Our recent interactions with a host of media companies have evoked a broadly similar set of responses to our queries on the macro-environment, client spending trends and advertising volumes.
ENIL has also pointed towards a challenging environment leading to a visible slowdown in advertising spends observed in the recent past, especially the last 2m.
Within advertiser segments, BFSI, real estate and automobiles have visibly cut budgets given the headwinds these segments face. Segments like insurance, DTH, media (entertainment channels) though continue to invest given the high competitive intensity prevalent within them.
Clients have now been working with reduced campaign sizes/budgets and spends are getting increasingly assessed more frequently, sometimes on a monthly basis.
We believe the reduced appetite of corporates to invest bears out the high co-relation that exists between economic growth rates and the growth trajectory of advertising revenues.
We have valued ENIL using relevant EV/EBITDA multiples for the different businesses-radio, OoH and Events. We have validated the same with a DCF based valuation methodology; assumptions being a 14% WACC and 3% terminal growth rate. The same throws up a fair value of Rs165 for the stock.
We now value OoH at Rs3-4per ENIL share, given our expectation of the airports’ portfolio and challenging macro being a likely drag on near term financials. The other businesses, radio and events contribute Rs165 (radio) and Rs7 (events) add to our SoTP value.
Lower value of individual businesses is on account of higher costs of capital, reduced earnings and lower multiples in our SoTP, accounting for multiple de-rating of benchmarks.
Summing the above we arrive at a price target of Rs165 (Rs210 earlier) for the stock, based on FY10E earnings. At current levels, the stock trades at 7x FY10E EV/EBITDA and 18x FY10E EPS.
Lower than estimated ad revenue momentum, a sharp slowdown in economic growth; margin erosion in radio, given the high competition and execution slippages across different segments could make the near term more challenging for the company.