Yesterday Zee Telefilms and Turner International India (a 100 per cent subsidiary of AOL Time Warner) announced a joint venture with Zee holding a 74 per cent equity stake and Turner holding the balance 26 per cent.

What happened on the bourses following this piece of positive news makes for interesting reading though. The Zee scrip has been in a downward spiral since peaking on 11 December at Rs 151.45. The scrip closed down at Rs 134.35 yesterday and continued its fall to close at Rs 123.75 today.

According to Motilal Oswal Securities though, this movement is not surprising. A report it has prepared states that the core issues dogging Zee remain - that of management quality, transparency, disclosure standards and unauthorised advances to group companies. Zee is also badly in need of funds to repay its debt of Rs 7 billion plus. It needs money for its hybrid fibre coax (HFC) network and acquisition of the last mile too. The number of days debts are outstanding on a consolidated basis has touched 180 days, clearly indicating stress on the business. None of these crucial issues would be addressed by this marketing JV, due to which Oswal Securities remains distinctly cool to these developments.

The report it has prepared further states that prospects of any resurgence driven by content continues to be bleak. Viewership is down significantly, making Zee TV the No 3 Hindi entertainment channel. Zee TV's channel share has slipped to an abysmal 4.4 per cent compared to Sony TV's 8.2 per cent and Star Plus' 19.4 per cent in the prime time slot. Now, the gap with Sony is also increasing continuously and there seems to be no major reversal in sight.

The management owes Zee Telefilms around RS 2.2 billion and there are no evident signs of repayment of the dues coming through. This after having missed the promised deadline several times. Even if the new JV brings along benefits in terms of better acceptance of the bouquet by MSOs, earnings will not get impacted materially over the next 4 quarters.

Oswal Securities expects an EPS of Rs 4.96 in FY02 (a growth of 12 per cent) and Rs 5.95 in FY03 (a growth of 20 per cent).

The stock price has run up from Rs 70 exclusively on the hopes of induction of a strategic partner (AOL Time Warner) in Zee Telefilms at a price of Rs175 plus. This JV with Turner International does not match up to anything close to a strategic stake by AOL Time Warner in Zee Telefilms.

This is a major disappointment for the market after expectations were run up so high. At the current price, the stock quotes at a P/E of 27x FY02 and 22.4x FY03 earnings. With valuations clearly stretched, the stock price will fall from these levels, the report concludes.

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