Music Broadcast IPO opens today, analysts say valuation looks reasonable

What works in favour of Music Broadcast is its higher advertising rates, healthy operating margins and strong listenership base, according to analysts


Proceeds from the IPO will be used to clear debt of Music Broadcast which is seen as positive as it will reduce finance costs allowing other income to rise. Photo: Mint
Proceeds from the IPO will be used to clear debt of Music Broadcast which is seen as positive as it will reduce finance costs allowing other income to rise. Photo: Mint

Mumbai: The initial public offer (IPO) of Music Broadcast Ltd in a price band of Rs324-333 per share will open for subscription on Monday.

The company from Jagran Prakshan Ltd stable is looking to raise Rs400 crore through fresh issue of shares and around Rs88 crore via offer for sale (OFS). The company, which operates radio stations under the name Radio City, has already raised Rs146.5 crore by anchor investors. The issue will close on 8 March.

Proceeds from the IPO will be used to clear debt. Post issue, Jagran Prakashan’s stake in Music Broadcast will be reduced to 71% from 89%.

Analysts say the valuation is reasonable. What works in favour of the company are its higher advertising rates, healthy operating margins and strong listenership base, they add.

Angel Broking says that in terms of valuations, the pre-issue price to earnings (P/E) multiple works out to 25.2 times the company’s annualized first half 2017 earnings (at the upper end of the issue price band), lower compared to its peers. Entertainment Network India (ENIL), is trading at 79.5 times its annualized first half of FY17 earnings.

“Also, Music Broadcast EV/sales multiple at 6.2 times, works out to be at discount to ENIL’s 8.2 times. On EV/EBITDA front too, Radio City’s issue appears to be attractive 18.7 times compared to ENIL’s 37.4 times. Moreover, MBL has a better margin and return on equity (ROE) profile than its comparable,” the brokerage said in a note. EV stands for enterprise value and EBIDTA is a measure of operating profit.

Radio City’s significant listenership despite operating fewer stations has enabled the company to charge 30% higher advertising rates than its peers, the brokerage said. “Owing to this, Radio City enjoys healthy 34% operating margin, much better than ENIL’s 30% margin in FY2016.”

Radio City’s advertising volumes have grown at a compound annual growth rate (CAGR) of 12.5% over FY2011-16, while, ENIL reported 9% CAGR in advertising volumes during the same period. Radio City’s advertising volumes have witnessed higher growth than the industry. Radio stations in Mumbai, Delhi and Bengaluru accounted for 51.3% of the company’s total revenue in FY16. Over FY12-16, EBITDA margins expanded 33.8%.

Brokerage Nirmal Bang too says the company is reasonably valued . “The company enjoys return on equity (ROE) of 39.6%. On the valuation front, at the given upper price band of issue of Rs333, as per our estimates, Music Broadcast is offered at PE of 33.4 times its FY17E EPS of Rs 10 and FY17E EV / Ebitda of 19.3x which is lower to its peers,” it said in a note. EPS is earnings per share and the earnings for 2016-17 are estimated, not actual.

For the six months ended 30 September 2016, the company generated a total revenue of Rs138.21 crore, and recorded EBITDA of Rs45.51 crore and net profit of Rs29.76 crore. For the fiscal year ended 31 March 2016, it generated a total revenue of Rs245.51 crore, EBITDA of Rs78.59 crores and net profit of Rs42.51 crore.

Equirus Securities Private Ltd estimates the company’s revenue/Ebitda to grow at CAGR (17-19) of 18% and 20% respectively. It says that given the long term growth potential of the industry and market leadership of Radio City , the offer is attractively priced at EV/Ebitda of 15/12 times on FY18 and FY19 respectively. It sees EPS to grow at CAGR (FY17-19) of 37% and believes that Radio City is well positioned to improve its utilisation rates and margins can potentially rise up to 38%-40% once all the stations mature. “One may argue that ENIL is double the size of MBL in terms of revenue and stations, but in our view, given similar growth profile and better profitability, the issue price offers an attractive entry point,” it said in its note.

IIFL Wealth Management Ltd said the stock does not look all that promising in terms of relative valuation. It pointed out that Music Broadcast did not pay any tax in FY16 owing to accumulated losses. Since it will have to pay tax going forward, net profit margin is expected to come down from FY18 and based on the current IPO price of Rs333, the stock should trade at a price to earnings (PE) closer to ENIL.

“Consequently, net profit margin is expected to come down from FY18 and based on the current IPO price of Rs 333, the stock should trade at a PE closer to ENIL,” IIFL said in a note.

Emkay Global Financial Services Ltd said that total costs are expected to increase because of the new stations although expenses of legacy stations will remain low. This will result in margin contraction in FY18 before it inches up in FY19. “Net growth would also see deceleration due to muted increase in EBITDA, higher depreciation/amortisation on account of license/ migration fee, incremental capex and finance cost,” the brokerage said.

Still, while recent cap-ex and equity dilution will keep return ratios depressed, Monarch Networth Capital said that the company’s return on equity (ROE) and margins will bounce back from FY18 onwards.

Analysts say that industry consolidation will also help in yield improvement for strong companies over the medium-to-long term.

A slowdown in advertising income, unfavourable changes in government policies, high gestation period for revenue and profit growth in new cities are few key risks for the company.

Music Broadcast is the first and oldest private FM radio broadcaster in India. The company started broadcasting from four cities in 2001 and has grown its presence to 37 cities as on 15 February.

HT Media Ltd, the publisher of Hindustan Times and Mint, competes with Music Broadcast in some markets.

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