New stations to drive earnings growth
* PAT impacted by new station cost: Revenue declined 3% YoY to INR1.3b (inline) due to the impact of GST, demonetization-led weak ad market, and inability to drive volumes at steep price hikes. EBITDA rose 23% YoY to INR284m (7% beat), led by a 44% YoY plunge in marketing expenses (the base quarter had a new station launch-related peak ad cost), partly offset by a 20% YoY rise in employee cost (related to new stations). PAT declined 24.5% YoY to INR60m (9% miss) on higher depreciation and lower interest income related to new stations launch.
* Steep price hikes fail to drive growth at legacy stations: ENIL’s intentional ad volume reduction at legacy stations (to improve listenership) with a corresponding price increase has seen low response from advertisers. Consequently, legacy stations witnessed de-growth (-10% YoY) for the second consecutive quarter. However, new stations recorded revenue of INR142m (11% of overall revenue) and 21% capacity utilization, while their EBITDA loss came down to INR18m from INR44m in the previous quarter.
* Uncertain growth outlook: Although an improvement in the ad market may support growth, management’s current strategy of steep price hikes at old stations could lead to continued loss of market share, as evident from higher growth posted by smaller peers. We believe ENIL may soften stance and increase inventory to partially cushion this impact. This, coupled with breakeven of new stations by 4QFY18, should drive earnings. We cut revenue/EBITDA by 4%/3% for FY18E. With complete ramp-up of new stations, we expect 29% EBITDA CAGR over FY17-20E.
* Maintain Neutral with TP of INR910: ENIL is valued at 19x EV/EBITDA on FY19E (35% premium to MBL), largely capturing expected growth over the next 2-3 years. We maintain Neutral, assigning 20x EV/EBITDA on FY19E, arriving at a target price of INR910.
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