ENIL's Q3FY20 results (Outperformer) - High operating leverage hurts as Ad rev dries up!

Q3FY20 Standalone Result Highlights

• Rev. fell 27.5% yoy to ~Rs1.5bn (19% miss). The fall was led by sharp fall in radio business (~18.8% yoy) while solutions business fell ~40.8% yoy (excluding concerts in base, the fall would be ~5.5% yoy).
• Reported EBITDA stood at ~Rs405m (+0.2% yoy; 14% miss) while margins stood at 27.8% (vs 20.1%; IDFCe: 26.2%). Pre Ind-AS 116 EBITDA came in at ~Rs317m (-21.5% yoy decline) although margins improved ~160 bps yoy to 21.7% - Solutions business margins have improved yoy which countered the negative op. leverage in core radio.
• Radio: Core radio revenue fell ~18.8% yoy (Radio City rev. fell ~20% yoy) with EBITDA margins of ~24.5%. Pricing was largely flattish (~0.7% drop in Top 35 markets) while the entire drop in revenue is attributable to volumes only. Central govt. rev. is down ~85% yoy and now contributes ~2% of rev. (versus 8% earlier).
• Non-FCT: Non-FCT business revenue fell ~40.8% yoy, but adjusted for international concerts, the drop would be ~5.5% yoy. 2 of ENIL’s key IP events were deferred into Q4, and ENIL estimates ~3% yoy growth in revenue if this was not the case. Gross margins came in at 35.3% (vs 30.0% yoy adj. for concerts). EBITDA margins stood at 16.9% yoy.

Key positives: Profitability scale-up in Solutions segment.

Key negatives: All-round miss.

Financials Impact: 7%/4% cut in ex-IndAS 116 FY20E/21E EBITDA. Introduce FY22E.

Valuations & view

The weak economic climate and the near absence of government spending in advertisements has weighed down on the fortunes of all radio players, including ENIL. Future radio rev. performance would be conditional on the return of private sector ad spending and central government coming in (schemes are getting announced but not being marketed). We like ENIL’s long-term strategy of diversifying into the Solutions Business, and it remains on the right track as its margin profile has steadily improved. Continued traction in this business, coupled with positive operating leverage once radio picks up should lead to strong FCF generation in the future. Post our EBITDA cuts, our TP stands at Rs293 (9x FY21E pre Ind-AS 116 EBITDA). However, do note that ENIL’s legacy stations were renewed at ~3 year FCF for 15 year license term (making their IRR at 50%+), while having a dual station in A+/A towns (ex. Chennai) is a unique competitive advantage, in our view, and should create long-term value.