I totally agree with your views. Only negative I can think of is low or rather NIL growth in Acrylic business. Management commentary in the recent past also is silent on any expansion or growth plans.

In this scenario, huge cash is a drag as it delivers suboptimal returns. Inefficient allocation of capital by retaining idle cash .

But core Acrylics business looks good. Healthy margins and outlook also stable.

Someday, valuation will catch up. Until then, stay invested.

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Introduction:
• ENIL is subsidiary of Times Infotainment Media Limited, the holding company promoted by Bennet Coleman & Company Limited – A flagship company of the Times of India group.

• Company is a leading FM radio broadcaster in the country with 32 operating stations spread across India with total listenership of more than 37 million. It operates the FM radio network with Radio Mirchi brand.

• ENIL is one of the oldest players in radio broadcasting business with its first station becoming operational as early as year 2000. It also has the distinction of being the only radio broadcasters to have consistently reported operating and net profit for last many years while all other players struggled to stay afloat.

• ENIL is an undisputable market leader with 33-35% revenue market share in spite of some of its peers having much larger foot print and operations in terms of number of stations. According to the last IRS radio listenership survey done Q4 2012, Radio Mirchi is way ahead of its competitors with weekly listenership base of 37.5 million, 50% more than the listenership of its nearest competitor.

• ENIL aspires to be a complete solution provider for the advertisers through multiple touch-points across various media. ENIL is slowly and steadily scaling up its non-radio businesses such as digital, activation and TV properties.

Industry:

Opportunity Size & Future Growth
• As compared to other media segments, FM radio industry in India is still in its early years. Private FM radio industry started its journey from 2001 with award of frequency to private broadcasters under Phase-I licensing. Thus, the FM radio industry is barely 14 years old in the country while other media like print and TV have been in existence since many years.

• Indian FM radio industry has grown at significantly higher rate as compared to other media as is evident from the below table.

Value in Rs. Crore

• Radio broadcasting market has grown at 18% CAGR from 2001 to 2013 increasing the share of radio broadcasting market in overall advertising spend from 2.5% to 4%. The only media segment that has performed the radio is digital advertising.

Key Drivers of Radio Industry’s Future Growth

• Even though, radio industry has grown at brisk rate, it is likely that the industry is likely to grow at brisk rate due to the confluence of following 4 factors

• Based on following range of possibilities on key assumptions India’s

• GDP in nominal terms in 2014 is USD 2 trillion

• In next 5 years, Indian GDP growing in the range of 6-8%;

• Advertising spending accounting for 0.5%-0.7% the total GDP

• Radio garnering 5% -7% share in the overall advertising spending

The size of the Indian radio industry may reach anywhere between INR 4000 Crore to 6000 Crore in 2019 in next 5-8 years implying 20-25% CAGR.

• Even though, none of the above numbers are sacrosanct, it is reasonably safe to infer that size of the Indian radio industry is going to grow significantly higher than its current size in next 5 years with growth for next five years at least equalling the historical growth rate of radio industry in last 5 years (18% CAGR)

Competitive Landscape
• In all there are 19 players in FM radio space other than All India radio. However, in terms of countrywide presence, there are only 4 major players which have pan-India presence, well spread out network and geographical & social reach

Thus, two aspects are clear from the above analysis

o Pan India FM radio broadcasting market is an oligopoly with 4 large players
o ENIL enjoys the dominant position in the industry with market share of 33-35% which is 50% more than that of its nearest competitor

Salient characteristics of the business model:
• Company’s pre-dominant revenue stream comes from Advertisement. Total ad-revenue is a function of
1) number of operational channels
2) advertising rates
3) number of ad slots in an hour and
4) Number of operating hours in a day.

Out of the four variables, two variables i.e. number of ad slots in an hours (typical range is from 13-18 minutes) and number of operating hours in a day (in the range from 16-20 hrs) have physical cap. Thus, once company reaches an optimal number on both these variables at existing stations, the incremental growth shall be driven by the other two variables

• Only 7-8% of the ENIL’s cost is strictly variable cost while the rest is fixed cost. Hence there is huge operating leverage present in the business. Thus, after the operations reach break even point, large portion of incremental revenue will flow to the bottom line.

• Company, in a steady state operation, shall be able to achieve EBIDTA in the range of 32-36%

• Company, from time to time, would need to pay large one-time fee for getting the new license/renewal of license for FM bandwidth that it intends to use. This onetime payment is then amortized as cost over the period of license period. This peculiarity will require company to slowly accumulate and maintain decent amount of cash on the books for renewal of existing license or acquisition of new license.

•The above trait also implies that since company would have paid the onetime fee upfront, the amortization of the license fee is a non-cash expense. Thus, in most of the years, the cash flow may be much higher than the reported profit.

Financial Analysis:

• In last 5 years, company’s top line has grown at 14% CAGR from 231 Crores in 2009-10 to 438 Crores in 2014-15. In year 2004-05, company had top line of 75 Crores. Thus, over last 10 years, company’s top line has grown at CAGR of 18%.

• Company’s net profit has grown 37.5% CAGR in last 5 years from 17.9 Crores in 2009-10 to 105.98 crores in 2013-14. Over last 10 years, ENIL’s net profit has grown CAGR 25%.

• Company has maintained a very healthy balance sheet throughout last 5 years. Company had marginal leverage in 2009-10, however since 2010-11, company has zero debt. In last 10 years, in only 4 years, company had debt on its balance sheet

• Company has consistently increased its investment (mostly parked in liquid mutual funds) from 40 Crores in 2009-10 to 549 Crores in 2014-15. This clearly suggests that there is significant free cash flow in the business. Company has been parking the cash in liquid investment, quite aligned with the peculiar business requirement of making large one-time payment for renewal of license and acquiring new licenses.

• Working capital management reflects effectiveness of the management in running the operations. ENIL’s working capital requirement has consistently declined from 48% of revenue in 2009-10 to 14% of revenue in 2013-14.

Key Ratio Analysis

• It is important to recognize that for ENIL, ROIC is a much better measure return profile of the business and not ROE or ROCE. The primary reason lies in the inherent business model where Company retains and accumulates cash generated from it to be utilized for acquiring more frequencies in the next round of auction. Thus, ROE and ROCE during this capital accumulation phase, will look artificially subdued. However, ROIC, over a long duration will give a more realistic view of the business.

• However, it is important to recognize that, from time to time, as company deploys additional cash for acquiring new frequencies and renewing existing frequencies, the return ratio will dip for the time being (as the money spent will increased the fixed asset-e.g. period from 2007-10) till the depreciation will reduce the gross block and income will start flowing from new stations. I believe that looking at the business model of ENIL (and other radio companies), IRR is the right matrix to evaluate the company’s capital deployment efficiency

Key Growth Drivers

Phase-III Auction: Currently, there are 245 operating FM channels present across 88 cities spread through the country. At present, FM channels are mainly present in larger cities with very limited presence in smaller towns. Since 2005-06, there has been no new channel awarded and hence, the volume growth and reach of the industry has stagnated. Under Phase-III, GoI is planning to issue FM channel license in additional 227 cities and total number of channels is going to increase to 839, which is more than 200% increase from current level. Higher number of channels will improve the inventory for the ENIL and thus aid volume growth. On the other hand, increased reach will lead to higher realization for the company as national advertisers will be able to pay more for addressing the larger audience base. Thus, Phase-III expansion, in medium term will drive both volume and value growth.

In the first batch of phase-III auction, ENIL has won frequencies in to 7 new cities and 10 new frequencies in existing market. This combined with its acquisition of TV Today’s radio business, it has acquired 4 frequencies in new markets and may acquire 3 additional frequencies in Delhi/Mumbai/Kolkata if the MIB approves the transfer of frequency. In all, it’s number of channels have increased from 33 to 52 and may go to 55 if the Delhi/Mumbai/Kolkata frequency transfer is approved by MIB.

Improved Realization: Even though ENIL enjoys significant lead in terms of listenership over its peers in number of cities that it operates in, it has not increased the advertising rates for last many years due to sluggish economy, idling inventory and lack of awareness about radio’s attractiveness as advertising medium. Typically, for a 10 second slot across network, the realization for ENIL is 10,000 while the same is 100,000 for a TV chanel (General Enterntainment). Thus, there exist a vast difference in advertising rates, which even if adjusted for the lack of visual impact (present in TV advertisement), may provide good room for radio players to increase the pricing.
Now, as the sentiments are improving in the economy with revival is in sight and inventory levels getting utilized more than 100%, company has initiated the price hike from December 2014 across most of its markets. Thus, this will be another kicker for growth in medium to long term. In the Q2, FY 16, management indicated that the pricing has increased by 7.5% YOY and management intends to continue focus on increasing pricing.

Activation & Event Business: In addition to the radio business, ENIL has also successfully experimented and scaled up non-radio business which caters to events and activation by leveraging the brand and reach of the radio business. We believe that this business is still taking baby steps, however with increasing reach of the network, ENIL’s creative and marketing teams’ ability to create value proposition for advertisers and demonstrated track record of activation/events to generate decent return for advertisers, in the long run, this can provide fillip to the overall growth of the company

Monetizing Digital Presence & Other Opportunities:
ENIL was the early adopter in radio industry in going digital. It has launched highest number of channels (currently stands at 13) in association with gaana.com. Management has indicated that they have started monetizing this digital properties and though the current contribution from digital is miniscule it is likely to go up significantly.

ENIL is also looking at other innovative opportunities like running airport radio at the large terminals. It recently entered into agreement with Delhi International Airport Limited (DIAL) to start providing airport radio services at T3. Though, at the moment, it is still at early stage, such unique opportunities can be monetized and provide fillip to the base business.

Competitive Advantage:

Strength
Company enjoys reasonably strong competitive advantage due to combination of
• Strong brand of “Radio Mirchi”
• Pan-India presence with presence across all A and A+ category cities
• Pedigree of Bennet Collemn& Co which provides a distinct advantage for sourcing the advertisement and cross selling to existing client of the group

In addition to above, another significant advantage for the company isits profitable operations during the testing times in last decade when most of its peers lost money heavily. This has provided company with very strong balance sheet and a war chest enabling it to take maximum advantage of upcoming auctions and carve out future growth path. Ability of financial resources may be a constraint for some of the existing players during the Phase-III auctions.

Sustainability
We believe that combination of “brand” and “reach” has created a competitive advantage which is sustainable at least in medium term. Management has clearly identified the strategic importance of brand has invested significant sums of money in brand building consistently over last few years.

We believe that the strong brand of “Radio Mirchi”, management’s focused and sustained efforts to build the brand, its leadership and presence in most of the metros/category A cities and increase in its reach post Phase-III expansion will not only ensure the sustainability of its competitive advantage but also strengthen it further.

Quantification of Competitive Advantage
I strongly believe that mere mention of “competitive advantage” or “moat” may be misleading and may tempt us to rationalize some mediocre aspects as competitive advantage. Thus, it is important to look for the competitive advantage translating into/reflected in numbers in at least one of the following ways for company to benefit from it.
• Pricing power (ability to command higher prices as compared to peers)
• High Entry barriers (high market share for a long time)
• Cost leadership (ability to be lowest cost producer without impacting margin for long time)

Pricing Power:
ENIL is enjoying significant pricing power as compared to its peers. In fact, a close analysis at advertising rates data (compiled from publicly available sources as attached in separate Excel file ENIL_Premium_pricing.xlsx (15.6 KB)) suggest following

• In 21 out of 32 cities that it operates in, ENIL commands more than 20% higher price than its nearest competitors.
• In 15 out of 32 cities, ENIL commands more than 50% price premium over its competitors
• In only 6 cities out of 32 cities, ENIL’s pricing is at discount to its nearest competitor

Management Quality

Capital Allocation:
Positives:

• Management is very focused on deploying the capital efficiently and this point has been reiterated by the management time and again during its conference call commentary.
One of the events that may lead to sub optimal use of capital is Over paying during the auction to acquire new frequency to achieve higher growth Management is extremely cautious in this regard and has consistently maintained that they will not pay “irrational price” for new frequency just to ensure growth. Management has indicated number of times that company’s focus is on becoming the most profitable network and not on becoming the biggest network. In fact, one of the important reasons for ENIL remaining profitable while other players incurred significant losses during last many years, was that ENIL refrained from overpaying for acquiring new frequencies during Phase-I & Phase-II.

• Company has consistently maintained that it will retain the cash with it to ensure the sufficient war chest for bidding in Phase-III. This is appropriate considering high return generated on the capital employed by the company.
• Management has also indicated that after accounting for the capital needed for Phase-III bidding and expansion, surplus cash will be distributed liberally to the shareholders as dividend.

Negatives:
• In the past, company had invested money into non-radio media businesses such as outdoor media and made loss during the slow down. However, realizing that it was a very asset heavy business, management sold the business off.

Corporate Governance
• Company has been run by professionals and there seems to be no interference of the promoters in the day to day running of the operations.

• Company’s annual reports are fairly good and provide a good overview of the business.

• Company conducts regular conference calls and management makes all effort to provide satisfactory answer to investors’ queries

• Accounting policy are prudent and disclosure norms are adequate

Valuation:

Currently company has market capitalization of 3157 Crores. In FY 15, company made net profit of 105 odd crores and cash flow of 95 Crores. Thus, company is trading at 30 times TTM basis. Without factoring in Phase-III business opportunity and base business growth of 15%, the business is available at 25 times FY 16 earnings.

Disclosure: Invested in ENIL at average price of 450 with allocation of 10%

Disclaimer: This is not an recommendation and Investors shall do their own due diligence before taking an investment decision.

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