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Music Broadcast IPO opens today, analysts say valuation looks reasonable

LiveMint logoLiveMint 06-03-2017 Nasrin Sultana

Mumbai: The initial public offer (IPO) of Music Broadcast Ltd in a price band of Rs324-333 per share will open for subscription on Monday.

The company from the Jagran Prakshan Ltd stable is eyeing to raise Rs400 crore through fresh issue of shares and around Rs88 crore via offer for sale (OFS). Operator of the private radio business arm, popularly known as Radio City, has already raised Rs146.5 crore by anchor investors. The issue will close on 8 March.

Proceeds from the IPO will be used to clear debt of the company, which is seen as positive as it will reduce costs allowing other income to rise.

Post issue, Jagran Prakashan’s promoter holding in Music Broadcast will be reduced to 71% from its current 89%.

Most analysts said that valuation of the issue is reasonable. What works in favour of the company is its higher advertising rates, healthy operating margins and strong listenership base, they said.

Angel Broking said that in terms of valuations, the pre-issue price to earnings (P/E) works out to 25.2 times its annualized first half of 2017 earnings (at the upper end of the issue price band), which is lower compared to its peers. Its closest peer, Entertainment Network India (ENIL), is trading at 79.5 times its annualized first half of FY17 earnings.

“Also, Music Broadcast EV/sales multiple 6.2 times, works out to be at discount to ENIL’s 8.2 times. On EV/EBITDA front too, Radio City’s issue appears to be attractive 18.7 times compared to ENIL’s 37.4 times. Moreover, MBL has a better margin and return on equity (ROE) profile than its comparable,” it said in a note.

Radio City’s wide listenership despite operating fewer stations has enabled the company to charge 30% higher advertising rates than its peers. “Owing to this, Radio City enjoys healthy 34% operating margin, much better than ENIL’s 30% margin in FY2016,” the brokerage firm said.

Radio City’s advertising volumes have grown at a compound annual growth rate (CAGR) of 12.5% over FY2011-16, while, ENIL reported 9% CAGR in advertising volumes during the same period. Radio City’s advertising volumes have witnessed higher growth than the industry due to its higher listenership. Of the total revenue, advertisement on radio station contributed 99.5% in FY16. Radio stations in Mumbai, Delhi and Bengaluru revenue account for 51.3% of the total in FY16. Over FY12-16, EBITDA margins expanded to 33.8% in FY16.

Nirmal Bang, an online stocks and shares market trading company, said that expansion in different geographies, playing music as per audience preferences and attracting listeners, will help in attracting advertisers and fuel growth to the company. “The company enjoys return on equity (ROE) of 39.6%. On the valuation front, at the given upper price band of issue of Rs333, as per our estimates, Music Broadcast is offered at PE of 33.4 times its FY17E EPS of Rs 10 and FY17E EV / Ebitda of 19.3x which is lower to its peers,” it said.

IIFL Wealth Management Ltd also agreed that compared to ENIL Music Broadcast is at reasonable valuations. However, it added that the stock does not look all that promising on a relative valuation basis. It says that Music Broadcast did not pay any tax in FY16 owing to accumulated losses but it is expected to be set-off in FY17. Consequently, net profit margin is expected to come down from FY18 and based on the current IPO price of Rs333, the stock should trade at a price to earnings (PE) closer to ENIL.

“Consequently, net profit margin is expected to come down from FY18 and based on the current IPO price of Rs 333, the stock should trade at a PE closer to ENIL,” IIFL added.

For the six months period ended 30 September 2016, the company generated a total revenue of Rs138.21 crore, Ebitda of Rs45.51 crore and net profit of Rs29.76 crore. For the fiscal year ended 31 March 2016, it generated a total revenue of Rs245.51 crore, Ebitda of Rs78.59 crores and net profit of Rs42.51 crore.

Equirus Securities Private Ltd estimates revenue/Ebitda to grow at CAGR (17-19) of 18% and 20% respectively. It said that given the long term growth potential of the industry and market leadership of Radio City , the offer is attractively priced at EV/Ebitda of 15/12 times on FY18 and FY19 respectively. It sees EPS to grow at CAGR (FY17-19) of 37% and believes that Radio City is well positioned to improve its utilisation rates and margins can potentially rise up to 38%-40% once all the stations mature as new stations may take 2-3 years to breakeven. “One may argue that ENIL is double the size of MBL in terms of revenue and stations, but in our view, given similar growth profile and better profitability, the issue price offers an attractive entry point,” it adds.

However, Emkay Global Financial Services Ltd feels that total costs are expected to increase towards launch and stabilisation of new stations but accelerated increase in expenses for legacy stations is not seen. This would result in margin contraction in FY18 before it inches up in FY19, pointing out that, the company may out reach peak margin level in medium term as new station would generate thin margins in the initial years of launch. “Net growth would also see deceleration due to muted increase in EBITDA, higher depreciation/amortisation on account of license/ migration fee, incremental capex and finance cost,” it added.

Although recent capex and equity dilution will keep return ratios depressed, Monarch Networth Capital says return on equity (ROE) and margins would bounce back from FY18 onwards as the capex bears fruit. “Although there are some concerns regarding the sustenance of radio over the long term, we believe the randomness of songs and its inherent aspect of it being a live local companion to listeners will help it to sustain in the long term,” it said.

Analysts feel that industry consolidation would also help in yield improvement for strong players over the medium-to-long term. “Yield improvement for legacy stations would drive healthy operating leverage, in turn leading to robust cash generation. Radio city has past record with strong trend in operating cash flow (OCF) and free cash flow (FCF) generation. Healthy cash generation would be driven by minimal capex requirements and stabilisation of new stations over the 12-15 months,” Emkay said.

Slowdown in advertising income, unfavourable changes in government policies and high gestation period for revenue and profit growth in new cities are few key risks for the company.

Music Broadcast is the first and oldest private FM radio broadcaster in India. The company started broadcasting from four cities in 2001 and has grown its presence to 37 cities as on 15 February.

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