ENIL's Q3FY18 results (Outperformer) - Growth outlook improving significantly…

Q3FY18 result highlights

• Standalone revenue declined 1.5% yoy to Rs1.5bn (1.5% miss). As per the management, ad rev. decline was primarily due to a client specific issue (which we believe is Govt.) which has since been resolved from mid-Feb. If the issue was absent, rev. would have grown ~4.6% yoy.
• Assuming the client issue was not there, ENIL’s est. performance of 4.6% yoy would be in-line with the numbers reported by its peers (HT Media Radio +4.7% yoy; Music Broadcast +4.7% yoy; DB Corp Radio 7.4% yoy decline).  ENIL’s strategy of capping ad inventory to improve consumer experience and increase yields has hurt it in the near-term as its capacity utilisation de-grew by 13.4% ppt to 83% even as gross effective rate grew 8.6% yoy (both across legacy 35 stations).
• Total costs were managed well during the quarter (+0.3% yoy) but EBITDA fell by ~7% yoy to Rs356m (9% miss) due to rev. miss (-ve op. leverage) while margins shrunk 130bps yoy to 24.0%.
• New stations rev. grew 119% yoy and they broke-even during the qtr. (Rs11mn EBITDA, 5.2% margin). Legacy stations rev. fell 9.8% yoy (led by Govt. ads missing) and EBITDA fell 22% yoy on –ve op. leverage.
• Net income came in at Rs131mn (-19.7% yoy; 20.6% miss).
• Outlook: Management is extremely upbeat about FY19E rev. growth and margins as it is exp. broad-based ad spend revival.

Key positives: Tight cost control, new stations breakeven.

Key negatives: Weak top-line performance.

Impact on financials: Cut FY18E/19E EPS estimates by 21.0%/16.6%. Introduce FY20E.

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 FY19E onwards). We believe growth should meaningfully pick up from FY19E as new stations would contribute positively, overall ad market would revive along with Govt. ads issue sorted out and 3 metro stations of TV Today would be merged. We build a 36% CAGR in EBITDA over FY18E-20E. We note that ENIL’s existing stations 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 station 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 Rs808 (16x FY20x EV/EBITDA).