IPO ANALYSIS. Music Broadcast: lilting to ears of those with high risk appetite

Music Broadcast (MBL) that operates the Radio City channel is raising ₹400 crore through a fresh issue of shares, while promoters will mop up another ₹100 crore through an offer-for-sale. The company, owned by the media group Jagran Prakashan, the publisher of Hindi daily Dainik Jagran, is the third-largest private radio company in India. The object of the issue is mainly to repay debt.

The company’s leadership position in some of the metros, strong growth in advertising revenue in the radio business and the likely synergy that can arise from its parent are big positives. However, the offer is not cheap when compared to its peer Entertainment Network India (ENIL). Earnings could also be impacted over the next one year due to the expansion undertaken recently. Therefore, only investors with a higher risk appetite can consider subscribing to this issue with a long-term perspective.

Music Broadcast gets half of its revenues from the Bengaluru, Mumbai and Delhi markets. Radio City (Music Broadcast’s brand) is numero uno in Bengaluru in terms of listeners, and number 2 in Mumbai. In Bengaluru, it has been maintaining strong leadership position for the last four years, while in Mumbai it has recently ceded to competition from Big FM for the numero uno one slot. In the phase three auctions held in 2015, it added footprint in 11 cities. Currently it has 39 radio stations operating in 37 cities.

The company’s sales and profits have grown at a fast clip in the past. While sales grew at an annualised rate of 19 per cent in the last three years (FY13-16), net profit was up 54 per cent. The company has benefited from its leadership position in the fast-growing radio industry. Advertising revenue growth in the radio business is second only to digital advertising in the media industry. Growth in advertising in radio industry has averaged 14.6 per cent annually in the last five years.

With operationalisation of 11 radio stations, the company’s sales are expected to grow further in FY18. However, profitability over the next one year is expected to take a hit with the rise in depreciation, sales and administration as well as employee costs incurred in setting up new radio stations.

Intense competition in existing cities is expected to put pressure on advertising rates and overall operating margins in the near future. Moreover, with demonetisation, the December quarter is expected to be a dampener — with players such as real estate, jewellery, auto and FMCG companies putting their campaigns on hold. However, profit growth is expected to be back to normal levels by FY19, when expenses stabilise and margins start improving.

In FY16, operating margins were 33 per cent. During 2015-16, sales were ₹245 crore while net profit was ₹42 crore. For the six months ended September 2016, the company reported net sales of ₹138 crore and net profit of ₹30 crore.

The company’s debt-to-equity ratio is currently high at 2.4. It has about ₹300 crore of debt on its books and it plans to prepay debt to the tune of ₹150 crore by March this year.

At the higher end of the price band of ₹333, the post-issue valuation demands a price-to-earnings multiple of 44 on its FY16 earnings. Its competitor ENIL, part of the Times group, is currently quoting at 45 times its FY16 earnings.

At the current offer price, its enterprise-value-to-operation profit ratio (EV/EBITDA) on FY16 financials would be 28 times — similar to that of ENIL.