ENIL - Ad growth offers positive surprise - Centrum

We retain BUY rating on ENIL driven by 23.4% YoY ad growth in the quarter which was better than our expectation and that of the industry. Price hike is inevitable in H2FY14 as capacity utilisation is over 90% for the network. With an upside possibility to our FY14 estimates on the back of election spends and TRAI ad cap for television networks, clients could move to mediums such as radio. Margin expansion on the back of partial fixed cost business model coupled with Rs3.5bn in cash gives us further comfort. However, delay in Phase-III could spoil the party as the scope for inventory expansion is limited.

Ad growth surprise boosts Q1FY14 results: 23.4% YoY ad growth during the quarter against 15% expectation was a positive surprise which led the company beat our sales growth expectations by 7%. Industry growth was 20-22% during the quarter led by strong volume growth across sectors. Lower than expected cost further boosted operating profit by 48.5%YoY, 27.7% above estimates, while PAT was up by 53.3% YoY, 44% above expectations.

Price hike inevitable in H2FY14: We expect the company to hike prices in H2FY14 as the scope for volume growth is limited with capacity utilization more than 90% at stations. ENIL will benefit further as advertisers move to cheaper mediums due to TRAI ad cap for television networks. Ad yields are further expected to move up on Government spending during elections and solution driven ads for clients. However, as situation on the ground continues to remain challenging, we have modelled 13.7% ad growth for FY14.

Margin expansion to continue: As radio is substantially a fixed cost business model, strong topline growth helped the company expand operating margins by 584bps YoY in the quarter. We have modelled 16bps operating margin expansion for FY14 as the share of activating business is double in H2FY14 which has a lower margin profile over core radio business.

Maintain BUY: ENIL is currently trading at 14.8x and 12.4x FY14E and FY15E respectively. We maintain Buy rating for the stock with a target price of Rs285 (based on 16x FY15E EPS of Rs17.8), an upside of 28%. Key risks are lower than expected ad growth as the company faces difficulty in passing on the rate hike, lower operating margin on the back of increasing share of activating business and the inability to identify businesses to deploy Rs3.5bn of cash with the delay in phase-III auction.

Source : Equity Bulls

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