Stock Review: Entertainment Network India

ENTERTAINMENT Network India (ENIL), the only profitable FM radio player in the country, stands to gain the most from Phase III of the FM radio policy announced recently. The company, which has a strong brand and well-established operations in major cities, is likely to grow faster in Tier-II and Tier-III cities as compared to its smaller and loss-making peers. The new guidelines are expected to drive profitability by reducing operational costs and opening avenues for inorganic growth for ENIL. The flexibility of having multiple frequencies in one city, coupled with networking to share fixed operating expenses between station operators, will drive significant margin expansion. The ENIL management expects to save close to 50-60 per cent of capital expenditure in setting up one new channel after the networking mechanism comes into effect.

Most analysts are bullish on the company and feel the stock could see a 20-25 per cent upside from current levels over the next one year. Rising competition and aggressive bidding are the key risks for the company.

A price war during the bidding process will mean a higher break-even period for these companies. However, ENIL has indicated an 18 per cent internal rate of return threshold while bidding for new stations. Even while bidding in Phase II, the company had maintained financial discipline. This prudent stance will enable it to maintain its profitability.

In addition to extending FM radio services to 227 new cities from the current 86, the policy also permits private players to carry news broadcasts of All India Radio. Both factors will bring in more listeners and increase stickiness to this medium. It will also expand the number of advertisers for radio players.

According to the policy, a single player cannot own more than 15 per cent of the total radio licences in India. At this cap, ENIL can buy a maximum 131 channels. The company will have to incur a licence acquisition cost of `250-275 crore for these new channels. If `200 crore is added towards set-up costs, the total capex requirement moves up to `475 crore.

ENIL has a cash kitty of around 100 crore and is expected to generate cash flow of `110 crore in FY12. Further, the company's debt free status leaves ample room for fund raising. Thus, the company is well poised to bid aggressively in these auctions that are at least 4-5 months away. The easing of FDI cap from 20 per cent to 26 per cent will open more funding sources for the company. The licence period has also been extended to 15 years from 10 for new stations, which will help the company generate better returns.

The policy has also allowed private operators to own more than one channel in a single city, subject to conditions. ENIL, which has a market share of 35 per cent, is short of free capacity in large cities and would be able to push its volume growth, as well as garner higher advertising revenues. Additionally, the policy allows the company to offer niche new channels with content differentiation (such as English music, news, among others) to listeners. The company can do that with lower capital as well as operating expenditure.

The move to reduce the lock in period for majority shareholders to three years (from five years), will act as a catalyst for consolidation in the radio sector. As promoters of some bleeding radio players look to sell out, ENIL could acquire these assets and tap in further growth avenues.