Here’s why Deepak Shenoy is bullish on the defence sector
You track Zee closely and a lot is happening there. with respect to the SAT order. Any view on Zee Entertainment?
We are not positive. The order is pretty damning, but I think it’s not enough. I do not know whether the SAT has given this order yet. So I feel that perhaps there will be a lot more investigation required to come to the kind of position that SEBI has on this. But it was known for a really long time. I think I first wrote about in 2017 when a large number of promoter entities of the Essel Group, the promoter group of Zee had taken on loans from a lot of mutual funds through bonds.
And these were non-operating companies that were issuing bonds backed by Zee shares. Eventually the default happened in 2019 or so, I think, or 2020. Then there was a fair amount of selling of shares by the mutual fund owners who effectively brought down the ownership of the Zee promoters down to 4% or something because they sold all the pledged shares.
And then there were loans given from Zee effectively to entities owned by these promoters by providing a quasi-guarantee on the loans that those entities took from banks.
And then the banks then took Zee’s money away, which is complex in a way, but then the answer to that was the money was returned.
And now what seems to have been the case is that Zee has apparently made a bunch of payments which have been routed through multiple entities within seconds of each other. And then the money has come back to Zee and they are calling it a repayment of those loans. So this needs more investigation and evidence, I believe, to stand muster in higher courts.
But it does not speak favourably about governance inside the company and there has never one cockroach, there will be more that will tumble out if there is a deeper investigation, so not positive. I mean, the business has always been a very good business, the only profitable media business in town, really, but at this rate, I would say, only profitable listed media business in town but I would say here that I think too many unknowns, I would not take the risk.
Apart from Zee Entertainment, what are the other stocks that you are watching out for? Of course, on Zee Entertainment you are not very positive. But which are the stocks or sectors that look the most promising at this point of time?
We run a PMS, so we have a lot of investments here. So we are talking our book in a way. But I think there is still a long way to go in the defence space. We are in the beginning of a relative re-rating of the entire sector in terms of revenues, in terms of growth, in terms of net profits.
I think this whole sector will grow multifold, whether it is the aeronautics spaces and companies in that space or the Navy and shipyards that are building submarines and ships or just defence equipment itself.
I think there is a huge way to go here. And from the likes of say an M&M or Bharat Forge that might make some parts of defence equipment to a Mazagon Dock or Cochin Shipyard, which might be in a slightly different place but still recipients of relatively larger sums of money.
I think this place has a long way to go. We have a fair amount of investments here. And also we are starting to look at the semiconductor space. Again, they are relatively new players here, very, very small companies so not useful to just go gung-ho over them because they are so small, they have to prove their worth.
But I think with the PLI and the relative importance of semiconductor manufacturing in India going forward, I think this is going to also be a good space to be in. I’m sorry, I am not taking too many names because we are still in the process of buying them but I think these two spaces are something I think they will give a much better than index returns over the next three to four years.
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