ENIL: Growth on track 2QFY11 result snapshot: Alchemy

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Growth on track
2QFY11 result snapshot
Entertainment Network India’s (ENIL’s) 2QFY11 results were a little above our expectations.
Consolidated revenue for the quarter grew 11.7% YoY to `1,100mn. A sharp volume-led
growth in advertisement revenue for the radio business, coupled with strong cost-control
measures improved the company’s operating profitability. Consolidated operating profits for
the quarter stood at `148mn, with an operating profit margin of 13.4%. Accordingly, net
profit for the quarter stood at `9mn as against a net loss of `138mn in 2QFY10.


Radio business in a growth trajectory
The radio business saw a revenue growth of 12.3% YoY to `628mn. This primarily came from
an uptick in inventory volumes as pricing remained flat on a YoY basis. During the quarter the
company had 35 days of benefit of lower royalty cost (as per the order passed by the Copyright
Board). As such, production expenses for the quarter declined 26.6% YoY and 13.9% QoQ, to
`42mn. However, this was negated by a sharp increase in marketing cost (incremental ~`30mn
towards Mirchi Music awards), which grew 106.6% YoY and 54.4% QoQ to `92mn. As such,
the operating profits managed to grow by a mere 8.5% YoY as well as QoQ to `157 mn.
Operating profit margins for the quarter remained flat on a sequential basis at 25.0%.
Accordingly, net profit for the radio business stood at `50mn, growing 31.3% YoY.

Performance of outdoor and events business
The outdoor business reported a revenue growth of 12.8% YoY to `412mn. The segment
reported an operating loss of `69mn.The event business reported revenue of `90mn growing
36.9% YoY. The first and second quarters are seasonally the weaker quarters for the event
business and, as such, could not cover the segment’s fixed operating costs. During the quarter,
the events business reported an operating loss of `2mn.

Change in estimates
We revise our estimates in view of the impact of lower music royalty charges for the radio
business and the sale of the outdoor business, which will now be completed in November 2010
(as against August 2010, as guided earlier by the management). Accordingly, we revise
downwards our FY11 earnings estimates by 6% and upgrade our FY12 estimates by 13%.

Valuations and view
 For the YTD, ENIL’s radio business has seen growth driven primarily by strong volume offtake.
Now, with the industry operating at optimum utilisation levels, particularly prior to the
commencement of the peak season, we expect better pass-through of ad-rate hikes, driving
growth.
 The sale of the company’s outdoor business (cash infusion `1.01bn) has helped reduce
leverage and fuel the next round of growth for the company’s radio business.
 Also, as the residual businesses (radio and events) are less capital intensive, we see healthy
growth in ENIL’s RoE from now on. Our sum-of-the-parts (SOTP) valuation for ENIL
comes to `235 per share, leaving a limited upside of 2.4% from the current levels. We
maintain Accumulate.


Conference call highlights
 The management expects the radio industry to grow in the range of 14-15% for the year.
Though ad revenue in 2QFY11 grew 12.3%, the 2% to 3% shortfall in growth rate will
be compensated in 3QFY11, as the festive season has seen a spill over to October, this
year. The company has already had a successful pass- through of ad-rate hikes taken in
August and expects yields, as well as volumes, to increase, driving growth from now on.
 Revenue for legacy stations (10) stood at `442mn, with an operating profit of `129mn.
While the balance 22 stations reported revenue of `186 with an operating profit of
`28mn.
 Utilisation for legacy stations (10) stood at 79%, whereas that of new stations (22) stood
at 48%. Overall utilisations for the radio business, during the quarter, stood at 58% (see
Exhibit 5).
 Consolidated administration expenses include a provision of `27mn, against private treaty
revenue of `39mn.
 The sale of outdoor business to BCCL is expected to be completed by end of November
this year.