Music Broadcast IPO: High-margin, high-growth business

Foray into new cities will drive revenue growth but valuations leave little room for immediate gains

The initial public offering (IPO) of equity in Music Broadcast (MBL), owner of leading radio brand Radio City, will enable the company to improve its balance sheet and become leaner.

Of the up to Rs 489 crore of issue proceeds, Rs 400 crore will flow into MBL, the rest being an Offer for Sale. The company will repay most of its Rs 300 crore debt through these funds, reducing its interest cost and improving the overall cash flow.

The Radio City brand enjoys leadership position in most markets and MBL has a healthy operating profit (Ebitda or earnings before interest, taxes, depreciation and amortisation) margin of a little over 30 per cent. Its strategy of capturing the number one or two slot in bigger cities will enable it to continue garnering a high share of advertising revenue.

While there is healthy visibility on its revenue growth and margins, the issue's pricing leaves little room for gain in the near term. Its only listed pure-play radio company, Entertainment Network or ENIL, trades at 41 times the FY18 estimated earnings. At the upper price band, the IPO is priced at about 39 times the FY18 estimated earnings on a post-issue equity capital basis.

This is after noting that MBL will start paying taxes in the second half of the coming financial year and FY18 will witness losses related to the 11 new channels. The management says new channels typically take 12 to 24 months for break-even. The only factor that could possibly lead to some listing gain is if the high liquidity in the markets chases the stock.

Experts believe the ENIL stock deserves to trade at premium valuations over MBL, with its higher revenue base (twice MBL’s FY16 revenue), similar Ebitda margin, diversified revenue stream and a policy of dual stations. ENIL enjoys dual radio stations in 12 of the 13 major cities. This enables the company to have multiple non-differentiated, general entertainment channels. Which, in turn, enables them to target more listeners in this segment and increase market share as well. Radio City does not have a dual stations policy.

At the sectoral level, given the miniscule share of radio in overall advertisement spending (about four per cent) as compared to other mediums, as well as global benchmarks, there is good scope for ad revenues of radio companies to grow at a healthy clip. Addition of new radio stations and cities is a key growth enable. Ramping up of advertisements inventory utilisation levels is another.

On the flip side for MBL, high dependency on the top five advertisers (32 per cent of FY16 revenue), as well as the three metros of Mumbai, Delhi and Bengaluru (nearly half of FY16 revenue), are key downside risks.

Demonetisation has impacted advertising and marketing spending for most media companies. It will be a near-term concern for MBL, too. Additionally, as its 11 new stations come on stream, the margins could see some near-term pressure due to initial start-up costs. Analysts say as these stations ramp up over a year or two, the margins are likely to return to the current levels of slightly over 30 per cent. Most of MBL’s costs are fixed in nature, with licence fees paid to the government (four per cent of revenue) and royalty to music companies (three per cent), which keep moving in line with revenues.