Entertainment Network: digital too small to make an impact

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ENIL radio revenue has been down 58% YoY in 9MFY21, which was at par with Music Broadcast’s decline for the same period; however, radio being the last vertical to recover, as 1) higher dependence on local advertisers, which have been badly hit, and 2) Top 8 markets witness slow recovery & are still down 45% vs pre-COVID levels. Ad volume uptick by 11.5% YoY and a sequential improvement by 80% YoY have been largely on the back of the festival season, but given heavy discounts on pricing for radio, revenue recovery to pre-COVID levels will be delayed, says management. We expect a 5% decline in revenue for Q4FY21E, translating into a 45% decline for FY21E. Also, radio royalty remains an overhang, as 1) Shelter under the shift to needle hour-based royalty with a mere 4% increase in royalty outflow being challenged by PPL India (Phonographic Performance) in court demanding 6-7% (vs earlier royalty of 2%) royalty, 2) large music labels are already dealing directly on minimum guarantee basis, which will lead to higher outflow, 3) overhang on digital royalty continues as there is no capping and radio firms will not be able to scale up on internet radio too as audio OTT pay a sizeable royalty (60% of revenue) on music. However, Mirchi’s digital solutions business (contributing 11.5% of top line) has been positive as along with healthy client additions, holistic solutions and delivering high EBITDA margin of 48%, which in the current environment will partially offset the negative impact of the radio business.

Valuation
The stock is currently trading at 5x FY23E EV/EBITDA, which looks fairly priced after factoring in concerns over a prolonged recovery of the radio business as well as weakness in the solutions business. We retain Buy with a TP of INR 210 based on 9x FY23E EV/EBITDA for the radio (contributing 70% to EBITDA) and non-radio (contributing 30% to EBITDA) on 4x FY23E EV/EBITDA.