Hold Entertainment Network; target of Rs 790: ICICI Direct

ENIL is a leading player in the radio industry with a portfolio of 53 stations (including 17 newly bagged Phase III stations & four Oye FM stations) across cities. During the quarter, radio growth saw lower growth of 6.4% YoY partly offset by superior non-radio business growth of 38% YoY. The company attributed lower radio growth to delays in launches of new stations and also to certain important categories like e-commerce and BFI underperforming. Furthermore, there was also the effect of the inauspicious Shradh period in the second half of September. Moreover, recently launched channels were being run ad free for the first month for better listener experience, which also led to some revenue losses. The company indicated that in Q2FY17, the government increased prices for advertising on radio by 22%. It expected that it would exert a positive pressure on pricing for the remaining private sector clients as well. The management also indicated it would continue to price new channels higher and keep the ad cap at 10 minutes. The management guided at 10% growth in ad revenues from the core 32 channels in FY17E with the topline to be further aided by incremental revenues from new markets. We factor in 17.1% (FY16-18E) CAGR in ad revenues to Rs 675.2 crore.

ENIL, being a leader, is expected to be a key beneficiary of the expanding reach of the radio. However, we highlight that new channel launches in phase III are expected to pressurise margins in FY17E with a gradual recovery being seen in H2FY18E onwards. Furthermore, we would wait to witness traction in the radio business recovery post a blip in Q2FY17. We assign a HOLD recommendation with a DCF-based target price of Rs 790. MIB’s approval in favour of ENIL and stronger traction in new channels would be an upside risk to our estimates.