Entertainment Network India Limited (ENIL)

Stock Opportunities Untested - but worth a good look
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Moving the ENIL specific discussion from the Portfolio Restructuring thread
Thanks Dhwanil for pointed responses.
@desaidhwanil

First of all - a big thanks again for bringing to our attention a business that looks very promising to dig deeper into; as also striving to bring everyone on the same page quickly - through each of your insightful responses.

Following facts that you mentioned - are really noteworthy for me - while thinking about the current attractiveness of the business

a) post round 1 of Phase 3 (which is behind us and companies have already committed capital), very little capital requirement for new frequencies is envisaged in next 5 years
b) The business characteristic is such that 70-75% of the cost is fixed cost and hence there exist strong operating leverage. Any incremental capacity utilization beyond breakeven point, largely flows to bottom line. Thus, the margin improvement is very sharp post break even point. Break even point for new stations to be launched is indicated as 1.5 to 2 years
c) Second/third frequencies will have significantly higher margins due to lot of shared cost (infrastructure, overheads, marketing etc). This will mean, overall margin on steady state basis will be much higher than current EBIDTA margin of 36%+.

My observations/queries - to think through and critique deeper

First the good parts

  1. This certainly looks like a “differentiated” business in an industry - doing consistently well in an industry, where others have struggled/struggling. In a sense, it is walking a path that others should be knowing well, but For some reason aren’t/choosing not to/or, cannot. That is the first point that attracts to me to look deeper - to find the answers to our next set of questions.

2.a) Long Runway - certainly FM radio as a medium is relevant, and many more years of growth ahead

b) Sustainability of competitive advantage - has been the most consistently profitable, and looks to have advanced its lead over competition with latest phase III auction execution - advantageously placed in most of the growth markets; strong support and recognition that it garners by being a group company of the Times Group - and its association with over 25000 advertisers - that group advantage should continue to aid the company’s future growth plans. Hard to envisage who/what can dislodge this business from its strong perch - “isko hilane wala kaun hai”??

3.Future Growth - increasing the distance with peers/other players
2nd frequency in 9 out of 13 top cities (70% of FM industry revenues); the nearest competitor has bagged the 2nd frequency in only 2 cities?? this seems like a huge huge lead - even consolidation among others may not be able to take this away. How much of a strategic advantage is this??

of course, this is all linked to successful execution of second/niche “branding” emerging - an act of faith if you like -

the 3 Metro 2nd licenses (Delhi, Mumbai, Kolkata from Oye stable) - still not allowed by MIB and under litigation - are of strategic importance again - this is more than an optionality in near future - do we have a way to put a number to this?

International market launch in UAE, any sense where this is and any timeframes when international could be significant?
4.Predictability of the business -
This I where I need to think lot more on - has impact on valuations/Margin of Safety thinking

I am wary of government/regulatory stance changing suddenly - like it did in the case of Telecom - where license augmentation/renewal terms completely deteriorated the picture; FM Phase III has just been concluded, but what about the earlier licenses? Perhaps the impact of this in FM radio case is far away?- as Top 13 cities - constituting 70% revenues - license renewal is still many years away??
Implementation of an accurate nationwide measurement mechanism for FM radio that will evaluate returns across FM stations - without something like that - how strong is the lead? if something like this is in the offing - can it bring disruptive changes in advertising patterns form broadcasters?
eCommerce share of the advertising pie (currently 10%+) is certain to slow down as the funding frenzy has considerably slowed down - and can affect contribution significantly in Fy2017
The advertising industry fortunes are linked closely to the economy. When economy slows down - to manage their profits better, advertisers will cut advertising spend. And when the economy lifts, advertisers start putting monies back with a lag effect. In many ways, advertising is the first to be cut, and the last to be re-instated. How does FM advertising behave in that context? in 2008 industry was still very nascent - now the impact could be much more??
Need to chew these for a few days more.

nav_19962d
Fever 104 has been closing the gap with in ENIL in metros. So it is not huge moat ENIL enjoys. There is no evident source of moat…

desaidhwanilDhwanil DesaiTop Contributor21h Donald
@Donald

Thanks for digging deeper and raising very pertinent questions. It is critical to form a balanced view on investment hypothesis and have the downsides/risks analyzed from various perspectives/angles. Regarding your specific points, here are the point wise responses

Renewal of existing licenses: First the bad part: Government policies/regulations remain one of the most important risks for ENIL story…and for that matter the whole industry. We have umpteen examples in the past where government, in its own wisdom, have come out with regulations that has changed the economic characteristic of the whole industry for worse (i.e telecom) or disincentivised the private investment in the sector (oil & gas). Is there a likelihood of something similar happening in Radio? we surely can not rule it out if we go by the history.
The good part: Renewal for all its existing 32 stations happened along with Phase-3 and the licenses for all the stations (barring Goa, which ENIL relented due to unattractiveness of the license commercially and/or strategically) for 15 years. That means, at least for 15 years, we can expect a stable regime for existing stations and license fee has been paid for it. So, the risk, if at all, is in very distant future.

Also, we shall recognize, that the growth for the industry is more likely to come from government releasing ample supply of frequencies which will result in increasing the pie for the industry. The regulations are relevant for the supply of frequency and the reserve price set for these frequencies (very similar to Telecom industry). At the moment, there is no regulations governing the ad inventory and/or the pricing for ad inventory. However, one of the possible risks can be the regulations related to cap on ad inventory as proposed in TV channels (Though that too is not yet implemented)

Measurement mechanism: I think you have captured a very relevant and yet often ignored point. This is very essential for radio ad market growth. Typically, in all media segments, measurement systems (be it TRP, readership or listenership) acts as advertising currency and accurate and reliable measurement provides advertisers confidence about the efficacy of the ad spend that they do. At the moment, there is no reliable and scientific measurement system for radio listener ship in place. Thus, whatever leadership that we are suggesting in the investment hypothesis is not based on consistently reliable, objective and upto date measurement system(i.e the latest listnership data is available from IRS 2014…which is two years old and the IRS measurement philosophy itself is challenged by many industry players). If, such objective measurement system does not evolve in near to medium term future, with current expansion of Phase-3 to 800 odd frequencies, it will be very difficult for advertisers and media planners to make informed decisions (ROI generated on ad spend) on adspend and allocate higher budget to radio as medium.

E commerce share of advertising pie- Amongst all risks, I see this as relatively lower risk and transient in nature (high probability, low impact risk). E-commerce is the fastest growing segment for most of the radio companies including ENIL. As you suggested, it constitutes 10% of their overall revenue (almost doubled in a year). Going forward, it appears inevitable that consolidation will happen in the e-commerce industry and smaller players will fall out. This will have an impact on the ad spend by them as well. However, if you listen to ENIL management, they are very cognizant of this fact. MD is very categorical that spend by e-comm companies is going to go off cliff in near term (in his opinion 6 months). At the same time, they see that compensated by much better traction in telecom spend, consumer discretionary and auto.

Impact of economic slow down on Ad spend: Your point is valid in the context of overall media spend. However, the pricing dynamics is such that, radio as medium gets more allocation in advertising spend during the economic slowdown due to two reasons (based on past management commentary and my limited understanding of the industry)

  1. Radio, traditionally, has been seen as more effective medium for discounts/promotions than for branding (Where visual impact/images are more relevant), though that too is slowly changing.However, for the time being, if we accept this notion, In times of economic slow down, companies run number of promotional schemes/campaign to spur the demand. This helps the radio players.

  2. Media planners, due to constrained budget, look for medium where the cost of reaching customer is lowest per rupee spent. Radio, among all medium, is the best bet for them.

Thus, I feel, economic slowdown may less pronounced impact on ad revenues than other mediums like print and TV.

I hope I am able to address some of the points you have raised.

DonaldDonald FrancisAdmin, Top Contributor20h 1
Thanks Dhwanil for pointed responses.

Most of the regulatory/government mischief/misadventures come about when new spectrum is to be distributed, or licences to be renewed, etc. So having valid licences for next 15 years provides great comfort, on continued business predictability. Though sudden turns in policy in between cannot be ruled out.

I am purposely trying to put on the questioning hat :slightly_smiling:
Will next put my mind to Competitive dynamics - the current happy picture on this front remaining unchallenged - how sanguine can we be on that front. Let me do some thinking/familiarising and come back on that.

But before that I would like you to share your thoughts on this other crucial part
3. Future Growth - increasing the distance with peers/other players
2nd frequency in 9 out of 13 top cities (70% of FM industry revenues); the nearest competitor has bagged the 2nd frequency in only 2 cities?? this seems like a huge huge lead - even consolidation among others may not be able to take this away. How much of a strategic advantage is this?? or this is transient like some others opine?

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@Donald

It is always good to have someone wearing questioning hat and playing devil’s advocate.It is distinctly advantageous for an investor to have such “some one” for each of his/her investment thesis because If the Devil’s advocate is able to prevail upon in his/her arguments then an investor will be saved from potential big losses otherwise, one comes out with much higher conviction about the investment idea from the process…so thanks for wearing questioning hat for ENIL.

Will reserve my views on competitive dynamics, till your usual probing questions come!:slightly_smiling:

Coming to your query on lead by ENIL through second frequency and strategic importance of it, I feel, at the moment the jury is divided. One of the primary reason for the difference in opinion is that there is no precedence/track record of operating such second frequencies in same city to compare how it will play out. This has led many people to be skeptical about the success of the business model.

Though, a bit biased, here is my thought process on the same

  • In last 10 years, the pre-dominance of top 13 market has remained constant and even after Phase-2 expansion, where many more new cities got new frequencies and came onstream. In fact, top 13 markets have been able to maintain its revenue share or increase it despite of the addition of new cities. Thus, it is fully fathomable, that going forward, the same will continue
  • Relevance of the top 13 markets for advertisers is immense. Typically, advertisers want to spend money where the population density is high, disposable income is high and the customers/listeners have certain characteristics.(in media parlance SEC A & B). Advertisers get a large population of urban consumers in SEC A & B segments. Also, many of the A+ and A category consumers are early adopters hence are more conducive for any new product launches etc
  • As Indian GDP grow, the urbanization is going to increase and already large cities are going to get larger thus, further providing tailwind to consumption in the cities and in turn to media spend.

Thus, I feel, that over a period of time, large part of additional media spend is still going to top 13-15 cities and ad markets in these top 13 cities are going to larger and larger. When one combines this with no new frequencies to be allotted in near future in these top 13 cities , already overflowing inventory in these cities and ENIL’s intention to provide differentiated content/product means a significant strategic advantage for some time to come.

Just to give some color to the skewness of the market, Only Delhi and Mumbai put together account for 400 odd crores of ad market for radio (i.e. 30% of the total radio industry and 40% of Top 13 market). Hence, any player who is well entrenched is going to benefit immensely while others may have to wait for next opportunity to participate in these markets (and from what I understand, participate they will…at much higher reserve prices!:-))

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@Donald @desaidhwanil
A different view on the 2nd frequency issue.
If you look at a similar experience in development markets, additional frequencies or channels/ pipes is the norm. Earlier we had AM/FM, then we have satellite (Sirius XM) and now we have pandora/ spotify etc.

So in a way, distribution channels continue to poliferate and as a result the toll bridge kind of economics of some of the media players is reducing. This not news and explains the rise of Netflix and other providers

If we apply a similar analogy, the second frequency and online in india is the same trend. I would guess the online channel is going to become as important in next 5 years. If it has already hit the inflection in video in developed markets, it is not a stretch for the radio/ FM.

In the above scenario, one can look at the example of sirius XM and how they have responded to this threat

Sirius XM has taken the route of differentiated content which is not available elsewhere. due to the high number of subsrcibers (from existing and presold satellite radios in new cars), they are able to develop this content and amortize over a large base (look at the example of the howard stern show). its expensive to produce this content and acts a barrier to entry.

In a similar fashion, i would say that the brand building is really the key for ENIL and i think they have been rightly focussed on it. The next phase of evolution could be differentiated content as they mention. Once you combine this content, with a strong brand and large customer base the channel of distribution becomes less important.

The monetization can then be based on ads or subscription or a mix of both

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Is there a way to get insight on latest RAM(Radio Audience Measurement by Nielsen) ratings? and is there a better rating scale?

Also, recently Radio Mirchi has exclusively partnered with ICC T-20 World Cup 2016 for live score updates.

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Interesting points there. My query is that just like DTH players are not allowed differentiated content as a basis of competing with each other, is it allowed for the radio industry.

I am unaware of whether this applies to the radio industry as such and hence the basic query. By differentiated content I mean something like a Game of thrones which is proprietary to HBO and available exclusively on HBO. By differentiated content, I do not mean Radio Mirchi playing Retro songs at night and thus differentiating from other radio stations.

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Interesting discussion - I work in the media industry and had discussions with someone who worked in the FM radio business. Here are insights

  1. radio has tremendous network effect business - that’s because your content costs, studio, RJ costs are largely fixed and being able to reach multiple circles is a huge advantage as marginal costs go down drastically and brand gets build through " stickiness".

  2. the other important point is that in radio, ticket sizes of sales are very small - a 10 sec spot costs Rs. 1000 or so when compared to TV at between Rs. 5000-5 lakhs and consequently being able to do bundling and doing pricing as per

a. geographies’
b. multiple frequencies in the same city
c. different content formats - sports, bollywood etc.

is a big advantage. here ENIL has quite a big advantage

c ENIL is run by xxceptional capitall allocators who have always run high FCF, high ROE busineesses for a long time - and have typically been no.1 or no.2 in all of their businessses

d. radio is the big big medium to reach masses in sub urbs or in tier II/ tier III cities. For eg., a vessel shop owner in virar cannot solicit customers from say andheri or mulund except through radio or outdoor. its quite useful to run promos during festive seasons etc. too without diluting the brand as unlike TV or print the brand does not get stuck as a discount brand

e. big threat would come from 4 g - it will lead to customized internet radios. right now the cost of getting about 500 bollywood songs on your mobile is about Rs. 20 or so (pirated mp3 download). Till inteternet can match that, shift to inernet radio won’t happen but it can happen very very quickly.

happy to answer any specific questions and discuss this further.

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Hi Vardha,

Thanks for your inputs.

Can you share more on impact of 4G. Hasn’t 3G already impacted this? I mean
as of now all songs can be listened on 3g bandiwidth also.

regards,

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well, I would watch what jio does to mobile data space - 3g has not been a success given high rates, low coverage and telcos getting caught in licence renewals and bandwidth constraints.

if for eg., reliance jio offers an entertainment bundle equivalent of music plus movie streaming for say Rs. 250 a month, it can turn this upside down.

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Recently there have been a bunch of apps that offer music through internet based on freemium basis. Freemium is a model where basic services are free but purchase needs to be made for second level of service. For example the hungama app lets you listen to music on the app for free but you pay for subscription for download. Gaana.com is another such service and both of them have largely created a niche for themselves rather than eat up FM’s market share.

Also in metros atleast, FMs are also popular for the humour/ contest series they run. In my office, I hear people catching up with popular fictional characters that FM channels have developed (kejriwal clone, kumar vishwas clone, phone pranks etc). These were even shared on whatsapp widely further marketing the channel’s content. FM audience now comes from more than just music, especially for the people on the move which internet entertainment won’t be able to match to the extent we are expecting.

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I personally think one way to look at ENIL is to compare with aggregators like Netflix at one end and also with sirius XM at the other end.

If you use the model of nextflix, some of the content is undifferentiated, but then one is not paying anything (or minimal) to get the content. ENIL then acts as a dumb pipe for the content. Ofcourse i am over simplifying here as ENIL is not a dumb pipe and provides curation (pre-selects) of content for a user.

Free or cheap content has now been available in all developed markets for a long time and with cheaper bandwidth the same will happen in india. But, i think as investors we over-estimate this risk as we tend to undervalue the important of pre-selection and time. One can get a lot of free content on you tube, but then you have to wade through a ton of garbage to find something useful. In comparison an ENIL, curates content for you via shows and thus one is spared of that work.

On top of that as ENIL builds differentiated content, the stickiness increases (look at the sirius XM subscriber counts and average subscription rates for reference)

I personally prefer to analyse ENIL as a media company which a combination of brand and curated/ differentiated content. As the company invests in these variables, it attracts more listeners, which allows ENIL to invest more driving a positive loop.

Ad rates are just a derivative of the above and as long as the brand is built, content developed, listeners and ad rates will follow

the channel - Frequency 1 or 2 or online etc are just distribution channel. As a customer, i could not care less for it and anyway they offer no competitive advantage to a media company (atleast not in the future)

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In the AR of 2015, the management actually speaks about Internet. But they don’t treat as threat but as an oppurtunity. Their stance is that companies streghth is curation as pointed by Rohit and brand. if they can do that internet is another channel.
they have actually given an example that gaana.com ( owned by Times group :wink:) has a radio mirchi channel.

To me this is an interesting way to look at a perceived threat.

regards,

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Entertainment Network (India) Ltd has informed BSE that with effect from 7.00 a.m. on March 29, 2016, the Company has commenced broadcast from its radio station at Guwahati.

With launch of this station, the Company has launched the first station acquired under Batch 1 auctions of Phase-3. This is an important milestone for the Company.

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Just as was mentioned by Rohit Chauhan exclusive content launched by Saavn:

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Excellent analysis @desaidhwanil Thanks for sharing all your data with everyone. I started going through the business and found couple of articles on net
Outlook Business report on ENIL(released before Phase III auction) on why Radio Mirchi is the happiest FM network in India

And i got CII-KPMG(from above report) report on Indian Media Industry released in 2015. However they have covered well on Radio but less compared to other media industry. Migh be a good report to understand on overall indian media industry
As you said earlier, they also mentioned that Radio is and will be highest growing industry with a CAGR of 18% when compared to TV(14%),print(8%) and Films.

PDF file a secured one. Couldn’t copy anything here :frowning:

Disc: Less than 1% of PF and will add on declines.

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Entertainment Network (India) Ltd has informed BSE that with effect from April 17, 2016, the Company has commenced broadcast from its radio station at Kochi (FM 104).

Good to see ENIL rolling out new frequencies.

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http://www.business-standard.com/article/management/the-digital-carrot-116042001246_1.html

Do seen any problem for radio industry ahead?
As ad spend in radio industry is deteriorating. Digital is occupying the space.

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Entertainment Network India Limited (ENIL)

Mr. Prashant Panday, MD & CEO

Co kicks off broadcast from Kochi radio station

Source: CNBC

• Kochi and Kerala are extremely important radio markets. In the south the penetration of radio is very high and also the advertising revenues in the south are very high. We have always had Thiruvananthapuram, but we have added now the city of Kochi and it is the biggest market in Kerala.

• Kerala, we acquired the licence at about Rs 19 crore and then, that was the one time entry fee that we paid to the government and there are three other radio broadcasts already. The capital expenditure (Capex) of the order of about Rs 3-4 crore.

• Our plan with respect to brand Radio Mirchi has always been the same that we must break even in 4-6 quarters at an earnings before interest, taxes, depreciation and amortisation (EBITDA) level and from that point on, lift the margins to the standard 30-35 percent in the next 4-6 quarters.

• We will segment the market, we are not taking anybody on. We believe that there is a huge market left untapped in Kochi and we are doing a very interesting product over there. We have 50 percent of our product which is going to Hindi music and while Hindi is already present on some of the radio stations over there, it is not present in such a large quantity. We believe that the younger audiences in Kerala and specifically in Kochi are really waiting for what they call as punchy music, which is Bollywood music.

• We have already launched Guwahati and we have launched Kochi now, so that is two more to our 36, that makes it 38. We have another five cities which will come up where brand Mirchi will enter for the first time. Will take the footprint of brand Mirchi to 43 and in addition to that, we have 10 more cities where our second sequence will launch. Will begin with Bengaluru in the next week or 10 days time.

• FY17 we do not give guidance but will tell you that the radio industry, the core radio industry will expectedly grow between 13 and 14 percent. We have seen that in the last 3-4 years and then, the launch of new stations under phase-III will take the overall growth to somewhere in the region of about 20 percent.

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Avdhesh, data provided is of global level…things may be different for Radio in India…but one cannot rule out similar trend in India going forward…

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In the UK there are talks in much advance stages to reallocate radio frequencies to non fm, I am not sure but I think it was to be auctioned to mobile firms
All radio is supposed to go digital. The TV signals are already no more analogue

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After Guwahati and Kochi, Mirchi has started its channel 95 FM in Bangaluru. This is is the 2nd frequency in the city.