Post-Satyam markets have been nervous, aided by the regulators’ attempted pro-active measures to ensure best corporate governance practices. The measures appear to have had a dysfunctional effect on the markets. For instance, the markets have reacted negatively to disclosures with regard to the pledging of shares with stocks of all those companies being dumped by investors making the disclosures. The prevailing market sentiment might have to be blamed for this behaviour since no attempt seems to have been made to know the end use of the funds so raised. The common fear is that, in the event of a further fall, such shares may be dumped by lenders for nonfulfilment of margin calls by such promoters. However, the most likely impact of such an eventuality may indeed be positive as those who end up acquiring such shares may be financially stronger and more professional than the incumbent managements.
Another aspect of concern is the obsession of the regulator with what it prefers to call the “disclosure-based regime”, especially for clearing IPOs of companies. None, including the regulator, analysts, media and even the most active investor groups, cares to look into what has been disclosed. It was shocking to know the company and the quality of disclosure made in the Red Herring Prospectus (RHP) of the recently concluded IPO of Edserve Softsystems. The de facto promoters of the company earlier promoted SSI Ltd – a company indicted in the Ketan Parikh scam. Besides, the financials are prima facie not credible. Surprisingly, the IPO has been fully subscribed even in these trying times when even top class companies would have struggled to attract investors’ attention. If appropriate steps are not taken, the company may leave a Satyam-like trail in corporate scams.
Meanwhile, the corporate sector reported its worst performance in the past five years with aggregate sales growth of Nifty companies dropping to single digits and net profit shrinking 12 per cent for the December quarter. A combination of sharply lower realizations for commodity players, market-to-market losses on derivatives exposure and high financial charges have done the damage across sectors with only a few exceptions. Even sectors like FMCG and pharma belied expectations. While services sectors performed better, manufacturing clearly disappointed. But the catch is that services, mainly comprising IT and finance, have significant downside risks ahead. Even the revival of interest rate sensitive sectors is subject to consumer sentiment improving. The steep fall in tax revenue and mounting fiscal deficit touching 10 per cent of GDP has worried policy makers because of the limits it imposes on the policy options available with them.
Indian markets of late have again started attracting the attention of international investors. The comparatively high growth, the recent policy easing by the RBI, timely fiscal stimulus by the government, likely demand stimulation due to hefty pay hikes given by the Sixth Pay Commission, and rural demand remaining robust are some positives. More important, the Indian market now trades at a discount to MSCI Asia ex-Japan Index, with the latest forward PE ratio less than 10. Also, there is a general consensus that the Indian economy will be among the first to bounce back and the markets will start looking up much before that.
Though there are significant risks in the short term, equities offer a promise of decent returns over three to five years. There may be intermittent rallies with one of them finally turning out to be the beginning of the next bull run. No one can for sure predict the time for definite revival. In the current scenario, investing may yield losses to the tune of 20-25 per cent at worst, but waiting for sure revival will make the investor miss out the initial rally – putting him in a disadvantageous position.
None, including the regulator, analysts, media and even the most active investor groups, cares to look into what has been disclosed. It was shocking to know the quality of disclosure made in the Red Herring Prospectus (RHP) of the recently concluded IPO of Edserve Softsystems
Zee Entertainment Enterprises
(CMP Rs 105)
Zee Entertainment Enterprises is a leader in entertainment with a bouquet of popular channels catering to the wide variety of audiences. The company is likely to continue clocking growth in revenues on the back of cable digitalization and DTH due to substantial contribution coming from subscriptions – half of which are derived from overseas – that gives it enough leverage to increase user charges. With an increased number of cities coming under the ambit of the conditional access system (CAS), it will get broadcasters a better share of revenues.
The company expects DTH subscribers to double in the country, thereby benefiting it substantially as one of the established players. This will substantially improve the advertising revenue, more so because Zee offers a diversified portfolio of channels that suits the advertiser more despite competition from players like Colors. The company also expects to considerably improve its receivables position by efficiently recovering dues from cable operators.
The stock is available at a PE of around 18 to its trailing 12 months’ EPS, and may not look cheap on account of a lacklustre performance in the previous couple of quarters. But the way it has positioned itself and the fact that not many channels are actually making profits shows that Zee is likely to benefit most when things start improving. Investment in the stock with a two to three years’ time horizon can give decent returns.
The author is retired as Professor from the University of Delhi in 2024. He is an alumnus of IIM Indore and holds a PhD from the Delhi School of Economics. An investor activist and former member of various SEBI committees. He taught Capital Markets and Investment Banking at leading business schools of India.
