ENIL's Q2FY20 results (Outperformer) - Core radio drag continues…

Q2FY20 Standalone Result Highlights

• Rev. fell 7% yoy to ~Rs1.1bn (13% miss). The fall was led by sharp fall in radio business (~17.5% yoy) while solutions business grew ~34% yoy.
• Reported EBITDA stood at ~Rs275m (+0.6% yoy; 6% miss) due to lower costs, while margins stood at 24.1% (IDFCe: 22.2%). Pre Ind-AS 116 EBITDA came in at ~Rs189m (-30.8% yoy decline) while margins fell ~570 bps yoy to 16.6%. Margin fall was on account of negative operating leverage in core Radio despite improvement in solutions.
• Radio: Core radio revenue fell ~17.5% yoy (Radio City rev. fell ~22% yoy) with EBITDA margins of ~14%. Key reason behind the fall was absence of government revenue (~Rs80m impact) and reduced spending from Media/OTT/FMCG sectors (~Rs90m impact). ENIL volume/pricing was down ~16%/5% respectively in Q2.
• Non-FCT: Non-FCT business grew ~33.9% yoy, while gross margins in this business have improved sharply, touching ~45% in Q2 (vs ~38% in Q1). Along with other operating income, non-FCT margins stood at ~24% (vs 18.5% qoq).

Key positives: Strong Non-FCT performance.

Key negatives: Sharp decline in core radio performance.

Impact on financials: 48%/41% LTL EPS cut for FY20E/21E. Earnings can be sharply upward revised once ad environment improves given high op. leverage.

Valuations & view

Worse than expected radio performance for the industry and ENIL (Radio City down 22%; Fever down 7%; Radio One down 16.9%; MyFM down 16.2%) and the continued subdued environment in Q3 drives our sharp cut in revenue/earnings for FY20E which in-turn drives our target EV/EBITDA multiple cut to 9x vs 10x earlier. However, the stock too has corrected ~36% in the last three months and thus we believe that the weak environment is priced in now. Improved margin profile of the Solutions Business is a positive, and coupled with positive operating leverage once radio picks up growth should lead to strong FCF generation. Our revised TP stands at Rs305. 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.