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ZEEL’s investors are a worried lot. Just as the merger with Sony is nearing, a slew of insolvency petitions (Exhibit 1) has thrown a spanner in the works. Legal outcome (or settlement) of these cases is anybody’s guess. But even a worst case scenario (call it Murphy’s Law test) would merely delay (and not derail) the merger, in our view. In an unlikely scenario of ZEEL having to pay the entire amount claimed in various NCLT petitions (INR 5.5bn), the impact on balance sheet (Q3FY23 cash: INR 6.7bn) and FY24 earnings (INR 2/merge-co share) does not pose any solvency risk. Besides, we see low probability of additional petitions as the deadline to make representations to NCLT regarding merger is over. More importantly, legal matters are obfuscating consistent improvement in operational performance. ZEEL’s viewership share in key regional markets is on the mend. Profitability in core broadcasting business has improved. Zee5’s growth continues to impress. Inventory, though still high, now has a better mix. While we don’t anticipate the worst case panning out, we have built an exceptional charge of INR 3.5bn (cash outflow of INR 5.5bn) in FY24 out of abundant caution. 20% correction YTD adequately captures the concerns while ignoring the structural positives of the merge-co, in our view. We reiterated BUY with an unchanged TP of INR 320.

* Murphy’s Law test: There are four petitions pending in NCLT against Zee (one was settled on 6th March). Additionally there are cases sub-judice in other courts (Exhibit 1). Potential worst case liability on ZEEL from these cases aggregate to INR 5,485mn. ZEEL has already provided INR 2,002mn for the loans it has guaranteed for Siti, limiting P&L impact to INR 3,483mn. These are manageable given Zee’s balance sheet. Bigger question many investors have is whether there could be more liabilities. We see low probability of that for two reasons. One, only two of the seven lenders to Siti (Exhibit 3) have filed petitions in NCLT against ZEEL, indicating no further exposure of ZEEL. Two, deadline to make representations by creditors to NCLT against the merger was 10-Jan-23 (Exhibit 2).

* How could this pan out?: While the worst case liability does not pose solvency risk, it could delay the merger. 9th March’s NCLT hearing on the merger might get deferred as NCLAT hearing on Indusind’s insolvency petition is still pending (hearing on 29-Mar-23). Out of court settlement, as was the case with IPRS, could be the fastest resolution mechanism. In any case, we don’t see more than a quarter delay in the merger.

* Worst priced in; BUY: Merge-co will receive a cash infusion of c.INR 70/share, implying that the stock is trading at 11x FY24E merge-co adjusted EPS (ex-cash). These trough valuations are ignoring the strengths of the merge-co, in our view. Merge-co’s OTT platform will be a formidable one, augmenting Zee5’s original content with Sony’s sports/ global catalogue. Even on a standalone basis, ZEEL’s operating metrics are on a mend. ZEEL’s viewership share in four of the five largest regions is up 130-550bps over past six months. Non-OTT’s EBITDA margin has improved by 440bps over 9MFY23, even as OTT’s losses have stabilised. Content advances and deposits’ share in inventory, a contentious item, is down from 34% in FY20 to 8%. TV’s subscription and ad-revenue growth are poised to rebound in FY24. Clearly a lot to look up to beyond the merger. BUY.

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