Brokerage and research firm Motilal Oswal has come out with a report on the radio industry wherein it feels that launch of new channels is likely to drive radio industry revenue CAGR of 16 percent over CY16-21E, 1.4x of traditional media (ex-digital).
Over the past 18 months, the Indian radio industry has witnessed a 66 percent increase in the number of channels to reach 407, led by phase-III auctions and phase-II license renewals.
Despite the evolution of the digital medium, radio remains a stable advertising medium globally, backed by its localized and interactive content. Notably, radio operators have introduced digital radio to mitigate the risk of losing share to digital medium. The firm believes that the radio listenership base in India is likely to increase going forward, driven by wider footprint and phase-III-led content differentiation avenues, it said.
Entertainment Network India Limited (ENIL)/Music Broadcast’s (MBL) heavy upfront investment of Rs 710 crore/340 crore in phase-III auctions and phase II renewals led to single-digit return ratios in FY'17. However, ENIL/MBL are expected to reach RoIC of 20 percent/25 percent by FY20, led by improving EBITDA margins and asset turns.
Large operators like ENIL/MBL with market shares of 30 percent/14 percent have strong execution capabilities. Inventory addition should help ENIL/MBL to record revenue growth of 16 percent/15 percent and EBITDA CAGR of 30 percent/20 percent over FY'17-20, it said.
Motilal Oswal has initaited a coverage on ENIL with a neutral rating and a target of Rs 928, assigning 20x on FY'19E EBITDA of Rs 210 crore, led by its healthy growth and market leadership. The research house has a buy on MBL with target of Rs 469, assigning 18x EV/EBITDA on FY19E EBITDA of Rs 130 crore, as it believes that the company should improve its market share led by an increasing listenership base.
Motilal Oswal further said, "The Indian radio industry witnessed significant inventory growth over the past 18 months. Notably, over this period, the number of radio channels in the country increased 66 percent to 407 from 245, while the total number of cities with presence of private FM operators has grown to 113 from 85. This has led to steady growth in advertising time in an otherwise inventory-starved radio industry. Additionally, the renewal of Phase-II licenses in FY'16 for 15 years has provided much-needed clarity on long-term business continuity and mitigated the risk of high license cost. Also, the radio industry’s current share of India’s overall ad pie at 4 percent has grown from 1.5 percent during the Phase-I period. The new frequencies should increase the ad share further, helping catch up with the world average of 7 percent and the US' 11 percent (ex-digital). With significant inventory addition, radio is likely to emerge as the fastest growing ad market in India.
Entertainment Network India Limited (ENIL) and Music Broadcast (MBL) remain the top two players in the radio space, with market shares of 30 percent and 14 percent, respectively. At 13 percent and 17 percent, ENIL and MBL’s revenue growth has remained resilient over the last five years. ENIL added 42 stations over the last two years to be the largest operator with 73 channels, while MBL added 11 channels to take its total channel count to 39. Fresh inventory with the launch of new channels is likely to help ENIL/MBL record revenue growth of 16 percent/15 percent over the next three years (FY17-20E). Additionally, operating leverage from an inherent fixed cost structure and networking of new channels are expected to drive profit margins. The firm expects EBITDA/PAT CAGR (FY17-20) of 30 percent/43 percent for ENIL and 20 percent/41 percent for MBL.
Phase-III has seen overall Rs 1300 crore cumulative investment in upfront license cost, which is 60 percent of the private FM market size. ENIL and MBL have spent more than Rs 700 crore and Rs 340 crore, respectively, toward Phase-III license acquisition, set-up cost and renewal of Phase-II licenses. This has resulted in their RoCE and RoEs plummeting from average 20-25 percent to currently below cost of capital. However, incremental maintenance capex should be a meager Rs 5-6 crore, driving steep FCF and RoIC growth. We expect ENIL and MBL to reach RoIC of 20 percent/25 percent by FY20, led by improving EBITDA margins and asset turns. Also, their FCF yield should improve to 5 percent, with FCF generation of Rs 430 crore for ENIL and Rs 260 crore for MBL over the next three years. – Money Control