Those who have followed me on CNBC-TV18 would have noticed the point I was making for some time apropos Zee Entertainment. The street was fearing the worst for the Zee stock, perhaps not to the extent of the single-day fall on Friday which took everyone by surprise.

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What were these warning signs? The biggest one came when the promoter Subhash Chandra said he is in talks with entities to sell his stake. It is unusual for a promoter — that too of the largest listed media company of India — to publicly say his stake is up for grabs. Did he sense some kind of danger to the stock price?

The Zee stock price has behaved curiously last year. It fell from a high of Rs 600 plus to around Rs 430 despite never disappointing financially. Of course, it was a terrible year for equities but the Zee stock clearly was in a big bear grip. So when the promoter announced a stake sale in November, not only did it put a floor to the stock price, it also triggered a mini breakout to Rs 480 odd.

Over the next one month, the stock would just refuse to go above the Rs 480-500 zone. Every time it showed signs of a big rally, someone would come out and sell big. So much so that it became the most obvious trade to short it every time it had a “breakout”.

Things got curiouser and curiouser. The company published numbers that beat most parameters but the stock after opening to hit Rs 475, slid sharply.

And no, this was not about market positioning, which is an important issue to track after earnings. Truth is the stock never had a big rally and hence you couldn’t attribute the fall to a normal long unwinding or profit taking.

It is at this point that you would want to connect the dots. What is Zee Entertainment’s shareholding pattern and how much of it is pledged? That was the most obvious angle to look at. Promoter holding is at 41.6 percent and institutional holding higher than that.

In fact, FIIs also own almost the same stake as promoter. Of the promoter stake, 59.37 percent was pledged. So if someone acquired the entire pledged stake, the promoter stake would be lower than that of person acquiring the pledged shares.

The market feedback was that Rs 400 was the line in sand for Zee Entertainment stock. The lenders had made it clear to the promoter that if the stock broke 400, they would sell the promoter stake in open market. And that would explain how stories of marquee players joining the race for promoter stake would keep appearing every time the stock fell within 10 percent of that threshold (roughly around Rs 430-440).

And hence on Friday as soon as Rs 400 broke, you had a vertical fall on the stock and the promoter’s letter after trade ended confirmed that the company is facing severe crisis and a stake sale is the only logical outcome.

Now, the obvious question is what next.

A total of 1.9 crore shares were marked for delivery on Friday. It is a fair estimate that around 70 lakh of that was the selling of pledged shares. Now, a total of 23.7 crore shares are pledged and hence this is only a very small amount of shares that are prone to be sold into open market.

Let’s make once thing very clear. Over the weekend, some parallels were drawn to Satyam but this is no Satyam.

This is just a case of a promoter spreading himself too thin and just taking too much of leverage on board. What to do with the stock then? Well, with the news of lenders reaching some agreement with the promoter, a gap is given. But that is vulnerable to be sold into and in case it does, keep Friday’s low as the Lakshman Rekha. And if you are a value investor, be on the prowl and grab the opportunity when it comes.

First Published:Jan 28, 2019 9:53 AM IST