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Research
ENIL - Strong operating leverage - Centrum
Posted On : 2014-03-02 08:23:15( TIMEZONE : IST )
Rating: Hold; Target Price: Rs370; CMP: Rs350; Upside: 6%
Strong operating leverage
We maintain Hold rating on the stock despite strong Q3FY14 results given the uncertainty on migration policy for Phase-II stations, risk of over bidding in Phase-III auctions coupled with 2-year time frame for consolidation of new stations. We further believe that operating margins have peaked in the quarter as the company is set to invest in manpower, brand and technology in FY15 for Phase-III auction. Stronger than expected ad growth as in Q3FY14 could be a positive. We believe pricing will become more critical given that utilization levels are at 89%.
Q3FY14 results above expectations: The company posted a healthy 12.7% YoY growth in revenues at Rs985mn (expectation of Rs971mn) while operating profit was up by 26.7% YoY to Rs382mn (exp of Rs342mn) on the back of 429bps margin expansion on prudent cost control and lower marketing expenses. PAT was up by 38% YoY to Rs259mn (13% above expectations). However going forward, the margins could be under pressure as the company is set to invest in manpower, technology and brand as Phase-III auctions are expected in the next 3-6 months.
Pricing led ad growth to continue: Given that blended utilization levels for the company are at 89% (112% legacy stations; 81% new stations), we expect ad growth to be pricing-led going forward. However Phase-III could help the company and the industry to add incremental inventory in the system. During the quarter, ad growth was on the back of ~6% volume growth and ~4.5% pricing growth. 2% of the revenues during the quarter were on the back of state elections while national elections could contribute Rs300-400mn to the radio industry in the next 2 quarters.
Phase-III auctions to happen in next 3-6 months: Management remained confident that Phase-III auctions will happen in the next 3-6 months as the process has already started. During the quarter, TRAI also floated a consulting paper on migration of Phase-II licenses considering that they would come in for renewal in March 2015. Management believes that pricing for the migration would depend on Phase-III auctions and will be completed only after national elections. At the reserve price of phase-III auction, ENIL would need to pay Rs2.6bn over 3 years starting FY16 for migration of all 32 stations.
Maintain Hold: We have increased our estimates for FY14/FY15 on the back of strong operating performance during the quarter. However, we believe current valuations of 20.3x FY14 and 18.1x FY15 capture all the positives and hence we maintain our Hold rating on the stock with a target price of Rs370 (17x Dec 2015). Uncertainty on the migration policy for Phase-II stations, risk of over bidding in Phase-III auctions coupled with 2-year time frame for consolidation of new stations continue to be downside risks on the stock while upside could come from stronger ad growth, M&A or strategic investor in the company post FDI.
