ENIL's Q1FY20 results (Outperformer) - Core radio weakness hits EBITDA…

Q1FY20 Standalone Result Highlights

• Revenue grew 8.2% yoy to ~Rs1.3bn (in-line). Growth was supported by non FCT business (+42.4% yoy) as core radio grew just 1.4% yoy.
• EBITDA (pre IAS-116) came in at ~Rs244m (13.8% yoy drop; 20% miss) on account of weak performance in core radio (while radio costs grew ~5.5% yoy). Non FCT margins were at par with radio in Q1. EBITDA margin (pre IAS-116) stood at 18.6% (~470 bps yoy fall; IDFCe: 23.4%).
• Radio: Core radio revenue grew 1.4% yoy (on a base of ~21.6%) while costs grew ~5.5% yoy. EBITDA margin stood at ~19% (LTL). Key segments which performed for ENIL included Automotive, and Organized Retail. All other categories have performed weak (incl. Govt + Political). June was a particularly weak month after good performance in April/May. Pricing held well during the quarter (heritage stations +0.7%; Batch I +5%).
• Non-FCT: Non-FCT business grew ~42.4% yoy, while gross margins in this business have improved sharply, touching ~38% in Q1. Along with other operating income, non-FCT margins stood at ~18.5%.

Key positives: Strong Non-FCT performance.

Key negatives: Flattish core radio growth.

Impact on financials: 14%/12% LTL EPS cut for FY20E/21E.

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. However, the weaker than anticipated economy has clouded the near-term prospects of the radio industry. With hope now being pinned on the festive season, revenue outlook for FY20E may have dimmed for radio. While we await a pick-up in ad spends in H2FY20E, we are enthused by the margin improvement in ENIL’s non FCT business. We maintain our OP rating on ENIL, but cut our target multiple to 10x (vs 12x earlier) given the near-term uncertainty. Our revised TP stands at Rs472 (10x FY21E EV/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.