ENIL's Q4FY18 results (Outperformer) - Weak quarter but worst is behind…

Q4FY18 result highlights

• Standalone revenue declined 3.7% yoy to Rs1.6bn (4% miss). The client specific issue plaguing ENIL for the past 3 quarters was resolved only in March. Revenue from this client is expected to normalize over the months ahead.
• ENIL’s strategy of capping ad inventory to improve consumer experience and increase yields has hurt it in the near-term, but there are signs of improvement as Q4 utilization (across legacy 35 stations) improved to ~90% (vs ~83% qoq; ~91% yoy). Gross effective rates during this period have improved by ~3%.
• Cost management efforts continue to bear fruit (-4.8% yoy), which led to EBITDA coming in flat yoy at ~Rs354m (7% miss). EBITDA margin improved 90 bps yoy to 22.2% (IDFCe: 22.9%).
• New stations rev. grew 67.6% yoy while EBITDA came in at ~Rs30m (broke even in Q3). Legacy stations rev. fell 11.3% yoy (mainly due to strategy of capping ad volumes and impact of one large client) and EBITDA fell 22% yoy on negative operating leverage.
• Net income came in at Rs117mn (-15.2% yoy; 22% miss). The decline is mainly due to lower other income and one-off charges (~Rs43m) as part of tax outgo during the quarter.

Key positives: Tight cost control, new stations growing well.

Key negatives: Weak top-line performance.

Impact on financials: Cut FY19E/20E EPS estimates by 7.1%/5.5%.

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 hurt in FY18, aggravated with client specific issue but should reverse from FY19E onwards). ENIL is hopeful of showing 7-10% yield improvement in H2FY19E given its improved competitive positioning as per IRS and lower ad inventory clutter benefits. We believe growth should meaningfully pick up from FY19E as new stations would contribute positively, overall ad market is looking up along with Govt. ads issue sorted out and 3 metro stations of TV Today would be merged. We build a 38% CAGR in EBITDA over FY18-20E. 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 Rs784 (16x FY20x EV/EBITDA). Key risk to our call is inability to outperform radio industry growth.