Thanks Hiteshbhai. It is very useful. I think it is very good quality business available at reasonable valuation with some optionality. Though, the turn around of the non- dainik jagran business remains a key monitorable.

Hi Ashwin,

1. From backward integration, I mean a company manufacturing its own Active Pharmaceutical Ingredients (API) for formulations. There are various steps and processes involved in manufacturing the final drug (formulation). You can read more about the basics here - http://www.valuepickr.com/resources/pharma-sector-faq/#respond. From whatever limited knowledge I have, it is better to have forward integration i.e. having own marketing set up for US markets than being backward integrated into APIs as the API cost is hardly anything compared to the overall formulation size. By being forward integrated, a pharma company doesnt have to share profits with the marketer which can be pretty high and can hurt especially in case of a first to file/exclusive products. However, being backward integrated into APIs gives you more control over supply chain especially in case of complex products.

Concall details : 022 39600607. 5 November 2015, 4 pm

@varadharajanr

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

Hi Sachit,

Here is my sample calculations of IRR for old stations (post migration fees) and new frequencies. ENIL_IRR.xlsx (13.3 KB)One can put in specific numbers for a city such OTEF (cash out flow), capacity utilization, realizations etc. It is important to note that the IRR is as right or wrong as our assumptions. Hence the critical thing is to get our assumptions right. Following is the basis of my assumotions

Capacity utilization: Conservative than Phase-II utilization in initial years (50-60% in 2 years)

Number of slots: 17 hours a day- 14 minutes (@100%) in an hour - 6 10 second slots in a minute

Realizations: Lower/equivalent than existing realization from the city or based on other player's realization

EBIDTA: conservative than estimated Phase-III EBIDTA margins

Tax rate: 30% flat

It is important to remember that this is all equity IRR. Any leverage will improve the IRR. You will also notice that migration has come at very low rates and IRRs are excellent going forward. Even management has acknowledged the same.

Though, I have not calaculated IRR on overall basis, one can replicate this sheet and change assumptions/variables to arrive at cumulative IRR.