Moving the ENIL specific discussion from the Portfolio Restructuring thread
Thanks Dhwanil for pointed responses.
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.
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
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
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?