JPMorgan: Phase III license auction approved, potential upside for ENIL

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Phase III license auction approved, potential upside
for ENIL


The govt. has approved phase III licensing for FM stations in India. Phase
III will open up expansion potential for FM radio to additional 227 towns
boosting growth for radio advertising.
 Bids to be invited for 839 new frequencies spread over 227
cities. Phase III licensing is likely to invite bids for 839 new channels
over 227 cities. Although, auctions may be 4-6 months away (with
guidelines and other procedures being finalised), we believe this paves
the way for enhancing penetration of FM radio to Tier II and Tier III
cities. This should provide a strong filip to radio advertising growth
 Bidding process through e-auction: The information and broadcasting
ministry has indicated that the bidding for Phase III licenses would be
through an e-auction process. An independent agency will be appointed
to set up the guidelines for the-auction. We believe that the e-auction
process could likely result in aggressive bidding. ENIL has demonstrated
financial discipline in their bidding during Phase II and management has
indicated an 18% IRR threshold when they bid for new stations. ENIL
has a strong balance sheet with net cash of Rs232MM (FY11) and we
believe would be one of the frontrunners in the bidding.
 Other expected regulatory changes. Phase III is expected to be
accompanied by regulatory changes including :1) Multiple frequencies in
a city, 2) Networking of stations, 3) Reduction of lock-in period for
bidders from 5 years to 3 years, 4) Increase in FDI from current 20% to
26% and 5) Allowing private players to broadcast news and current
affairs. We believe these changes would provide significant operating
leverage benefits to leading radio and likely improve profitability for the
radio industry, given largely fixed cost operating structure
 We see significant potential upside to our FY13E-FY14E estimates:
While it is difficult to gauge the impact of phase III on ENIL’s
profitability at this juncture (much will depend on bid prices as well as
regulatory changes), we see potential for significant margin improvement
for ENIL going forward. These benefits are likely to accrue from sharing
of fixed costs between stations based on networking, as well as leverage
from multiple frequencies in a single city. In addition, we expect industry
consolidation as smaller players become eligible to sell-out; we think
ENIL could be a potential buyer. Reiterate OW rating. Key risks include
aggressive bidding for Phase III licences, rising competitive intensity,
entry into non-core segments and adverse legislation.