Entertainment Network India Limited (ENIL)

Stock Opportunities Untested - but worth a good look
22

Thanks Dhwanil.

As per Q2 result announcement, company is migrating 35 out of 36 stations (including 4 purchased from tv today) from phase -ii to phase -iii. Company has paid 340 crs for phase - iii migration and 339.23 cr for new 17 licenses for phase -iii.
Also TV todays delhi/mumbai/kolkata channels are not approved by MIB for transfer. The Company and TVTN have appealed against the MIB decision before the Hon’ble Delhi High Court. The next court
hearing in respect of the appeal is scheduled for January 20, 2016

http://www.enil.co.in/pdf/stock_exchange_fillings/FY16/ENIL%20Financial%20Results%20-%20Q2FY16%20-%20Oct%2026,%202015.pdf

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I am putting up ENIL BQ sheet which I think is an excellent tool to gauge the business quality succinctly.

ENIL-Business-Quality-Ver3.xlsx (19.2 KB)

P.S.: I had uploaded the sheet in BQ sheet thread, however uploading the same for completeness of the thread with some refinement/addition to the earlier BQ sheet

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24

Excellent effort dhwanil.

Two queries:

First is with a lot of new frequencies being auctioned and new players coming up and existing players ramping up, do you foresee any stiff competition?

Secondly would the profits be impacted in the shorter term bcos the working of new stations would take some time to settle down and start generating optimum revenues/profits and till that time overheads and license feeds would remain as revenues?

regards
hitesh.

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25

Hiteshbhai,

On competitive landscape, I feel, there is hardly any new major player in the Phase-III. Most of the players have been in existence since phase-II barring some regional players in Orissa and Kerala. In the existing cities that ENIL has operations, I do not see any impact of competitive intensity impacting its realizations primarily because, theyare far ahead of it’s competition in many of these cities in terms of listenership and revenue share. Moreover, in many of it’s strong markets, it has acquired second frequency for itself and hence the real challenge is not to canniabalize it’s existing product in those cities. From the concall updates, it is very clear that they are targeting to monetize the second frequency with differentiated product and probably different brand. In nutshell, for it’s existing cities, I feel they will be able to sustain their rates. In fact, from March 2015, they had selectively started improving yields/increasing rates and management has indicated that they are boradbasing this increased rate to all existing stations and they want to continue this process going forward as well.

For new cities, I feel, it will be a challenge for ENIL to compete with incumbents and hence they may have to start with much lower rates than the market leaders. Thereafter, how well they perform and get listenership will decide the trajectory of their rates in new markets. So, ENIL is yet to taste waters here. However, this is true for all player who are entering in new market and not specific to ENIL.

On Profitability, according to management, inspite of rollout of new stations, higher roll out cost and negative operating leverage in new stations, the impact on EBIDTA margin is going to be only 1% on blended basis. Thus, on EBIDTA level, there is likely to be decent improvement in absolute terms if management walks the talk. One of the reasons why the impact at EBIDTA level may be minimal is because, the completely new frequencies are only 7 out of total 52 frequencies. Rest of them are either second frequencies or are acquired ones (TV Today). So, I do not see any negative impact on EBIDTA.

At the same time, there is going to be a significant Amortization charge coming from One time fee for new licenses and renewal fee of existing licenses (yearly 40-45 Crore). Plus, there is interest on short term borrowing kicking in and other income from 500 Crore cash going out. Thus, for a year, the PAT may decline from current levels. So, from business operations perspective one may see positive movement but on accounting front, the numbers may look subdued.

This may present a good opportunity to build position, if market ignores the operating performance and weighs the accounting earning disproportionately.

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26

Hi Dhwanil,

I know nothing of ENIL Business.
However I get a very good feel reading your BQ Sheet on the business - very crisply articulated.

I will familiarise myself with the story now that I am suitably impressed to - try and find holes in your persuasive arguments.

2 things stand out for me in this 15 min first read - to think more about - tells a lot about the clarity you have brought :smile:
a) a lot at stake on outcome of phase 3 bidding. So to think more clearly on how the ODDS are balanced, I need to familiarise myself with effective competition and the extent they can queer the pitch - atleast the pan india players and the Metro players - Metros I guess are the biggest markets

b) The Regulatory environment and outlook. Is there a consistent policy direction towards auctioning/license/revenue share mechanisms
The Sunrise Telecom sector was turned completely topsy turvy with policy turns/interventions right in front of our eyes

Any directions from you are welcome - where to prioritise my energies in taking this forward - as this is a 15 min Dhwanil Desai BQ Inspiration only at the moment. Inspired enough to start reading up with gusto!!

Thanks again for one of the finest BQ Sheets on a business VP Community has seen.

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27

Hi Donald,

Thanks for your words of appreciation. I look forward to a strong critique/counterpoints to my arguments to take a more balanced view. I think you have focused on two very important points that can have large impact on the business.

On Phase III- Phase III auction is to be conducted in two batches. Batch 1 consisted of largely metros, category A and B cities (i.e. larger ones) while the Batch 2 will consisted of category C & D town. Thus, Batch 1 effectively symbolizes larges advertising markets while Batch 2 will mean smaller markets but wide reach. The current status is Batch 1 auctions are over and results are out. In batch 1, 3-4 players have adopted different approaches/strategies in bidding. ENIL seemed to have focused on strategy where they have worked with two objectives

  1. To gain second frequency in most of it’s existing market
  2. Expanding the reach in key areas of north & north-east

So, the key points to focus for us

  • How well ENIL be able to capitalize on second frequency especially when other players in those markets may have idle inventory (we need to understand inventory position of other players/competitors in those markets and then understand the ability of ENIL to fill up it’s inventory for second frequency either through differentiated strategy or through brand pull
  • What will be the benefit to ENIL due to increased reach in northern and north-eastern region

On the regulatory environment

  • The clear evolution of regulatory regime /rationale and stakeholder expectation/observation - is available on MIB website through Phase I/ Phase II/ Phase III bidding norms and regulatory structure. Key points to focus should be
  • How one time fee - reserve price is evolved
  • Migration methodology
  • Recurring license fee to be paid
  • Licensing period
  • Lock-in clauses

Here are the documents- Citywise_Migration_Fee_PhaseII_to_Phase_III.pdf (340.0 KB)First Batch_PhaseIII FM Auction Result.pdf (357.0 KB)Phase_II_Guidelines.pdf (181.9 KB)Phase III_Guidelines.pdf (520.8 KB)Phase III Auction_NIT.pdf (1.6 MB)

In addition, I am also uploading detailed investment note on ENIL that I have prepared which may give some perspective on industry/regulatory structure

ENIL_Investment_Note_03_11.docx (94.6 KB)

Hope this is helpful.

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28

Woww… Nice work… thanks

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Thanks Dhwanil for BQ insights/investment note.

one thing i want to bring to notice is that during weak economy, advertisers move towards radio because of low cost and to focus on local/target customers.

Below is from AR 13.

" It is a well known fact that FM radio fares well when the economic times are bad. There are two major reasons for this. First, clients who have been bred on a diet of TV and Print are forced to re-evaluate their media mix when advertising budgets come under pressure. A re-evaluation brings to the fore, radio’s core strengths, often not well known to clients. Radio’s reach for example is far higher than print’s. Radio’s pricing is far more reasonable than both print’s and TV’s. It is this combination of high reach and affordable pricing that makes radio so attractive as an advertising medium, especially during periods of economic slowdown.

Second, clients tend to shift focus from nationwide pure brand-building to more tactical, local, sales-generating “promotional” activities. Radio, being a local medium and being the last one consumed before a brand purchase, is ideal for such activities. Both these factors have contributed to FM radio’s fast growth in FY’13.

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30

Thanks Dhwanil for the additional docs and the nice Investment Note.
I had a quick look through to first familiarise myself with the terrain quickly.

Following are top-of-mind very basic questions as of now, which you can help me understand better/quicker

  1. I am yet to place a finger (from all the Notes) - what is/are the Key Success Factors for success in the radio business - among the few Top players? What is it on the ground that ENIL does better (it obviously has done much better than nearest competition) that makes them stand apart among teh top players?

  2. If they are known, why aren’t others able to replicate the same, or unwilling to do the same, or execution-wise very difficult to do - requiring a different mind-set (different business models for e.g as in commodity yarn vs Ambika yarn, or extensive field-work being the decisive tilting factor in case of an Avanti or Kaveri that others just aren’t upto) - just what is the secret sauce :smile:

We usually want to be able to articulate that fairly well for businesses where we have done extensive work on.

  1. What are the 6 cities where ENIL Pricing is at a discount to Competition. How much is the discount and to who all - the leading player, or it lags a few?

  2. Pricing power is a function of?? - pardon me for trying to get this off you :smile:

  3. What are the components of its Marketing/Brand-building spend? Why is Marketing Expense not a variable expense in line with Revenue growth? I read somewhere it being clubbed under Fixed Expenses

  4. Risks as enumerated by you look Low probability. In order to understand Risks at a more granular level - are there any critical must-get cities/must-get renewals in phase III or Renewals? Like some Key-Metro licenses for Mobile Operators used to queer the pitch? Has ENIL lost out on any such key must-have cities/locations so far?

Will start doing the basic reading up on domain/ENIL specific business.

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31

@ Dwanil…super good job indeed…ur analysis and the attention to detail is really praiseworthy.
I just have one question( pardon me if its too naive)…Is there any clarity on the licence renewal fees of the frequencies awarded in phase I and II?
If yes, How much are these companies expected to shell out for the renewals?
Thanks!!!

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I work in the media space and radio has the following advantages/disadvantages

advantages

  • veyr cost effective - a spot on radio costs Rs. 1000 vs Rs. 3-5 lakhs on TV
  • very focussed and has a 'call to action" element - so important for local advertisers who are interested in driving sales and less about brand building

disadvantages

  • perceived as a “desperately shouting” medium - a mercedes benz for eg.,or for that matter even a 10 lakh car won’t be caught advertising on air. there is a way to work around this through creative programming - for eg., it could be a "tips on choosing a high end luxury car’ talk show sponsored by mercedes to make the brand recall subliminal and subtle.
  • threat of personalized internet radio channels - the likes of gaana, wynk etc. a lot of telcos are now bundlign this as a package with data packs and making money off advertising. This could be a far more serious threat than you think. To me this is the single biggest issue that one has to think about - if 4G takes off and if creative ways are found by the likes of airtel, we could have internet radios ala USA. would I pay 50-100 a month for a radio channel without ads streamed throough my mobile playing only the stuff that I like and care for ? I think so. with ad exchanges like inmobi it would be possible for even local advertisers to place their ads at the right place at the right time.

should we take this seriously ? I have no idea but we can’t ignore it. discussions are welcome

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33

Hi Donald, In radio business the key success factors are as below

  • Engaging content
  • Sourcing capability (advertsing) and ability to devise creative advertising solutions for marketers
  • Reach (listenership across population segments and geographical distribution)

I think, ENIL is doing extremely very well on these three fronts

  • Engaging content- from what I understand from my small research, ENIL has a very strong programming department which time and again have come up with extremely creative programming content. Some of these programming have created a unique space for itself (e.g. Mirchi Murga)

  • Sourcing & Creative ad solutions: This is where parentage is helping them a lot (Times of India group). In addition since they are one of the oldest players, over the years they have come up with numerous ad campaign that are best suited for radio segment and creates high impact on the listeners (e.g. they designed an ad solution for very popular local bakery shop in Ahmedabad. In this,Popular RJs wish lucky listeners on their birthday and send them cake. The bakery company in turn sponsors the morning show and listeners have strong brand recall of bakery shop)

  • Reach- Top 13 cities (Metro and Category A cities) constitute 70-75% of overall radio advertising market in India. ENIL is one of the only company to have presence in all the 13 Cities and is leading in listenership in most of them.

A combination of all these factors, puts ENIL far ahead of competition.

According to my data collection, following are the cities where ENIL’s rates are at discount to it’s nearest competitor
Hyderabad (-10%); Raipur (-33%); Mumbai (-31%); Jalandhar (-12%); Chennai (-23%); Varansi (-31%)

Pricing power is function of Reach both in terms of listernship across demographic segments and geographical spread. Thus, a company who is present in most of the major markets with listener ship base across social and demographic strata is likely to command premium over it’s competitors (even though with more number of stations) who is not well spread out or is not present in major markets. A clear distinction one can make is between ENIL and Big FM. Big FM has the largest network in terms of number of stations but it hardly commands price premium in any of it’s markets.

In terms of more granular risk, a key risk is company not able to renew/get hold in top 20 markets which constitutes more than 80% of advertising market. As of now that risk is low as ENIL already has presence in top 13 markets and has further increased it’s presence in Chandigarh, Cochin, Kozikode and Amritsar which are reasonably large markets ( I feel they are in top 20 but not sure of it).

However, post phase-III a key risk is to successfully pull off a strategy of launching second/third frequency without cannibalizing it’s existing frequency. If ENIL is not able to pull it off successfully, it can pull down the projected growth and may also impact margins.

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34

@ranvir

Thanks for your appreciation. Total amount for renewal of license fee for ENIL is around 340 Crores. For city wise break up please refer to earlier file of Citywise_Migration_Fee_ in earlier post.

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@dwanil

Positives : negative working capital and low capex. Since I worked in Telecom as project finance specialist, I fully agree with you on the concept of IRR.( Cashflow based financing). Both businesses are comparable except you incur a very high capex in telecom for growth and maintenance.

Based on your data, I have worked out IRR for each individual city and overall. The results are attached. In major metros like Bangalore, Hyderabad, it appears they are not making any money as the IRR is very low. The big question here whether the second rung cities will be able to compensate the loss in metros. For the new licences which is not covered in your list, I have taken the maximum advertising rate of the Category from your list ie for Cochin, Chandigarh, etc

Some of the cities like Bangalore , Pune, Ahmedabad,Jaipur, etc they have bid heavily - Compare the migration Vs new licence fees.

I will also work out for migration and new put together and see if there is any improvement in present IRR from the new licence IRR 15%.

Further, since equity is expensive ( they do not have any debt), the IRR is not attractive as compared to the hurdle rate. Further, the biggest risk is the advertising rate and volume for this business as compared to ARPU and subs in telecom

IMHO an investment more of defensive nature giving steady returns and not growth , unless there is a dramatic shift in advertising rates ( a big ???) due to change in competitive landscape. On a ball park basis, the new investment of Rs705 cr can be recovered in seven years going by the cashflow they do every year. If you knock off Rs 550 cr ( cash on hand), it is only 200 cr which they can recover in 2 years.

Discl: Will invest in dips.ENIL Query.xlsx (11.5 KB)

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@sethufan,

Thanks for putting in effort for IRR calculation results. However, the key to understand the numbers are assumptions. What all assumptions you have taken to arrive at cash flows for city on following

  • Inventory utilization; advertising rates; FCF to Revenue ratio and number of available slots in a year

Without this, it will be difficult to comment on final numbers. However, my numbers based on following assumptions are coming out differently than yours. Following are my assumptions

  • No of slots in a year (17 hr * 14 min ad inventory/hour * 6 slots per min * 350 days opeations)- roughly 500,000 slots
  • Ad realization for second frequency- 60%-65% of prevailing rates of ENIL in first couple of years and then the gap narrowing down (i.e. for Ahmedabad, prevailing rates are Rs. 700 for 10 second slot, for second frequency in ahmedabad, the realization will be 420-460 Rs for 10 second slot in first couple of years)
  • Inventory utilization: 50-60% in 1st year; 2nd year-60-70%, 3rd year 80% and 4th & 5th year 90% and 6th year onward 100%+.
  • We also need to factor in higher EBIDTA margin for second/third frequency stations due to synergy and cost savings. Thus, I feel they can start with 30% kind of EBIDTA margin from first year of operation if they can achieve 50% utilization

All these put together, they can get 20%+ IRR on realistic basis for new frequencies. In addition, we shall factor in that IRR for existing station migrating to Phase III is very very high as the migration fee is 1/3 to 1/5th of the new license fee while the utilization levels are close to 100% and ad rates are also much higher. Thus, on combined basis, I will not be surprised if they generate 25%+ IRR on 700 odd crores that they will put in for new licenses and migration.

Again, as I said, the whole basis for the calculations is assumptions on 4-5 key parameters and we need to see how they pan out as things progress. However, to me economics look very appealing with limited downside unless they do mess up things big time.

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@dwanil

It is all your numbers as per your IRR sheet except I have put new licences fees as outflow. I have substituted the ad rate for each city as per your number. Other numbers are not changed. Anyway, I worked out this just to get the numbers so that we can derive comfort that they have not overbid.

I think , as you say, when we do a combined IRR it can be attractive. Still working on. I will also try to get some inputs from the Company ???.

Rgds

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Radio in the US is a medium where local companies dominate the advertising pie whereas in India it is the exact opposite with national companies dominating the advertising pie. With the expansion of FM licenses, this will bring in more local advertisers in to the fold.
Also advertising growth as a whole is dependent on economy growth and as an when economy picks up we will see advertising growth also coming back in. But radio has a hedge even if economy does not get back on track soon. Its rates are lower than competitive media like TV and so even in a downturn to get more bang for your ad spend companies will look towards radio as an attractive media outlet.

Disclosure: Have sold out of ENIL in last 30 days, but still interested and waiting for a decent correction to buy again.

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Sales up by 23% EBITDA up 12.6%. Marketing expenses and other expenses were disproportionately higher.
PAT down 17%. Other income was lower by 3.34cr

EPS 5.66 vs 6.88

Footnote
In February 2015, the Company had entered into a non-binding memorandum of understanding with TV Today Network Limited (“TVTN”) for purchase of seven radio stations from TVTN. On July 22, 2015 the Company received the approval from the Ministry of Information and Broadcasting (“MIB”), Government of India to purchase TVTN’s four radio stations in Amritsar, Jodhpur, Patiala and Shimla. The Company completed the acquisition on September 19, 2015. The Company also paid the migration fees to the MIB for these four stations in order to migrate from Phase 2 to Phase 3. As regards the remaining three stations viz. Mumbai, Delhi and Kolkata, the MIB declined to grant its approval. The Company and TVTN have appealed against the MIB decision before the Hon’ble Delhi High Court. The next court hearing in respect of the appeal is scheduled for February 10, 2016.

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40

Management interview on CNBC

Key points IMO

First let me clarify that it wasn’t weak quarter in operating terms. You have to remember that this is a quarter where we have invested hugely in phase three so almost Rs 700 crore of investments have happened during the quarter. So, a lot of a treasury income is really down and that is why you will notice that at profit after tax (PAT) level we are have reported a de-growth actually. If you therefore pass the business and look at how the business is by itself even our operating PAT for instances is up about 18-19 percent. So, the business has been strong in fact revenue growth at 23 percent reflects a very strong business. Now you asked about marketing and marketing is a sustained effort. I have been mentioned this for couple of quarters now that we will be stepping up marketing and that is exactly what we have done. So, you will notice that TV campaign of course much of that effect will come in this quarter but we are preparing for our roll out and I think that will be a sustained effort.

I am very happy to report that again on a quarter-on-quarter (QoQ) basis we are focusing more on the price increase because there really isn’t much volume left in longer. So, if you look at the 23 percent revenue growth almost about two-third of that has come from a price increase and only about a third of it has come from volume increase. That is going to be the way going forward as well.

remember whatever demand we have is coming more from the consumer side of the economy and that to very urban consumer side of the economy and that is exactly where radio is look at it today. Given, for instances e-commerce, e-commerce is a very urban and very consumer kind of category and all media companies are benefiting enormously from e-commerce. So, that is the way it is, I believe radio in the next five years is in a terrific sweet spot and we should see continue growth.

We don’t give margins but all that I can say is that while margins will dip obviously because of treasury income. I think underlying business to continue to remain very robust. Hopefully, by the end of FY17 we will again be a debt free company so that should tell you that we expect margins to be good.

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41

CONFERENCE CALL - from Capital Markets

Entertainment Network (India)

Future growth largely driven by price hike

Entertainment Network (India) (ENIL) held a conference call to discuss quarter ended December 2015 result and future prospects of the Company.
Highlights of the call

Revenues grew 23% to Rs 143.6 crore. Out of 23% growth, 16.9% growth came from pricing and rest from volume. EBITDA grew by 12% to Rs 49.7 crore, though underlying EBITDA growth was 17.4%. Net Profit stood at Rs 27.0 crores

Entire media sector benefited from good festive season.

Non radio business did well.

EBDITA growth was impacted due to expenses related to phase 3 and prior period expense on change in bonus act. Also, Non radio business margin are lower, as such EBIDTA was little bit impacted…

Reduction in treasury income impacted bottom-line. Tax was high due to reduction in treasury income, which has tax benefits.

From Q1 FY17 till Q4 FY17- phase 3 radio stations will start.

Radio Mirchi with Delhi International Airport § Limited (DIAL) has recently launched ‘Mirchi T3’ radio at Terminal 3 of Delhi Airport. With Mirchi T3, Radio Mirchi looks to cater to the niche group of premium listeners who frequent India’s premier airport.

Mirchi Music award – expects to generate as much margin as other business doing. The mgmt expects overall margin to grow going forward.

The mgmt said that going forward it expects revenue opportunities to be strong as it will be operating in biggest markets. Top 13 markets have 75% of radio opportunity.

In Kerala and North, its entry will help market to expand. However, present players may see some share erosion, but there revenue will be intact as market will expand.

Increase in brand spend and higher activation resulted in increase in marketing expenses QoQ.

Core radio business has grown by 13.5- 14%.

The gross realization for the company is in the region of about Rs 10240.

Night band – 10 pm to 1 am has now come on sale. It is at 40% inventory now. Even inventory available on Sunday.

The mgmt said that its future growth will largely driven by price.

The company has now reached to advertisers for 4 stations acquired from Oye FM.

The mgmt said that it will see steep investment in marketing for its new stations.

Gross debt is around Rs 289 crore and cash and cash equivalent of Rs 195.6 crore

The blended inventory utilization level was at 111%. Utilization in top 8 stations was at 138%, while for remaining 28 stations it was 102%.

At end of FY18 – new station expected to see break even at EBIDTA level. Expects margin improvement in FY18 on new stations also.

Biggest sectors spenders were FMCG (17% of total advertisement revenue), e-comm (at 10%) , media, government, Auto and BFSI (7.5%), below it were services, apparel and political advertisers

e-comm is fastest growing sector follow by Govt. and auto.

The mgmt expects fall in e-comm advertisement revenue in H2 FY17. It expects uptick from telecom sector due to 4% and consumer durable. Auto is also expected to maintain its momentum.

Expects radio industry to grow at 18% CAGR for next 4-5 yrs.

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