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MOSL: ENTERTAINMENT NETWORK INDIA (Buy)-Earnings pressure evident-expect Non-FCT to bring solace

ENTERTAINMENT NETWORK INDIA: Earnings pressure evident; expect Non-FCT to bring solace

(ENIL IN, Mkt Cap USD0.3b, CMP INR388, TP INR500, 29% Upside, Buy)

 

• Solution biz safeguards revenue growth albeit at lower profitability: For 1QFY20, ENIL echoed the dismal performance of the media industry in general and the radio industry in particular. Revenue growth of 8.2% YoY (to INR1.4b) garnered crucial support from Non-FCT (Solutions) business (+42% YoY) at a time when Radio segment growth was flattish at 1% YoY. In Radio, increasing cost along with the low 11.6% margin in the 21 new stations of Phase III pushed the segmental EBITDA margin lower to 19% from the historical levels of 25-30%. Moreover, Non-FCT margin remained inherently low at 19%. As a result, overall EBITDA margin shrank to 18.6%, with EBITDA declining 14% YoY to INR244m (on a pre-Ind-AS basis). PAT was down 11% YoY to INR64m in the quarter.
• Concall highlights: (1) Ad revenue is likely to pick up pace in 2HFY20. (2) ENIL maintained the EBITDA growth guidance of 12-15% for FY20, although the composition may change with a higher share from the solutions business. (3) Batch 1/2 stations' capacity is expected to reach 75%+/65% over time. (4) According to IRS, industry listenership increased 8.3%, with Radio Mirchi's listenership rising by 14% to 45m/month.
• Expect revenue/EBITDA CAGR of 15%/28% over FY19-21: ENIL has done well to mitigate the risk from Radio's declining share and the weak market conditions, generating 28% revenue from Non-FCT. Moreover, management has exuded confidence in capitalizing on growth opportunities and improving the learning curve, which is likely to translate into a margins improvement. However, it indicated that the weak ad market may exert pressure on revenues over the near term. Subsequently, we cut our FY20/21 revenue estimate by 5% and EBITDA estimate by 10-15% (on a pre-Ind-AS 116 basis), given the fixed cost nature. We expect EBITDA growth of 14%/22% for FY20/21 on a pre Ind-AS 116 basis. Potential gains from the acquisition of three TV Today radio stations (pending approvals) could provide further upside, in our view.
• Valuation view: We cut our TP to INR500 (prior: INR589), assigning 10x to FY21E EBITDA, to factor in the cut in our earnings estimates. A revival in earnings from 2HFY20 will remain a key monitorable and also a factor that can fortify our positive stance on the company. Maintain Buy.