A reasonable opportunity to piggyback on the potential in radio

MUMBAI: Entertainment (Network) India Ltd is entering the market with an initial issue of 1.2 crore shares in a price band between Rs 144 and Rs 162.

The company is part of the Times Group and runs the largest private FM radio channel, ‘Radio Mirchi’. The issue also has a greenshoe option of up to 0.12 crore shares, including which the issue size would be between Rs 190 crore and Rs 214 crore.

The company would be offering up to 27.75% of its post-issue paid up equity capital. Based on the equity prior to the issue, ENIL has been valued between Rs 495 crore and Rs 557 crore.

Based on revenues for the trailing 12-month period till September 2005 of Rs 92.1 crore, the market capitalisation/ sales multiple works out to between 5.4 and 6 times, which looks steep.

But consolidated revenues are set to jump to about Rs 150 crore in the year till March 2006, which makes the valuation more reasonable at between 3.3 and 3.7 times.

Revenues till September 2005 do not include the performance of the event management and out-of-home media businesses ENIL acquired through a 100% subsidiary in November 2005.

These businesses had annual revenues of Rs 26.2 crore in financial year 2005, including which trailing 12-month revenues would jump to Rs 118 crore. Besides, business is generally better in the second half of the year, traditionally accounting for about 60% of a year’s turnover, based on which consolidated revenues could be about Rs 150 crore in FY06.

As far as profitability goes, ENIL has seen a huge improvement in the first six months of this fiscal ended September 2005.

The company posted a net profit for the first time after it launched its radio operations in financial year 2001 during this period. Its operating margin stood at 27.6% in the six-month period, compared to a negative margin of 39.8% in the comparable period the previous fiscal.

The main reason for this improvement was a change in government policy on licence fee calculation. Till March 31, 2005, ENIL was paying a fixed amount of licence fees, based on the amount the company had initially bid to obtain each licence, with an annual increase of 15% on a cumulative basis.

Thus, ENIL’s licence fees increased 15% in financial year 2005 to Rs 39.85 crore. According to the new rules, the company is required to pay licence fees based on a revenue sharing formula, apart from a one-time entry fee, which is based on what the company bids for the licence of a particular area.

Had the earlier rule of a fixed licence fee continued, the company would have reported a loss even in this financial year, because licence fees itself would be as high as 45% of revenues. With the new rules in place, licence fees amounted to just 5.8% of revenues.

But one needs to keep in mind that the results of the six-month period ended September 2005 do not include the impact of the one-time entry fee the company has had to pay for each licence.

The one-time entry fee payable by Radio Mirchi for the seven cities it bid for earlier this month was Rs 70.2 crore.

With regards to the seven cities in which it is already operating, the government has decided that existing players must pay a migration fee in lieu of the one-time entry fee.

Excluding Indore and the migration fee which is yet to be decided, the aggregate fee ENIL has had to pay for its existing operations is Rs 76.8 crore.

This would be amortised on a straight-line basis over ten years, the period for which the licence is applicable. The results of the six-month period ended September 2005 do not include this amortisation amount since the migration fee was decided only this month.

The impact of this on the first half results would be 8% of revenues at the profit before tax level, which would drop by over 30% from the reported figure.

It would be reasonable, therefore, to adjust for this while arriving at earnings estimates for FY06. At the same time, it is pertinent to reiterate that traditionally Radio Mirchi has done better business in the second half of the year. Last fiscal, 58% of total revenues came in the second half period.

Keeping these two factors in mind, analysts estimate a profit of Rs 20 crore this fiscal, or earnings per share of Rs 5.8 on the company’s pre-issue equity.

The price-earnings multiple, accordingly, would be between 25 and 28 times estimated FY06 earnings, which by itself is not exactly cheap. At the same time, revenues have been growing at a reasonably fast pace.

They grew at a compounded average rate of 90% between FY03 and FY05, and in the first six months of this fiscal, revenues grew 55.3%. Going by the performance in the first half of the year, when the operations turned profitable, earnings growth could also be impressive going forward.