Radio Mirchi going public
Well positioned to capitalise on the growth prospects of the FM business in the new licensing regime
Entertainment Network (India) (ENIL), operating FM channel Radio Mirchi, is issuing 120 lakh equity shares with a greenshoe option of an additional 12 lakh shares. The funds will be utilised to participate in the bidding for FM channels in new cities (seven bagged by January 2006) and finance the migration fee to shift to the new licensing regime in the seven cities (Mumbai, Delhi, Chennai, Kolkata, Ahmedabad, Pune and Indore),where it already operates FM channels. About Rs 10 crore will be invested in its 100% subsidiary in the business of event management and out-of-home media business. The ascertained project cost of Rs 230 crore will have a debt component of Rs 100 crore.
Due to the stiff licence fee, ENIL could not make profit since the past five years. After a new liberal policy, effective in the current year, the company’s licence fee obligation has come down drastically. It made a turnaround in the first half of FY 2006. Accumulated losses of over Rs 100 crore have been written off against equity and share premium account.
Before coming to the public, ENIL incorporated a 100% subsidiary, Times Innovative Media Private Limited (TIMPL), to take over the event management and out-of-home media business from the promoter company, Time Infotainment Media Company Limited (TIML). Bennett and Coleman Company (BCCL), the other promoter, had a 97% stake in TIML.
Strengths
*As compared to other developed and developing countries, advertising on radio has not been popular in our country. However, as consumerism in the country is on the rise, this medium can increase its advertisement share faster than other media as it is the cheapest mode of advertising and has a low base.
*As opposed to the old licensing policy, which had a provision of a flat 15% escalation of license fee per annum, the new policy provides for performance-based revenue sharing. This provides good opportunity for ENIL to expand rapidly to capitalise on its first mover advantage.
*ENIL has the largest radio network in the country: seven major cities including four metropolitan cities. The company operates in the same 93.5 MHz frequency band in all the four metros, giving it an advantageous position among frequently traveling listeners. Also, by having a pan-India presence, ENIL enjoys the advantage of providing greater advertising coverage to its clients. The brand, Radio Mirchi, is well recognized in the market, with 95% and 100% brand awareness in Mumbai and Delhi, respectively.
*The Times group enjoys rich patronage from advertisers due to its deep presence in the media and publication business, giving ENIL an edge compared to its competitors.
Weaknesses
*The entertainment and media industry is very much people-centric. Attrition rate will increase with the entry of many players after the new liberal licensing policy. This may put tremendous uncertainty on the listener-hold of existing channels.
*A substantial portion of the issue proceeds will go to bid for new stations. The revenue and profit from such new ventures is subject to uncertainty and gestation periods of varying degrees.
*ENIL is involved in a host of litigations relating to the sources of its contents. Any ruling against the company can have material financial implications.
*The 100% subsidiary of ENIL is engaged in event management and out-of-home business, where many unorganised players have a good presence, raising uncertainty on growth and profitability.
Valuation
In the half-year ended September 2005, ENIL reported sales of Rs 48.37 crore and net profit of Rs 11.05 crore. The company earns higher revenue and profit in the second half of the financial year due to the festive season. However, in the half year, it has not provided for around Rs 4 crore of amortisation charges related to one-time fee payable to shift to the new licensing regime. Its debtors amount to Rs 37 crore. As ENIL will be spending above Rs 70 crore for acquiring new licenses, it will have to take further hit on amortising these charges, as the new cities will take time to bring revenue. So one can not expect big EPS numbers in the short to medium term and P/Es will be high. Being the only listed player (at least for some time) in this field will stand it in good stead post-listing.