ENIL's Q1FY19 results (Outperformer) - Good start to FY19E!

Q1FY19 result highlights

• Standalone revenue grew 16.4% yoy to ~Rs1.2bn (4% beat). Although the base was weak (inventory cut strategy put in place), the performance is commendable, compared to peers (Radio City +7.7%; My FM (DBCL) +1.7%; Fever & Nasha FM (HTML) +9.6% yoy). Core radio revenue grew 22% yoy.
• Q1 utilization (across legacy 35 stations) stood at ~80%. New station utilizations stood at ~30%. Core radio business growth of 22% yoy was entirely volume-led.
• Improved performance on top-line pulled a sharp 65% yoy recovery in EBITDA at ~Rs284m (17% beat). EBITDA margin improved ~700 bps to 23.3% (IDFCe: 20.8%). Margin improvement was also supported by better non-FCT gross margin (which came in at 28% vs 24% yoy).
• New stations rev. grew ~70% yoy while EBITDA came in at ~Rs7m (vs loss yoy; broke even in Q3). Legacy stations rev. grew 10.3% yoy and EBITDA grew 28.6% yoy on positive operating leverage.
• Strong operating performance led to net income coming in at ~Rs92m (46x yoy – adjusted for exceptional provision writebacks in the base quarter). Interest expense fell 25.5% yoy.

Key positives: Strong revenue growth.

Key negatives: N/A.

Impact on financials: 9% cut in FY19E EPS to incorporate higher tax rate.

Valuations & view

We believe ENIL’s ‘perfect storm’ (which led to earnings/stock underperformance) is now firmly behind, and its revenue growth should outperform the industry’s hereon. Profitability too should consistently improve, led by operating leverage across its legacy stations (~80% utilization) as well as new investments (Phase III Batch I/II, TV Today metro stations) going forward. While H1 would see volume-driven growth, pricing improvement should begin again from H2 onwards. 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 a TP of Rs790 (18x FY20E EV/EBITDA).