ENIL's Q2FY19 results (Outperformer) - Weak even on muted exp., H2 should be far better...

Q2FY19 result highlights

• Standalone rev. fell ~2.2% yoy to ~Rs1.2bn (2% beat) largely due to festive season shift (which has affected both radio and the non-FCT business). ENIL estimates ~Rs120-140m loss in revenue due to this (adj for this ~7-8% yoy rev. growth). Core radio revenue grew ~6.8% yoy (adj. for festive season shift, this would have been 13-15% as per ENIL).
• Legacy station utilization stood at ~78%. Amongst new stations, Batch I stations utilization stood at 33% while Batch II stations stood at 6%.
• Standalone EBITDA came in at ~Rs273m (4% yoy decline; 4% miss) due to lower non-FCT contribution and launch of Batch II stations during the quarter (marketing spends incurred upfront). Margins fell ~40 bps yoy to 22.3%. ENIL estimates a ~20% yoy growth in EBITDA on adjusting for festive season shift and is confident of achieving strong growth in Q3 (October has started well for Radio/non-FCT).
• Batch I station revenue grew ~53% yoy while EBITDA came in at ~Rs24m (vs ~Rs18m loss yoy; ~Rs7m qoq). Batch II station EBITDA loss came in at ~Rs14.8m. Legacy stations rev. declined 9% yoy, while EBITDA fell ~17% yoy (negative op. leverage).

Key positives: Non-FCT gross margin up ~440 bps yoy to 36.1% in Q2.

Key negatives: Lower than expected core radio business performance.

Impact on financials: Trim FY19E/FY20E EPS by 7%/13% respectively.

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. Growth should pick up meaningfully in H2 and into FY20E as well with overall improvement in margins due to operating leverage benefits for both radio and ‘Solutions’ (non-FCT business). 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 revised TP of Rs715 (18x FY20E EV/EBITDA).