Thanks for sharing the insights from industry insiders.It really helps in crystallizing the thought process. .
You are quite right in pointing out that ROIC may go down. I think that is the nature of the business and the way accounting is done. In fact, the best way to look at this business is through IRR model as company incurs one time license fees and then the capex is amortized over the life of the license period. It is very very similar to project financing.
Having said that, since large portion of fixed cost increase (non-cash) in P&L is going to come from amortization charges thus impact on EBIDA will not be much but PAT will be impacted. On the other hand, the accurate reflection of such businesses shall be cash flow and not PAT. Thus one must look/value the business based on cash flow instead of PAT. Your point of high fixed cost being double edged sword is very valid as most of the time when we talk about “operating leverage”, we discuss that in positive light, but that is not how situations pan out in business.
On drop in margins, in fact, management on record, has mentioned that even after incremental fixed cost and initial expense for new launches, on overall basis they do not expect EBIDTA margin to dip by more than 1%. That came as positive suprise to me as I was expecting decent dip in margins due to negative operating leverage. This minimal impact is due to couple of factors
- There is very low additional fixed cost incurred for second and third frequency
- Compared to Phase-II, radio industry has matured much more thus capacity utilization ramp up will be much faster. In fact, if they can achieve 30-40% capacity utilization, they may break even at EBIDTA level
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