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ENTERTAINMENT NETWORK INDIA LTD (ENIL)
RECOMMENDATION: BUY
TARGET PRICE: RS.265
FY12E P/E: 17.6X
q ENIL reported strong set of results for 3QFY11. Revenues came in at Rs
775 mn (+22%, y/y), EBITDA at Rs 282 mn (+33%, y/y), and adjusted PAT
at Rs 126mn (+19%, y/y) (standalone financials). Revenues and EBITDA are
well above our estimates. Adjusted PAT came in below our estimates on
account of high deferred tax charge.
q Strong results followed from: a/ improved advertising environment, b/
lower production expenses following the order of the copyright board
that has reduced the royalty payments. Advertising revenues growth was
amply helped by improved pricing in larger cities (11%, q/q), and improved
capacity utilization in the smaller cities. The company has continued
to book lower expenses on production, as a result of an order of the
copyright board. Reported PAT (standalone) has been amply helped by
profits booked on account of sale of OOH division (exceptional items),
while adjusted PAT has come in lower than our expectations, as the company
has taken a deferred tax charge of Rs 78.4mn.
q We make changes to our FY11/ FY12 estimates to incorporate 3QFY11
results as well as higher growth in profits that the results indicate. Our
FY11E/ FY12E EPS is raised to Rs 10.3(+58%)/ Rs12.1 (+1%). Adjusted EPS
(FY11E) is revised upward by 18%.
q ENIL management sounded positive on the announcement of Phase - 3 of
FM radio licensing. The management expects a decision from the government
regarding auctions in the next 3-4 weeks. Auctions themselves
could be held in 3-4 months, and new stations could get operational in
the next 12-18 months.
q The sale of OOH division has brought in ample cash in ENIL's balance
sheet. The company currently has Rs 940mn net cash position, which
would be helpful in funding expansion for the Phase - 3 licenses.
q Improved profitability, continued strength in listenership, stronger cash
position, and exposure to positive regulatory impetus, place ENIL in a
sweet spot among media companies. We are bullish on ENIL and value
the stock at Rs 265, based on 22xPER FY12E EPS. On account of decline in
the stock price since our last update (due, we think to market decline),
we find the risk - reward more favourable on ENIL and upgrade the stock
to BUY.
ENIL reported strong set of results for 3QFY11. Airtime sales growth, 18%, received
a fair contribution for improved pricing. FYTD, pricing has improved 15%. On a
blended basis, pricing has exceeded Rs 10,000 -mark again this quarter, with December
2010 pricing 37% higher than December 2009 pricing. Even so, the management
noted that pricing remains 16% lower than peaks. Capacity utilization on
a blended basis was 62% for the quarter, with legacy stations utilization at 85%,
and newer stations' utilization at 54%. The company's expenses declined on lower
production and marketing expenses, while growth in administration expenses was
led by higher revenues from private treaties (provision of Rs 37mn for the quarter, on
private treaties' revenues of Rs 45mn). The company has reported EBITDA margin of
37%. It is noteworthy that following the decline in royalty payments, smaller stations
have reported strong margins, in the range of 24-27% for the quarter.
The company has consummated the sale of its OOH division. As a result the company
has received cash Rs 845mn, and booked a profit of 123 mn on sale of the
same (standalone), which is booked as an exceptional item. Provision for tax is
higher on account of high deferred taxes booked in the quarter, which results from
the book block being different from the tax block.
Net-net, the company reported PAT of Rs 249mn in the quarter, a growth of 132%
y/y, and 396% q/q. Adjusted PAT grew 19% y/y, on account of high deferred tax,
while PBT (pre-exceptional items) rose 93% y/y.
Change in Estimates
We affect changes in our estimates to reflect: improved advertising environment,
changes in interest expenses, higher provision for tax, and factoring in of exceptional
items (FY11).
Outlook and Valuation
n Advertising revenues are expected to be strong in the near future, as the company
benefits from radio's increasing acceptance as a medium for advertising.
Relative to the industry, ENIL is expected to perform in-line in the coming quarters.
In the past few quarters, ENIL has actually under-performed the radio industry,
and its relative revenue share has declined to 35%, as smaller players have
expanded inventory to gather greater share. However, the management believes
that inventory expansion beyond a point shall not be a viable option to other
players, and advertising rates are set to rise in the industry - which will help ENIL
perform better relative to the industry. ENIL is likely to raise its advertising rates
again in the coming few months by ~5% in 3-4 large markets, while growth at
smaller stations shall be led by rise in inventory utilization.
n Royalties, and production expenses shall likely be in line with this quarter's expenses,
as we believe that copyright board's order shall be upheld. We note that
T-Series, one of the larger music companies, has contested the order, and ENIL's
expenses provision fully for T-Series' music as per prior rates. If T-Series were to
lose the case it has filed, the benefits to ENIL could be higher. Other expenses
are expected to be well in control in the near future. The management has
guided for EBITDA margin of 30-31% in FY11, in line with our fresh estimates.
n Following the meeting of group of ministers in January 2011, the company is
positive that the auctions for Phase - 3 of Radio FM licensing could be declared
soon, along with changes in the policy. While there are multiple benefits that
companies would obtain from Phase - 3, ENIL management appears most excited
about the fact that the new policy shall bring in greater number of stations,
which will provide the company with an opportunity to participate in the Tier2-
Tier 3 towns' story, and compete with regional newspapers for a portion of the
towns' advertising pie. We note that Phase -3 is likely to add 806 radio channels,
in 216 new towns and cities. Additional benefits expected in the Phase - 3 draft
include extension of the licensing period to 15 years from 10 years at present,
and multiple channel ownership in cities.
n We believe that ENIL has a strong understanding of the FM radio business, which
is apparent from the #1/#2 positions held by "Radio Mirchi" among the four key
cities that RAM data is available for. The company has a demonstrated ability to
maintain strong competitive position, and benefits from strong pedigree (BCCL
group). Vision of the company, based on expansion of radio markets into new
avenues (Mirchi Mobile being an example), and expansion of radio into new
markets, is positive. With strong cash position following the sale of the Out of
Home division, ENIL is well - positioned to reap advantages from impending
regulation changes.
n Given the above, we think that current multiple of 17.6x FY12E PER presents an
opportunity. The current multiple, in our opinion, is inadequate to factor in
favourable changes in the company's environment. We set a FY12- end price
target of Rs 265 (prior price target Rs 264), based on 22x FY12E PER, and upgrade
the stock to BUY on improved price - value differential, and increased visibility
on FM radio reforms.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ENTERTAINMENT NETWORK INDIA LTD (ENIL)
RECOMMENDATION: BUY
TARGET PRICE: RS.265
FY12E P/E: 17.6X
q ENIL reported strong set of results for 3QFY11. Revenues came in at Rs
775 mn (+22%, y/y), EBITDA at Rs 282 mn (+33%, y/y), and adjusted PAT
at Rs 126mn (+19%, y/y) (standalone financials). Revenues and EBITDA are
well above our estimates. Adjusted PAT came in below our estimates on
account of high deferred tax charge.
q Strong results followed from: a/ improved advertising environment, b/
lower production expenses following the order of the copyright board
that has reduced the royalty payments. Advertising revenues growth was
amply helped by improved pricing in larger cities (11%, q/q), and improved
capacity utilization in the smaller cities. The company has continued
to book lower expenses on production, as a result of an order of the
copyright board. Reported PAT (standalone) has been amply helped by
profits booked on account of sale of OOH division (exceptional items),
while adjusted PAT has come in lower than our expectations, as the company
has taken a deferred tax charge of Rs 78.4mn.
q We make changes to our FY11/ FY12 estimates to incorporate 3QFY11
results as well as higher growth in profits that the results indicate. Our
FY11E/ FY12E EPS is raised to Rs 10.3(+58%)/ Rs12.1 (+1%). Adjusted EPS
(FY11E) is revised upward by 18%.
q ENIL management sounded positive on the announcement of Phase - 3 of
FM radio licensing. The management expects a decision from the government
regarding auctions in the next 3-4 weeks. Auctions themselves
could be held in 3-4 months, and new stations could get operational in
the next 12-18 months.
q The sale of OOH division has brought in ample cash in ENIL's balance
sheet. The company currently has Rs 940mn net cash position, which
would be helpful in funding expansion for the Phase - 3 licenses.
q Improved profitability, continued strength in listenership, stronger cash
position, and exposure to positive regulatory impetus, place ENIL in a
sweet spot among media companies. We are bullish on ENIL and value
the stock at Rs 265, based on 22xPER FY12E EPS. On account of decline in
the stock price since our last update (due, we think to market decline),
we find the risk - reward more favourable on ENIL and upgrade the stock
to BUY.
ENIL reported strong set of results for 3QFY11. Airtime sales growth, 18%, received
a fair contribution for improved pricing. FYTD, pricing has improved 15%. On a
blended basis, pricing has exceeded Rs 10,000 -mark again this quarter, with December
2010 pricing 37% higher than December 2009 pricing. Even so, the management
noted that pricing remains 16% lower than peaks. Capacity utilization on
a blended basis was 62% for the quarter, with legacy stations utilization at 85%,
and newer stations' utilization at 54%. The company's expenses declined on lower
production and marketing expenses, while growth in administration expenses was
led by higher revenues from private treaties (provision of Rs 37mn for the quarter, on
private treaties' revenues of Rs 45mn). The company has reported EBITDA margin of
37%. It is noteworthy that following the decline in royalty payments, smaller stations
have reported strong margins, in the range of 24-27% for the quarter.
The company has consummated the sale of its OOH division. As a result the company
has received cash Rs 845mn, and booked a profit of 123 mn on sale of the
same (standalone), which is booked as an exceptional item. Provision for tax is
higher on account of high deferred taxes booked in the quarter, which results from
the book block being different from the tax block.
Net-net, the company reported PAT of Rs 249mn in the quarter, a growth of 132%
y/y, and 396% q/q. Adjusted PAT grew 19% y/y, on account of high deferred tax,
while PBT (pre-exceptional items) rose 93% y/y.
Change in Estimates
We affect changes in our estimates to reflect: improved advertising environment,
changes in interest expenses, higher provision for tax, and factoring in of exceptional
items (FY11).
Outlook and Valuation
n Advertising revenues are expected to be strong in the near future, as the company
benefits from radio's increasing acceptance as a medium for advertising.
Relative to the industry, ENIL is expected to perform in-line in the coming quarters.
In the past few quarters, ENIL has actually under-performed the radio industry,
and its relative revenue share has declined to 35%, as smaller players have
expanded inventory to gather greater share. However, the management believes
that inventory expansion beyond a point shall not be a viable option to other
players, and advertising rates are set to rise in the industry - which will help ENIL
perform better relative to the industry. ENIL is likely to raise its advertising rates
again in the coming few months by ~5% in 3-4 large markets, while growth at
smaller stations shall be led by rise in inventory utilization.
n Royalties, and production expenses shall likely be in line with this quarter's expenses,
as we believe that copyright board's order shall be upheld. We note that
T-Series, one of the larger music companies, has contested the order, and ENIL's
expenses provision fully for T-Series' music as per prior rates. If T-Series were to
lose the case it has filed, the benefits to ENIL could be higher. Other expenses
are expected to be well in control in the near future. The management has
guided for EBITDA margin of 30-31% in FY11, in line with our fresh estimates.
n Following the meeting of group of ministers in January 2011, the company is
positive that the auctions for Phase - 3 of Radio FM licensing could be declared
soon, along with changes in the policy. While there are multiple benefits that
companies would obtain from Phase - 3, ENIL management appears most excited
about the fact that the new policy shall bring in greater number of stations,
which will provide the company with an opportunity to participate in the Tier2-
Tier 3 towns' story, and compete with regional newspapers for a portion of the
towns' advertising pie. We note that Phase -3 is likely to add 806 radio channels,
in 216 new towns and cities. Additional benefits expected in the Phase - 3 draft
include extension of the licensing period to 15 years from 10 years at present,
and multiple channel ownership in cities.
n We believe that ENIL has a strong understanding of the FM radio business, which
is apparent from the #1/#2 positions held by "Radio Mirchi" among the four key
cities that RAM data is available for. The company has a demonstrated ability to
maintain strong competitive position, and benefits from strong pedigree (BCCL
group). Vision of the company, based on expansion of radio markets into new
avenues (Mirchi Mobile being an example), and expansion of radio into new
markets, is positive. With strong cash position following the sale of the Out of
Home division, ENIL is well - positioned to reap advantages from impending
regulation changes.
n Given the above, we think that current multiple of 17.6x FY12E PER presents an
opportunity. The current multiple, in our opinion, is inadequate to factor in
favourable changes in the company's environment. We set a FY12- end price
target of Rs 265 (prior price target Rs 264), based on 22x FY12E PER, and upgrade
the stock to BUY on improved price - value differential, and increased visibility
on FM radio reforms.
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