FM radio players can double revenues in 5 years

CRISIL foresees IRRs of 11-14% in large markets

CRISIL believes that the FM radio industry has the potential to nearly double revenues in the next five years to an estimated Rs 3,900 crore from Rs 2,000 crore in calendar year 2015. Ad volume would get a fillip as Phase III regulations will help radio cover a proposed 294 cities -- from 86 at present - and reach 85% of India's population.

For broadcasters, Phase III offers greater flexibility because it allows ownership of multiple frequencies (or channels/radio stations) in one city and sharing of network infrastructure, and also has a longer licence period. This will support profitability. Of the 135 frequencies on the block in the first batch, 97 were provisionally won.

Says Sudip Sural, Senior Director, CRISIL Ratings, We estimate an overall bounty of around Rs 5,000 crore for the government. This includes Rs 1,150 crore through auction proceeds, another Rs 2,000 crore from migration of existing frequencies from Phase II to Phase III, and an estimated Rs 2,000-2,300 crore from licence fees collected through revenues sharing over 15 years.

This is significantly more than what the government had earned in Phases I and II.

CRISIL estimates an internal rate of return (IRR) of 11-14%, and a payback period of 7-9 years for the big radio companies in metros. In the large ad markets the top radio companies are already operating at peak utilisation and, an addition of one or two incremental frequencies, would keep their ad inventory utilisation as high as 60-65% in the first year.

Says Ravi Nori, Director, CRISIL Ratings, Moreover, because of low set-up cost for players with established operations, new frequencies will be EBITDA positive from the very first year. However, economic shocks pose a risk to ad rates and can derail our IRR estimates. Tier-II cities would need longer payback periods of 8-10 years because of relatively lower revenue and profitability potential compared with 7-9 years for metros.

The ad rates in Tier II cities such as Kanpur and Lucknow are as low as Rs 250-660 per 10 second slot compared with Rs 1,150-1,900 in Delhi or Mumbai. Tier II cities will have to attract more local advertisers who do not buy in bulk.

However, investments have also been relatively lower with bid per frequency for Kanpur and Lucknow at Rs 8-14 crore vis-a-vis Mumbai and Delhi at Rs 120-170 crore, making them attractive but with lower profitability. Further, players that offer bundled portfolio of national and local frequencies as well as other advertising options such as print to advertisers would fare better.

CRISIL's outstanding ratings for radio companies already factors in investments for auction, migration and associated set-up costs. CRISIL-rated players exhibit a healthy credit risk profile, as underscored by dominant presence in large advertising markets, significant pricing power and strong parentage. The higher-rated companies, being on a stronger footing, are expected to benefit from growing presence in large ad markets. However, Phase III would see higher competitive intensity.

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