozen large caps, or companies that currently have a market capitalisation of Rs 20,000 crore or more.
Essel Group flagship Zee Entertainment saw the most distinct selloff by offshore investors as the company had been a rank underperformer over the past year because of corporate governance concerns.
FIIs cut their stake from 64.1% to 57.4% in Zee Entertainment, the country’s most valued publicly listed media and entertainment company, during the quarter ended June 30. The Zee Entertainment scrip, which counted as many as 524 FII shareholders as of March 2021, saw 218 of them exit the company last quarter.
Zee Entertainment, in which the promoters now own just 4% stake, has been facing calls from institutional investors for a change of guard. Indeed, with the resignation of Manish Chokhani and Ashok Kurien from the board on Monday, the company’s stock shot up 40%, to near a 52-week high on Tuesday.
Other large cap companies where FIIs reduced their stake last quarter by 2% or more include commodities major Vedanta, whose share price has more than tripled since December last year.
Hospitals, auto, BFSI stocks
Offshore investors also sold stake in companies across the healthcare, automotive and banking, financial services and insurance (BFSI) space during the quarter through June.
These companies were hospital chains Max Healthcare and Fortis Healthcare, two-wheeler maker Hero MotoCorp and automaker Mahindra & Mahindra Ltd.
The three BFSI stocks that lost favour among FIIs were Shriram Transport Finance, SBI Life Insurance and YES Bank.
The other companies where the FIIs lowered their holdings were Jockey-branded innerwear maker Page Industries, Adani Ports and Tech Mahindra.
The stake sale in Tech Mahindra showed FIIs churned their IT portfolio as they had increased their stake in India’s second- and third-largest software services exporters—Infosys and Wipro, respectively—during the same period.
The ‘freak show’ on the NSE and why it is happening
On Tuesday, the Indian stock markets were witness to a ‘freak show’ that saw futures contracts of several index heavyweights on the National Stock Exchange (NSE) open with a gap up of as much as 10%.
As stock markets opened for trade, September futures of several marquee counters including Reliance Industries Ltd (RIL), HDFC Bank, HDFC Ltd and Bharti Airtel were up sharply.
While RIL futures opened with a 9% spike over the previous close, futures of Bharti Airtel and the HDFC twins were up by nearly 10% each. This, even as these counters were trading flat on the spot market.
So, effectively, even while there was no significant movement in the underlying stocks, the derivatives market opened with a significant gap up.
Has such freak trade happened before?
Yes, this is not the first time such a ‘freak show’ has happened on the India share bazaar. Exactly a week before the latest anomalous event, movement in the Bank Nifty options segment had given a nervous time to traders as the index surged by a staggering 2,000%.
The premium of weekly Bank Nifty 36,000-strike put option, due for expiry on September 9, surged to a high of Rs 750 from Rs 35.25. It finally closed at Rs 53.65 against the previous close of Rs 62.15. The underlying Bank Nifty index opened at 36,559 points and hit a high of 36,686 before closing with a loss of over 100 points.
In fact, these events have been happening ever since the NSE scrapped the so-called trade execution range (TER) in August. The TER had been put in place to avoid erroneous trades, colloquially dubbed ‘fat finger trades’.
What is the trade execution range? What are fat finger trades?
Trade execution range (TER) basically refers to a quantity freeze rule that regulates the order flow to within a range, so as to avoid erroneous trades caused by mistyping.
A ‘fat finger trade’ is one where the number of units of say an index or stock futures to be bought or sold are entered erroneously. This triggers a massive upsurge in demand or supply, leading to a significant gap up or gap down opening.
In August, the exchange had defined these freeze quantities for Nifty, Bank Nifty, Finnifty at 2800, 1200, and 2800, respectively. Above these limits, orders would be automatically cancelled.
Moreover, the NSE had also set price ranges. If the price crossed the lower or upper limits, the exchange would halt any trading till the price came down.
So, why was this system abolished? Why is that a problem now?
The new system became problematic and caused price discovery distortions when prices actually swung sharply, causing a mismatch. So, the NSE removed it.
But the removal of the system has now become problematic as it has led to these freak trades.
A Moneycontrol report says this is also thanks to people trying to game the system, in a bid to avoid taxes.
The report points out that while the cash segments have various price filters, the F&O segment does not have such filters. “However, there is a dynamic price band of 10% on either side. When the prices of the futures contract hit the 10% limit, there is a cooling period of 15 minutes before the limits are revised for the day,” it notes.
According to the report, high-net-worth individuals looking to evade tax or launder undisclosed income often do so through fictitious trades in the F&O segment. “There are brokers who offer such services for a fee,” it added.
Since law enforcement authorities like the income tax department and the market regulator, the Securities and Exchange Board of India (SEBI), have tried to curb this activity in the F&O segment, the action seems to have shifted to index heavyweight stocks.
These auto stocks can benefit as govt approves PLI scheme
The Indian government has approved a production-linked incentive (PLI) scheme for the automobile sector to help companies ramp up local manufacturing of cars, bikes and electric vehicles.
The government has fixed an outlay of almost Rs 26,000 crore for the scheme, which will be effective from 2022-23 for five years. The base year for eligibility criteria would be 2019-20.
To benefit from the scheme, automakers should have annual revenue of at least Rs 10,000 crore and Rs 3,000 crore investment in fixed assets. Auto-parts makers should have clocked revenue of at least Rs 500 crore and Rs 150 crore investment in fixed assets.
The government estimates that the PLI Scheme will lead to fresh investment of Rs 42,500 crore and incremental production of Rs 2.3 lakh crore over a period of five years. This will help create 7.5 lakh jobs.
Shares of auto and auto component companies climbed on Thursday after Wednesday’s decision. Bosch was the biggest gainer, rising 5% on the BSE. Two-wheeler makers Hero MotoCorp and Bajaj Auto as well as component maker Tube Investments of India rose almost 2%, before paring the gains. The benchmark BSE Sensex was up 0.4%.
However, top automakers Maruti Suzuki, Tata Motors and Mahindra & Mahindra were trading lower, likely because the scheme for vehicle manufacturers is only applicable on battery electric vehicles and hydrogen fuel cell vehicles.
What analysts say about PLI scheme
Motilal Oswal Financial Services says that the incentives offered under the scheme are attractive and that the eligibility criteria on both revenue and expected investment are reasonable.
It noted that the incentives are lower than the original plan of Rs 57,000 crore but said the step will help improve competitiveness in the segment.
Motilal Oswal picks two-wheeler makers Bajaj Auto and TVS Motor as well as car and truck maker Tata Motors among the likely beneficiaries.
Antique Broking says the scheme will promote cleaner technologies as it gives sops to companies that make EVs and fuel cell vehicles.
On the flip side, this means traditional automakers will have to transition quicker from internal combustion engine-powered vehicles to EVs. This will require heavy investments, and is a negative for such companies. The brokerage houses feels Tata Motors and auto component firms like Bosch and Sona Comstar will benefit.
Kotak Securities and Swastika Investment both think Bosch and other auto-parts companies like Minda Industries, Motherson Sumi, Jamna Auto, Endurance Tech, Varroc Engineering and Sona Comstar will benefit from the scheme.
ICICI Securities thinks that Mahindra & Mahindra—India’s biggest maker of sport-utility vehicles—can benefit as well.
ITC shares surge, finally! Is it breaking out?
Cigarette maker ITC Ltd, which has diversified across fast-moving consumer goods (FMCG), hospitality, paper and other areas, has been one of the laggards in the stock market rally that has seen benchmark indices hit new highs.
Despite being among the stock picks of scores of analysts, ITC had underperformed the top indices as well as its peer set. However, the counter surprised the markets with a sharp 8% rally on Thursday to touch Rs 232 a share. ITC’s stock price is now near its 52-week high of Rs 239, which it reached in February.
But the stock is still nearly 30% below its peak in 2017 when it had reached Rs 339 apiece. ITC’s share price has been sliding for the last two years in particular, much before the onset of the coronavirus pandemic that also sunk it to half its previous peak.
While most large-cap stocks in the Nifty 50 had bounced back from the lows of early 2020, when the lockdown in the country hit most businesses, ITC just about recovered. The Nifty 50 has more than doubled since March 2020 while ITC, even after today’s rally, is up just about 50% in the same period.
ITC’s counter saw a sharp spike in trading activity, with more than nine-fold jump in trading volume on the BSE and a similar spike on the NSE. A combined 136 million equity shares changed hands on the NSE and BSE till 1:49 pm. The stock had been recording a daily average of 10-20 million shares in the last few days.
Trades with heavy volumes indicate big investors are piling up on the stock, which is one of the few large caps that have been out of favour for long.
What was wrong with the ITC stock?
The country’s biggest cigarette maker and the second-largest FMCG company had been facing the ire of some institutional funds that base their investment decisions given their environmental, social and governance (ESG) norms. While ITC has a large business that is ESG-compliant, these funds tend to discount the company given its cigarettes business that still contributes a bulk of its profits.
The negative impact of cigarette consumption on people’s health has been a long-term concern and as more funds adopt ESG investment norms, ITC was losing fans.
At the same time, many fund managers perceived that the company has been slow in pushing up its FMCG business which could have given it a much higher valuation like its peers. The company’s hospitality business was also affected by the pandemic like the rest of the hotels and tourism industry.
Some have been waiting for the company to demerge its business units to spur the FMCG unit as a separate company.
Is it catching up? What do experts say?
“The stock was lagging behind in terms of performance. While several other stocks have now turned expensive, this seems to be one of cheaper stock available. The stock is now doing some catch-up, and single handedly has supported the Nifty today, contributing 30-odd points,” according to A Prabhakar, head of Research, IDBI Capital.
Deepak Jasani, head of research at HDFC Securities, believes the breakout was likely due to the expectation of restructuring of the company that could be announced next month. This is with respect to a possible demerger of one or more businesses to unlock value.
Some believe the firm is now going to enjoy better earnings profile. “We also believe elevated commodity prices would cool off in the next two to three quarters with considerable margin improvement in the FMCG business set to continue. However, investor perception of cigarettes business and its long-term prospects has been one of the biggest drags for the stock price performance in the last five years,” according to ICICI Securities.
According to B&K Securities, all of ITC’s businesses were showing favourable tailwinds in their recovery from the pandemic and a rerating is “around the corner”.
“The stock trades at an FY22E estimated dividend yield of 5.5%, higher than most fixed-income instruments today, so downside below Rs 200 is ruled out,” according to a note by the brokerage.
Chirag Shah and Nitin Gupta, analysts at CLSA, expect the company's FMCG business is on a path for a profitable scale-up and could deliver more than 26% CAGR in EBITDA over the next three years given industry tailwinds, margin levers and improving asset utilisation.