ENIL's Q2FY18 results (Outperformer) - FY19E the year of redemption…

Q2FY18 result highlights

• Net sales fell by 3% yoy to Rs1.26bn (miss of 3%) led by poor July & August on impact of GST implementation and some recovery in September due to an early festive season. Radio business weakness continues as the Top 5 categories performance was broadly flat yoy (government / FMCG / real estate / auto / BFSI).
• ENIL’s fall in rev. is in stark contrast to yoy growth of 10%/17%/20% in Music Broadcast/DB Corp’s radio/HT Media’s radio division revenues respectively. ENIL’s strategy of capping ad inventory to improve consumer experience and increase yields appears to be hurting in the near-term as its volumes have fallen 16% yoy in this quarter even as competition has posted growth. Management indicated that increasing volumes by offering discounted rates is not the right strategy as it would hurt in the medium-term as taking up yields in Radio is difficult.
• EBITDA came in at Rs284mn (+22.8% yoy; 6% beat) while margins improved 480bps yoy to 22.6% because of tight cost control and base quarter had higher marketing spends (fell by 44% yoy) on new station launches. Losses in new stations fell to Rs18m from Rs99m yoy, management expects these stations to break-even in H2FY18E.
• Adj. for a one-time tax charge of Rs28mn on taxes on accumulated treasury gains, net income came in at Rs87mn (+10.6% yoy; in line).

Key positives: New stations are approaching EBITDA break-even.

Key negatives: Volumes continue to decline drastically.

Impact on financials: Cut FY18E/19E EPS estimates by 4.8%/5.8%.

Valuations & view

We feel ENIL’s strategy of keeping ad inventory in check in key markets to improve consumer experience will keep him in good stead in the medium term (although it is hurting in the near-term and should reverse from Q4FY18E onwards). We believe growth should meaningfully pick up from FY19E onwards as new stations would contribute positively, overall ad market would revive, 3 metro stations of TV Today would be merged and bulk of the ad yield increases would have been accepted by advertisers. We build a CAGR of 31% in EBITDA over FY17-19E (back-ended with FY19E growth at 58% yoy). We note that ENIL’s existing frequencies were renewed at ~3 year FCF for a 15 year license term making their IRR strong at ~50% plus. On top of this, having a dual frequency in all A+ and A category towns (ex. Chennai) is a unique competitive advantage, in our view, and should create long-term value. Maintain OP with revised PT of Rs920 (20x FY19x EV/EBITDA).