Zee's Hidden Value: The Inventory Factor Exposed

It's a curious case, indeed, when the market throws us a curveball, especially with a stock as widely discussed as Zee Entertainment Enterprises Ltd.

Early this year, something truly remarkable, even historic, unfolded with Zee's stock price.

For the first time in an entire decade, in fact, the first time in more than two decades, the stock actually dipped below its book value.

Think about that for a moment - not a single day in the last ten years, not even during the COVID crisis, did Zee's stock price fall below this crucial marker.

This was, without a doubt, a momentous occasion for the company's stock.

Now, I can almost hear your thoughts: "Book value for a media stock like Zee? Isn't that irrelevant? Shouldn't we be looking at things like price-to-earnings for a company that deals in content and entertainment?"

Well, I find myself a little neutral on these sorts of valuation debates.

Let's consider a simple analogy: If you're trying to figure out the worth of a tree that reliably produces fresh, delicious fruits every year, does it really matter if you value the tree itself or the basket of fruits it yields?

In the end, the final value you arrive at should be the same.

The same logic, to a large extent, applies to companies. You can approach their valuation by looking at the earnings they generate, or you can look at the "tree" - the book value - which is the foundation that helps produce those earnings.

Ideally, the outcomes shouldn't be drastically different.

So, let's circle back to Zee's book value and take a closer look at its balance sheet.

Zee boasts a substantial balance sheet, coming in at a hefty Rs 140 billion (bn).

But here's where it gets interesting: Half of this impressive sum, around Rs 70 bn, is made up of something called "inventory."

Now, for media companies like Zee, inventory isn't quite what you'd find in a typical retail store. Instead, it represents the content they either create themselves or acquire from external sources.

Think about a movie they've bought the streaming rights for or a TV show they produced.

The financial benefit from this content doesn't just disappear after one viewing. It continues to generate revenue over several years.

Due to this ongoing benefit, media companies like Zee are allowed to "amortize" these costs over a period of time.

Let's break that down with an example...

If Zee spends Rs 50 crore to buy the streaming rights to a popular movie, that entire Rs 50 crore will initially show up as 'inventory' on their balance sheet.

Instead of writing off the whole amount at once, they might spread that cost out, say, equally over 5 years.

So, each year, one-fifth of that Rs 50 crore (which is Rs 10 crore) would be recognised as an expense, slowly reducing the inventory value on the balance sheet.

Since Zee TV is constantly churning out new shows and acquiring fresh content, their inventory has, understandably, continued to grow steadily over time.

Putting things into perspective, Zee's stock currently trades at around Rs 130 per share, quite close to its book value of Rs 120 per share.

And out of that, the value attributed to inventory alone is quite significant, close to Rs 70 per share.

Historically, Zee has often traded at around twice its book value.

This means that if we simply assume that these historical valuation patterns will continue, the market could potentially push Zee Entertainment's stock price towards Rs 240 per share.

That's a pretty appealing prospect, isn't it?

However, here's where we need to introduce a dose of reality and a bit of caution. What if we believe that Zee has been a bit too optimistic, even aggressive, in how it values its inventory?

It's common for companies to have different approaches to valuing their assets.

If we decide to apply a discount, say, of at least 30% to the book value of this inventory, then the inventory's per-share value would fall from Rs 70 to a more conservative Rs 50.

In this scenario, Zee's total book value would drop to around Rs 100 per share.

Even with this more conservative book value, if we still apply the historical 2x price to book multiple, then the fair value for the stock would be around Rs 200 per share.

Still quite a decent upside.

Now let's push this idea even further. What if we assume an even larger discount for the inventory, a 50% reduction?

In this more pessimistic, but potentially realistic scenario, the total book value per share would fall to Rs 85.

Applying the 2x price to book multiple to this would give a fair value of Rs 170 per share.

So, as you can see, we've arrived at three distinct fair values for Zee Entertainment, leading to three different possibilities for its future stock price.

And honestly, there could be even more variations depending on how you personally choose to assess and value that crucial inventory.

Ultimately, your decision on whether to invest in Zee Entertainment will largely hinge on your personal assessment of how that inventory is valued.

This is where you need to tread carefully. Be realistic in your assumptions. Don't shy away from being a bit conservative if you feel it's warranted.

But at the same time, don't be afraid to act and "pull the trigger" if, after the stock's recent 50% surge from its lows, you see a significant gap between its current price and what you believe its true value to be.

The market often presents investors these kinds of situations. It's up to us to analyse them thoroughly and decide if we need to act decisively or not.

Happy investing.

Warm regards,


Rahul Shah
Editor and Research Analyst, Profit Hunter
Equitymaster Research Private Limited (formerly Equitymaster Agora Research Private Limited) (Research Analyst)