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A balancing act

ZEEL’s board took two important decisions over the past few days. First, it has set higher financial targets, including a definitive payout ratio, to evaluate Puneet Goenka’s performance as CEO. Second, it has accepted Puneet Goenka’s resignation as MD of the company while appointing him as CEO (he was earlier MD and CEO). Puneet intends to focus entirely on his operational responsibilities while relinquishing some of his board ones. Importantly, Puneet’s board seat is now subject to shareholders’ approval. This is a significant development, in our view. It not only makes Puneet more accountable, it also puts the ball in shareholders’ court to determine extent of Puneet’s involvement in the board affairs. We find this balance – an empowered board and a transparent and measurable CEO evaluation metric – apt for ZEEL’s shareholders. Puneet’s continuation as CEO of ZEEL is critical for the operational turnaround of the company. The signs, as we highlighted in (“Turning the page”, 20 Oct 2024), are already evident. These aren’t reflecting in valuations though. Our reverseDCF and SOTP based valuation exercise highlight the extent of undervaluation. A more favourable board-CEO equation for shareholders, backed by consistent execution, can unlock value. We reiterate BUY with an unchanged TP of INR 200.

* What has changed: ZEEL board has set higher targets to evaluate performance of Puneet Goenka. These targets will include a) quarterly consolidated revenue outlook for next four quarters (commencing Q3FY25); b) quarterly consolidated EBITDA outlook for next four quarters (commencing Q3FY25); and c) dividend payout of 25% of consolidated net PAT. While the company had given some guidance on the first two metric, a definitive target for dividend payout is positive and should provide confidence to shareholders on sustainability of cash generation. Separately, board accepted Puneet’s request to relinquish MD position while re-appointing him as CEO. Puneet has agreed to stay on the board as Director, subject to sharesholders’ approval. The board also appointed Mukund Galgali, the CFO, as deputy CEO to strengthen the leadership. Puneet will now focus entirely on operational goals for the company/shareholders.

* Why is it important: Separation of MD and CEO role should improve board’s independence. Puneet has proactively put the ball in shareholders’ court to determine his role/power in the board, suggesting alignment of interest. Importantly, Puneet’s undivided attention towards operational performance will benefit ZEEL, in our view. ZEEL’s recent performance – c.600bps margin expansion over past two quarters, better growth and improved cash flow – are early outcome of his operational rigour.

* Stock offers deep value; BUY: ZEEL has corrected c.20% over past six months despite two successive strong quarters, pushing its value to unreasonably low levels, in our view. Our reverse DCF exercise – even on reasonable assumptions (6% average revenue CAGR over FY24-35E; gradual margin recovery; WACC at 14%) - implies close to zero terminal value at CMP. Even our SOTP methodology – valuing digital business at 3x LTM sales – implies mere 5.5x forward PER for the core broadcasting business. At c.10% FCF yield, and 25% payout target, we find risk-reward very attractive. We reiterate BUY

Peeling off ZEEL’s inherent value

At c.10x FY26E EPS, ZEEL’s value is optically low. We revisited our alternate valuation methodologies – reverse DCF and SOTP – to highlight the extent of its undervaluation. DCF suggests near zero terminal value while SOTP implies 5x core broadcasting PAT. Clearly, there is deep value in the name. See details below:

Method I: Reverse DCF

For a mature, cash generating business such as broadcasting, DCF is a fairly accurate way of determining inherent value. We ran a reverse DCF exercise to figure out what the CMP is discounting. For this exercise, we project 6% revenue CAGR over FY24-35E, against management aspiration of 8-10% growth. We forecast EBITDA margin expansion to continue gradually and reach 26% by FY35E, achievable given the cost focus and operating leverage in the business. With these assumptions, reverse-DCF implies a near zero terminal value. Clearly, there is minimal downside from current levels. With the improvements now visible, investors have all the upside to play for.

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