Media Buzz ::Radio – Tune In:: Citi

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Media Buzz
Radio – Tune In
 Listen In — The radio market in India is in its infancy, at ~US$200m, but growing
faster than the overall ad market in the last decade, post (partial) deregulation.
We think there is scope for further growth – radio currently constitutes ~4% of the
ad pie and could move closer to the global average of 7-8%. Increasing mobile
phone penetration, emergence of local advertising and expansion into smaller
cities are accelerating industry growth.


 Resolution of music royalties issue – a growth kicker — A recent Copyright Board
order favors radio companies – royalty payments will now be on a revenue sharing
mechanism, like most other countries. The hitherto method of a fixed royalty fee,
regardless of the category of city or listenership, impacted profitability, esp. for
the small city operators. Royalties, which worked out to ~7-23% of sales of
different operators, will come down to 2% of net ad sales, a big margin kicker.
Admittedly, legislative issues remain, as music companies (T-Series) challenge the
order; but speedy resolution is likely as the govt. wishes to attract radio
companies’ participation in Phase 3 licensing (expansion into smaller towns).
 Regulatory support aids turnaround — Positive commentary on other ‘expected’
regulations like: a) permission for multiple frequencies in a city by an operator
(more channels/differentiated content at marginal cost), and, b) networking
between stations across categories of cities will likely provide scale benefits.
 High operating leverage — Players are talking of ~15-30% yoy revenue growth
(yields + volumes) in FY11/12E. Besides license fees (& royalties), the cost base
for radio operators is largely fixed – operating leverage is high. We think larger
players and/or ones with presence in high-growth markets will benefit.
 Stock Focus — The top 2 private FM players, ENIL & Reliance Broadcast, are key
plays on radio; the former being the only profitable player as of now. DB Corp, HT
Media & Sun TV also have exposure to radio, but revenues are too small (~3-4%
and at/near operational breakeven) to move the needle for them.


Radio & India’s Advertising Market
 The size of the radio industry in India is ~Rs9bn; which constitutes around
~4% of India’s overall ad pie. Ex-agency commissions of ~Rs1bn, the radio
market consists of government (All India Radio) and private players – with
revenues of ~Rs2bn and ~Rs6bn respectively.
 Strict government policies, high license fees and lower ad yields hampered
radio industry prospects. Almost all participants post the first phase of radio
licensing incurred losses between 1999 and 2005. With phase 2, the
government shifted to a revenue-share license fee regime – which increased
the attractiveness of the radio medium and led to bids worth ~US$200m+ in
phase 2 vs ~US$35m in phase 1.
 We think that mobile phone penetration has accelerated radio industry
growth. It is estimated that 25% of the 500m mobile subscribers in India
have radio-enabled handsets, which is driving listenership.
 Radio ad growth has been better than the overall advertising market average
over the past five years – radio has moved from being <2% of the overall ad
market (pre phase 2 licensing, mid CY2005) to ~4-4.5% now. This is lower
than the global average of ~7-8% share of radio. Our discussions with radio
operators reveal that it may be difficult for the sector to move beyond 5-6%
in the current regulatory regime.
 In 2HCY08/1HCY09, ad yields declined sharply, impacting industry growth.
While volumes have picked up in CY09, industry growth was still lackluster.
Radio industry players suggest that inventories are now running full and ad
rates are have stated improving in recent months – but are still on an
average ~15-25% below peak levels. Better yields are likely to help revenues
and EBITDA growth going forward.
 While leader ENIL’s management expects ~15% yoy ad revenue growth in
FY11E to be reasonable; DB Corp and Sun TV Network expect radio growth
of ~25-30% and 30-40% yoy respectively on their relatively smaller base,
with higher growth in non metro stations.



 Apart from national advertisers (mainly consumer companies and telecom
operators), recently radio is attracting many local advertisers. Independent
retailers, real estate agents, education institutes, etc are increasingly
advertising through this medium. The localization of content, cost
effectiveness and targeted advertising bodes well for the smaller advertiser.
As per FICCI KPMG Media & Entertainment Report, 2010, the share of local
advertising has moved up from ~20% in 2007 to ~40% in 2009 –
highlighting their importance in driving industry growth.
 Digital and satellite radio is still a distant prospect in India. WorldSpace’s
attempts to grow in Indian market failed. Globally too, the digital form has
not garnered much scale – industry players note that it is only now that sunset
dates are being set for digitalization in cities in UK. The price conscious
Indian consumer may not be ready to invest in hardware (costing ~Rs3000-
4000 per set) and pay for content. Besides the demand economics,
operators also face technical, regulatory and infrastructure headwinds –
returns may not justify the significant investment.


Regulations Matter
The radio operators think the heavily regulated industry is a major reason for
the slower growth and delays in profitability. We discuss some of these.

1) Music Royalties- A Big Growth Driver…..
Radio operators pay a fixed rate per needle hour to the India Performing Rights
Society (IPRS) and Phonographic Performance Ltd (PPL) as music royalty
payment. The rate is fixed by the royalty board, regardless of the category of
city or listenership of the station. Even for the larger players like ENIL and
Reliance Broadcast Network, royalties accounted for ~7% and 12% of
revenues respectively in FY10; whereas for players with a higher mix in smaller
towns like DB Corp, this was ~23% of revenues. Radio companies argue that in
non metro towns, the fixed quantum of royalty payments make the cost
economics unviable given the lower absolute revenues.
Internationally, the revenue sharing model is preferred and radio companies
are charged ~0-5% of their revenues for royalty payments. Alternately, a flat
fee structure, fixed for each category of city, was also being considered.
An order by the Copyright Board in August 2010 to move away from fixed-fee
regime to one where royalty payment is based on 2% of net advertising
revenues favors radio companies and would lead to a massive margin
expansion.





However, our discussions with industry participants reveal that the new royalty
sharing formula would decrease the industry wide royalty payment to ~Rs160-
180m from ~Rs1.2-Rs1.3bn earlier – which severely impacts the music
companies. T-Series (contributes ~20-50% of the volumes for different
operators) has challenged the order – resolution of which could decide the
extent of profit growth of the radio companies going forward.
We think a speedy resolution is expected given that the government would want
to attract participation of the radio operators in phase 3 licensing- i.e.
expansion to smaller cities. The hearing of the dispute with T-Series will begin
from the end of this month.


2) ….. And makes way for Phase 3
The government is looking to roll-out the 3rd phase radio licenses in the near
future. This will include an addition of ~240 towns for private FM with ~700-
800 new stations being added, which would then ensure that 80-90% of India
ad market potential by value would then be covered.
Focus in phase 3 will be on tier-II/III towns and will further enhance the spread
/ penetration of radio in the country. The royalty issue has been pending for the
last two years and its resolution is thus important before the government rolls
out Phase 3 policy. These plans provide some confidence that the music
royalty issue should be sorted in the near future.



3) Extending License periods
High set-up costs and capital requirement for building the network has been a
major issue for radio operators and a prime reason for industry losses. Radio

operators mention that they are looking for some relief, in the form of an
extension of the license period from 10 years to 15 years. Operators have been
hoping for automatic renewal for five years, after the expiry of the current
license period. As of now, there has been no response from the government on
these demands.

4) Multiple frequencies and Networking aid growth
Permission for multiple frequencies in a city for an operator and allowing
broadcasters to network within their own network across cities have been the
other demands of the industry.
As incremental costs are low for setting up an additional station in a city,
multiple frequencies could help improve cost structures. Industry players think
the larger operators will benefit more given: a) better financial viability – may
be able to leverage this to set up second stations and b) could drive
consolidation.
Current regulations have lead to minimal content differentiation – which has
hampered profitability and growth rates in the past. Further, an increase in the
total number of frequencies in each city could help reduce the entry costs for
players and make focused or niche formats viable. This may improve radio
listenership levels and thus enhance ad market potential.
Industry players think that multiple frequencies and networking may be
partially permitted with the new policy. They think govt. may allow ownership of
multiple frequencies subject to a minimum of three private broadcasters in a
district. There may cap the number of the frequencies – any one broadcaster
can own ~40-50% of all available frequencies in a district. Networking could
be also permitted as long as a part of the content (~20%) would be local.

5) Other Regulations
A number of players have been talking about the benefits of the introduction of
news and current affairs on radio, which is currently not permitted. This maybe
accepted if news content is likely to be restricted to content sourced from the
national broadcaster or govt. bodies. Companies with existing newspapers & TV
channels expect to reap benefits for any policy changes in this regard. We
think this may benefit listenership levels in the long run, however there is little
competitive advantage for one player over the other, given that almost all the
players have a media background.
There has also been talk of increasing FDI in radio from the current 20% to
26%. While this may be sentiment positive, it may not impact large groups with
little capital constraints.

Economics – Operating Leverage Is High
 Except for license fees (and royalties), the cost base for the radio operators
is largely fixed – thus, operating leverage benefits are high. Further, the
positive regulations expected in the form of permitting multiple frequencies
in a city by an operator and networking between stations could provide scale
benefits.

 Most players are talking of 15-30% yoy in revenue growth in FY11/12E – a
combination of yield increases (ad rate hikes taken in the last quarter) and
higher volumes (improving - already near/at peak levels).
 We think larger players with leadership positions would benefit more. As in
other media, the top 1 or 2 players get a disproportionate share of the ad
revenues.
 Operators with presence in higher-growth markets will likely benefit. Like
print media, radio growth in non metro towns is higher. The ad rate
differential between metros and non metros is likely to narrow over the
medium term.



ENIL (ENIL.BO; Rs218.15; Analyzed Not Rated)
 Entertainment Network India (ENIL) is India’s leading private radio company,
operating stations under the Radio Mirchi brand. It is a part of The Times of
India Group, one of India’s largest and oldest media conglomerates.
 ENIL is primarily a radio company – ~75-85% of revenues would come from
radio business, after the demerger of the out-of-home (OOH) business.
 It operates 32 stations across 14 states in ten languages- a mix of large and
small stations. Radio Mirchi is the market leader in the three key markets of
Delhi, Mumbai and Bengaluru.
 With revenues of ~Rs2bn, ENIL is the market leader among the private FM
players with market share of ~37%, with a weekly listenership base of ~42m
(i.e ~2x the nearest competitor). It thus commands strong pricing over other
major private FM players (premium varies between 10-30%).

 Mgmt expects ~15% yoy ad revenue growth in FY11E driven largely by yield
improvement (~10% yoy) and to some extent by higher volumes (~5% yoy).
Inventory utilization is near historical peaks at ~56-57%; whereas pricing is
still ~20% lower than the earlier peak levels. We think the benefits of ~5-
20% ad rate hikes in August would be visible in 2HFY11.
 Retail to corporate advertising mix is currently ~36/54%. Share of local
advertising has increased sharply in the last three years (was ~20% in
2007).
 Radio business derives a reasonable part of its ad revenues from private
treaty companies that are aided by the Times of India group. ENIL is
expected to account for ~4% of its radio revenues from private treaty deals.
The total size of the private treaty book is ~Rs200m. Mgmt also noted that it
shares the client MIS of the other group companies.
 ENIL supports its radio channel by on-ground local events, through ‘Mirchi
Activation’. This way it also diversifies its revenue base.


 Royalty was ~7% of sales for ENIL last fiscal. Mgmt expects 300-500bps
expansion if the issue is resolved as per the order by the Copyright Board. TSeries
accounts to ~20% of ENIL operations.
 Mgmt would be interested in Phase 3 depending on the regulatory support
and has adequate capital for the same. It thinks IRR targets of ~18-19% are
needed to make business sense.
 The company also launched Mirchi Mobile, the first streaming radio channel
on mobile phones; mgmt noted that this has started generating revenues.
 It is currently the only profitable radio player. ENIL stock trades at ~34x
FY11E and 20x FY12E P/E, based on consensus forecasts. On EV/EBITDA
basis, it trades at 14x FY11E and 11x FY12E.



Reliance Broadcast Network (REBN.BO; Rs97.70; Not Rated)
 Reliance Broadcast Network is primarily a radio company – 88% of revenues
in FY10 come from radio business (~Rs1.6bn). The company is also into
events and OOH.
 Reliance ADAG’s 92.7 BIG FM has a reach of 45 radio stations (max
permitted). Including alliance partners, Raneka Fincom (Rangila FM),
B.A.G. Infotainment (Radio Dhamal) and Music Broadcast (Radio City), the
network offering is around 65 radio stations.
 Its market share is ~21% within the private FM players with leadership
position in Bengaluru and Kolkata in terms of listenership.
 The FY10 annual report notes that the company’s inventory utilization in
Tier II/III cities increased by 44% yoy in FY10; whereas utilization in tier I
rose by 24% yoy. Retail revenues rose ~15% yoy last fiscal.
 In 1HFY11, radio revenue growth was ~14% Y/Y, 61% of which is from non –
metro towns. In an interview with FE, Reliance Broadcast Network CEO notes
that the contribution of tier II/III stations to the radio revenues is now ~37%
v/s 30% a year before. Inventories have improved 48% Y/Y in the non metro
stations.
 The company recently raised ~US$60m via preference share allotment,
which it has used to retire debt and mgmt believes it could help for future
expansion. The current market cap and enterprise value (EV) of Reliance
Broadcast Network is ~US$180m and ~US$190m respectively.




DB Corp (DBCL.BO; Rs265.60; 1L)
 DBCL has presence in radio flanking its print business. Earlier this year,
DBCL announced the demerger of its radio business from its 56.8%
subsidiary, Synergy Media Entertainment (SMEL), into itself. SMEL operates
FM radio businesses under the MY FM brand name in 17 cities in India,
namely, Jaipur, Ahmedabad, Chandigarh, Amritsar, Jalandhar, Indore,
Bhopal, Gwalior, Udaipur, Ajmer, Surat, Bilaspur Nagpur, Kota, Jabalpur,
Raipur and Jodhpur.

 The focus on SMEL has been in relatively smaller cities and towns where
there are group synergies in the form of an established brand, reputation
and infrastructure. This also aids growth rates given that the non metro
towns are growing faster than the large cities. Mgmt notes that even in FY09
as the industry growth moderated, SMEL was able to report double digit
growth due to its presence in non metro stations.
 DB Corp has been strong in the retail advertising space in its print business.
We believe radio is most suited for local advertising – DB Corp can grow
faster than industry by focusing on retail advertising on radio.

 Overall, the radio business does not impact DBCL’s consolidated financials
materially, given that its contribution is <5% of consolidated revenues.
Operationally, radio business has achieved break even at the EBITDA level.
Given that the average age of the stations in ~2.5 years, the breakeven has
been faster than most peers.

 The management indicated that it may bid for more radio licenses in Phase
3 bidding process; however, it maintained its strategy of sticking to non
metro markets only.
 Our estimates forecast ~25% yoy growth in revenues (1H: ~20% yoy growth)
and small EBITDA profit in FY11E. We have not factored the benefit post the
revised music royalty order in our estimates – note that there are upside
risks to radio profit growth estimates if the revised rates (ordered by the
Copyright Board) are accepted.
 We think there could be some tax benefits accruing to DBCL, given that
SMEL has accumulated losses. As per company reports, SMEL had
accumulated losses of ~Rs770m on its books (as of March 31, 2010). Post
this transaction, the near term effective tax rates may be lower, however, we
have refrained from ascribing a multiple to a non-recurring tax benefit.



HT Media (HTML.BO; Rs153.10; Not Rated)
 HT Media operates its radio stations, Fever 104 FM, focusing on the larger
cities. It operates in three A+ stations (Delhi, Mumbai and Kolkata) and one
A category city (Bengaluru). While competition in these markets is higher, so
is the absolute market opportunity. Fever maintains its second and third
position in Delhi and Bengaluru markets respectively.
 Radio business has revenues of Rs418m in FY10 (~mere 3% of consolidated
revenues) and has broken even at the EBITDA level in recent quarters.
Revenue growth in the last quarter was ~44% yoy, driven by higher volumes.
Going forward, higher pricing should drive revenue and EBITDA growth.
 Mgmt has in the past mentioned that it may be interested in Phase 3
licensing, depending on the scope and nature of the regulations. Focus
seems to be on the larger markets.
 Mgmt notes that it primarily caters to the youth – targeting the 18-24 year
old SEC A/B audience.





Sun TV Network (SUTV.BO; Rs511.00; 2L)
 Sun owns FM radio licenses for 45 cities. Three stations (Chennai,
Coimbatore and Tirunelveli) are a part of the parent company, 18 stations
through its 97.8%-owned subsidiary Kal Radio and another 23 stations in
South Asia FM Radio company (in which Sun's ownership is 59.2%).
 The cities in which 93.5MHz Suryan FM operates include Chennai,
Coimbatore, Tirunelveli, Madurai, Tuticorin, Pondicherry and Tiruchy. The
company operates 93.5 MHz RED FM stations at Vishakapatnam, Bangalore,
Hyderabad, Jaipur, Bhubaneshwar, Tirupati, Lucknow, Bhopal, Kozhikode,
Indore, Vijayawada, Varanasi, Rajahmundry, Kanpur, Thiruvananthapuram,
Thrissur, Mangalore, Kannur, Allahabad, Jabalpur, Mysore, Guwahati,
Jamshedpur, Nasik, Vadodara, Rajkot, Aurangabad, Ahmedabad, Warangal,
Nagpur, Kochi, Gulbarga, Asansol, Shillong, Pune , Siliguri and Gangtok .
 Mgmt guides to ~Rs750-800m revenues in FY11E from the radio ventures –
expect growth of ~30-40% yoy in FY11-12E. However, radio’s contribution to
Sun TV Network consolidated revenues is remains at ~4%.
 In FY11, per mgmt guidance, Kal Radio is expected to turn PAT positive;
while South Asia FM should break even on the operating level. Overall loss
should be contained within ~Rs200m in the current fiscal.