What is wrong with Zee Entertainment? Detailed Analysis.

#1
Shares of Zee entertainment saw a huge decline last trading session, second largest fall since the listing if the company.
The decline eroded almost Rs.14,000 crores from the market capitalization of the company.



Source: BloombergQuint[1]

What triggered the fall is the probe by SFIO (Serious Fraud Investigation Office)against the company for alleged illegal transactions between Essel group, Mr. Subhash Chandra, and Nityank Infrapaower (formerly known as Dreamline Manpower)between 2015–17.

As a result, Chairman Group Subhash Cahndra stepped out, and kind of blamed “Negative forces” for the stock crash. However, he also admitted to some of the mistakes and error of judgement he made while making crucial decisions for the business.

Read: Full Text: Zee Group’s Subhash Chandra Says ‘Negative Forces’ Caused Stock Crash

However, if we look at the company past performance, one cannot blame only negative forces for the decline.
The root cause of this was brewing for past few years, which is evident in the financial statements of the company.


The financial statements of Zee entertainment is an interesting case study on why investors should look at the whole picture instead of focusing on a single aspect.

Most investors believe if a company is posting good earnings growth, it is a great investment.
What they usually forget is that every rupee earned as profit, comes at a cost, and if the cost paid for the profit is higher that the benefit received, its not a great business.

Something similar happened in Zee Entertainment.

Just look at the Profit and loss Statement of Zee Entertainment.



Source: Screener.in[2]

As you can see from the screenshot above, in the year 2017, there was a sudden jump in profits from Rs. 823 crores in 2016 to Rs. 2,221 crores in 2017.
An average investor would have cheered, thinking the company is now on a high growth trajectory.

But if you examine carefully, a large part of this profit was actually contributed by other income, which is almost 65% of the Net Profit.

So a large part of company's income was coming from non core operations.

In the year 2018, the other income reduced to Rs. 576 crores which was 38% of the Net Profit, still on the higher side.

But hey, profit is a profit isn’t it? and that is true, but as I mentioned earlier, every rupee of profit comes at a cost, and if the cost paid is higher than the profit earned, its not a great investment.

The profit Growth in Zee Entertainment came with a huge cost. Here is a screenshot of the balance sheet of Zee Entertainment.



As you can see from the screenshot above, the borrowings of Zee entertainment saw a huge spike in 2016, from mere Rs.2 crores in 2015 to Rs. 1,716 crores in 2016, and Rs.2,203 crores in 2017.

While the numbers came down to Rs. 1,526 crores in 2017, the short term debts such as trade payable and other liabilities spiked from Rs.1,446 crores in 2016 to Rs. 2,042 crores in 2018, and is still on the rise by Sep 2018,

In other words, while the long term pain of the company eased, short term liabilities are still escalating, causing trouble for the company.

So, what went so wrong with the company that caused such massive debt on the books and wreaked havoc on stock prices?
Mr. Subhash Chandra
himself pointed out the mistakes he made in a letter he wrote (quoted below):

I would also like to state through this message, the key points which have gone wrong:
  1. Essel Infra: As most of the infra companies, even we have made some incorrect bids. In usual cases, Infra Companies have raised their hands and have left their lenders with non performing assets, but in our case, my obsession of not walking away from the situation, has made me to bleed 4000 crore to 5000 crore of Rupees. Despite the loss making projects, we continued to pay the interest and the principle, by borrowing funds against our shareholdings in Listed Companies.
  2. Acquisition of D2H: My recommendation made to my brother Jawahar Goel to buy D2H from Videocon was one more key error, which costed me and Jawahar both, a fortune.
  3. When our family business separation was implemented, as the eldest member of the family, I had taken the entire burden of the debts. I believe, it was my mistake to have told myself that “Subhash you can earn and repay the creditors”. Post which, most of my bets on the new businesses have not worked, which led to the increased debt, due to the added interest levels.
  4. The situation at hand, became further unmanageable after the IL&FS issue, came to public light. Till then, we were managing our borrowings efficiently. The IL&FS meltdown stopped the roll overs, diminishing our ability to service our borrowings.

Source: BloombergQuint[3]

The Possible future of Zee Entertainment:

So what will be the future of Zee entertainment and other group companies?

Debt is like a python, it slowly constricts a business, a bad financial year can suffocate a business’ profits, taking away a massive chunk of whatever business makes.

Miss a few years of profit, and business slowly moves towards its own death.

Zee Group first needs to clear the rumors and come out with a blueprint to fix the issue, in front of their shareholders, it the only way they can earn the trust of their investors.

Since most of its liabilities are short term, Zee Group needs to identify and sell few of its not-so-profitable assets to raise funds and service debt.

At present, there is a lot of pain company has to go through, and some tough decision need to be made. Yes this may severely impact the stock prices for the coming months, but one has to take bitter pills to cure the disease.
Disclaimer: Ankit Shrivastav is a SEBI registered Research Analyst (Reg. No. INH000006758). I, or my family members may have positions in the stocks discussed above. This is not a recommendation to buy or sell, but my personal opinion on the stock discussed. I encourage investors to do their own research before investing.
I write at www.Infimoney.com
 

OneThatGotAway

Well-Known Member
#2
so a week ago no one was thinking of borrowing but suddenly this week all ppls saw balance sheet . it that wat you saying ?
if thats case yes bank must have made profit even greater then TCS just saying ...
Total Liabilities = Total Assets so mhm
you saw borrowing increase did you see Other asset is increasing that nullifies threat that company is borrowing it has asset inmy view
i amnot expect in reading balance sheet.

somebody elignten me

My freind its the scam market makers does they do that to clear Account of retail investor . A normal small investory cann;t stand 21% up / down in a week :xD thats how banks and operator makes money killing all of small investor all at once.

In my Arjun eyes view big crocodile that was buying slowly since 2007 to 2013 he exited all of sudden in 1 go :xD making a crash on purpose.
He shorted in f& 0 then dumped his Equity position probably an As*S hole fund manager or FII .
 
Last edited:
#3
so a week ago no one was thinking of borrowing but suddenly this week all ppls saw balance sheet . it that wat you saying ?
if thats case yes bank must have made profit even greater then TCS just saying ...
Total Liabilities = Total Assets so mhm
you saw borrowing increase did you see Other asset is increasing that nullifies threat that company is borrowing it has asset inmy view
i amnot expect in reading balance sheet.

somebody elignten me

My freind its the scam market makers does they do that to clear Account of retail investor . A normal small investory cann;t stand 21% up / down in a week :xD thats how banks and operator makes money killing all of small investor all at once.

In my Arjun eyes view big crocodile that was buying slowly since 2007 to 2013 he exited all of sudden in 1 go :xD making a crash on purpose.
He shorted in f& 0 then dumped his Equity position probably an As*S hole fund manager or FII .
Hi, Thank You for your valuable insight, @OneThatGotAway, its true that Zee limited has seen good growth in assets in the past few years. While asset growth is necessary, but is not sufficient for a company unless those assets generate profits proportionate to their cost. In case of Zee Limited while borrowing soared from mere Rs. 3 crore in 2014 to Rs.1,526 crores in 2018.

Not just that short term payables also soared during the same time.

Mr. Subhash Chandra has explained in his letter how it happened. The reason why there was a sudden decline was that Zee is now finding it difficult to pay its obligations, especially the short term ones, which triggered a fear that the company may default or may have to sell some of its profitable assets in order to meet obligations.

All this plus an additional frea of SFIO investigation against the company lead to panic among investors, resulting in huge decline in the stock price.

I hope this was helpful.
 

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