Ushodaya Enterprises Private Limited: Ratings Re-Affirmed; Rated Amount Enhanced

June 04, 2019

Ushodaya Enterprises Private Limited: Ratings re-affirmed; rated amount enhanced

Summary of rating action Previous Rated Amount Current Rated Amount Instrument* Rating Action (Rs. crore) (Rs. crore) Term Loans 208.47 240.13 [ICRA]AA (Stable); reaffirmed Short-term, Fund-based Limits 110.0 135.0 [ICRA]A1+; reaffirmed Short-term, Non-fund Based 10.0 10.0 [ICRA]A1+; reaffirmed Limits Total 328.47 385.13 *Instrument details are provided in Annexure-1

Rationale The rating reaffirmation considers the healthy financial profile of Ushodaya Enterprises Private Limited (UEPL) as characterised by robust debt servicing indicators and strong liquidity position. The company enjoys significant net cash and bank balances because of the healthy cash flow generation, despite the modest capital expenditure undertaken in the past. At the consolidated level, the company had cash and cash equivalents (including liquid investments) of Rs. 746.2 crore as on March 31, 2019 compared to total debt of Rs. 262.7 crore. The ratings also favourably factor in the financial flexibility enjoyed by UEPL by being a part of the Ramoji Group.

The ratings continue to reflect the strong market position of Eenadu newspaper and ETV-Telugu channel (under UEPL’s 50.94% subsidiary, Eenadu Television Private Limited or ETPL) in Andhra Pradesh and Telangana. The same is also reflected in the modest revenue growth and healthy operating profit margins (OPM) of the company over the years. The newsprint prices increased significantly in FY2019, resulting in a moderation in Eenadu division’s OPM to 26.9% in FY2019 (as per provisional financials) from 31.0% in FY2018. The newsprint prices have started moderating since March 2019. However, UEPL has stocked up newsprint inventory at higher prices, which is expected to last till Q2 FY2020. Hence, Eenadu division’s OPM is expected to improve only from Q3 FY2020.

The rating also takes into consideration the modest performance of the Priya Foods division with strong market position in Andhra Pradesh and Telangana. The OPM of the division was impacted in FY2017 and FY2018 by the significant decline in chilly prices, resulting in inventory write-offs. However, this division reported YoY revenue growth of 15% in FY2019 (as per provisional financials) supported by its entry into new segments, such as spice mixes (masalas), and increased penetration in Northern and Western India. The rating also factors in the strong operating performance of ETPL as reflected by the 16% revenue growth in FY2019 and healthy operating margins of 43.2% during the same period.

The rating is constrained by the lack of geographic diversity of UEPL with the Eenadu newspaper publication limited to Andhra Pradesh and Telangana, high concentration risk for television broadcasting business towards a single channel, ETV Telugu, the vulnerability of advertisement revenues to cyclical downturns and the susceptibility of the newspaper business to volatility in newsprint costs. The rating also factors in the increasing competition to newspaper publications from digital media, which resulted in 6% YoY decline in Eenadu’s circulation volumes during July-December 2018. As digital penetration increases, the circulation volumes of newspapers may undergo significant changes; however, the extent of such digital impact on the circulation volumes of newspapers remains to be seen.

UEPL launched four Radio FM channels in July 2018 and ETV Bharat—a digital platform for news and infotainment—in March 2019. Both the business divisions reported operating losses in FY2019. ETV Bharat reported significant loss of

Rs. 53.6 crore in FY2019 and is expected to continue to report losses for the next two to three years. ICRA would continue to monitor the turnaround in operations / profitability of both these business divisions.

ICRA also notes the various contingent liabilities with respect to direct taxes, which are under appeal. While the company has paid most of them under protest, it also has sufficient cash and bank balances to meet the remaining liability if the appeals go against the company. ICRA notes the favourable outcome of the appeals pertaining to AY 2010-11, resulting in an income tax refund of Rs. 75.2 crore in November 2018. ICRA will continue to monitor the developments in this regard.

Outlook: Stable ICRA expects UEPL to maintain its current healthy credit profile on the back of consistent robust cash accruals. The outlook may be revised to Positive if the company is able to significantly improve its OPM by turning around operations of its radio and digital business divisions while sustaining the OPM of the Eenadu, Priya Foods and television broadcasting divisions. The outlook may be revised to Negative in case of significant decline in newspaper circulation volumes due to competition from digital medium, thereby impacting UEPL’s OPM or any large debt-funded capital expenditure that may suppress the profitability and adversely impact the capital structure.

Key rating drivers Credit strengths Healthy financial profile as characterised by low gearing, strong debt servicing indicators and liquidity position with huge cash and bank balance – Despite the debt drawn in the past to fund the capital expenditure plans, the credit profile of the company remains strong, with high cash and bank balance. The capital structure of the company remains healthy at 0.1x (at consolidated level) as on March 31, 2018 due to healthy accruals and lower debt levels. At the consolidated level, the debt coverage indicators also remain healthy, as reflected by interest coverage of 19.1 times and NCA/ Total Debt of 184% for FY2018. The company’s liquidity position is also strong, as reflected in cash and cash equivalents (including liquid investments) of Rs. 463.4 crore at the standalone level and Rs. 746.2 crore at the consolidated level as on March 31, 2019.

Strong market position of Eenadu newspaper and ETV-Telugu channel in Andhra Pradesh and Telangana – Eenadu ranks eighth among all the newspapers in India in terms of total readership as per the Indian Readership Survey (IRS) 2019 data. Moreover, Eenadu leads the print medium in Andhra Pradesh and Telangana. ETPL’s general entertainment channel, ETV Telugu, is among the top three channels by market share in Andhra Pradesh and Telangana.

Priya Foods enjoys a strong market position in Andhra Pradesh and Telangana – With presence across pickles, spices, instant mixes, commodities trading, edible oil trading, etc, Priya Foods leads the organised food and food products industry in Andhra Pradesh and Telangana. It, however, continues to face competition from the unorganised segment.

Financial flexibility by being a part of the Ramoji Group with a professional and experienced management team – The Ramoji Group, of which UEPL is a part, has diversified its business interests with huge asset holdings in various companies such as the 1,700-acre land holding in Ramoji Film City. UEPL enjoys strong financial flexibility as a part of the Group with a professional and experienced management team, which has demonstrated its ability to raise equity for its ventures.

Credit challenges Lack of geographic diversity for its newspaper publication business; high concentration risk for television broadcasting business – Eenadu newspaper’s presence is limited to two states—Andhra Pradesh and Telangana—exposing it to the political and economic developments in the region. Nonetheless, comfort is drawn from the leadership position of Eenadu newspaper in these states. More than 70% of the revenues and profitability of ETPL is derived from a single channel—ETV Telugu—indicating high concentration risk. Nonetheless, comfort is drawn from the healthy market share of ETV Telugu in Andhra Pradesh and Telangana.

Profitability of Eenadu remains vulnerable to increase in newsprint prices – The main cost element for a newspaper company is the newsprint cost. The newsprint prices have been volatile and it may not always be possible to pass on the increase to the customers through an increase in cover price or higher advertisement tariff. The newsprint prices increased significantly in FY2019, resulting in a moderation in Eenadu division’s OPM to 26.9% in FY2019 (as per provisional financials) from 31.0% in FY2018. However, the company managed to limit the decline in OPM by increasing the cover prices of its editions (to Rs. 6.5 from Rs. 5 for weekdays and Rs. 8.0 from Rs. 6.0 for weekends) with effect from November 13, 2018 and ~10% increase in advertisement rates with effect from May 2018. The newsprint prices have started moderating since March 2019. However, UEPL has stocked up newsprint inventory at higher prices, which is expected to last till Q2 FY2020. Hence, the OPM of Eenadu division is expected to improve only from Q3 FY2020.

Vulnerability of advertising revenues to cyclical downturns – The newspaper publishing and television broadcasting industry remain vulnerable to cyclicality in advertising spends by corporates and the rising competitive intensity, which challenge the company’s ability to retain market share and by implication, its advertisement revenue share.

Increasing competition from digital media – Newspaper publications are witnessing gradual slowdown in circulation and readership due to the increasing penetration of digital medium, market saturation and changing media consumption habits. Eenadu’s circulation reported YoY decline of 6% to 1,732,788 copies per day during July-December 2018 (as per data certified by Audit Bureau of Circulation) due to increased competition. As digital penetration increases, the circulation volumes of newspapers may undergo significant changes; however, the extent of such digital impact remains to be seen. ICRA, however, notes UEPL’s foray into the digital business through ETV Bharat, which will diversify revenue stream for UEPL.

Losses from two new business divisions—ETV Bharat and radio—impacting overall profits – ETV Bharat, a digital platform for news and infotainment in 13 languages, was launched in March 2019; and the four radio FM channels in Vijayawada, Rajahmundry, Tirupati and Warangal were launched in July 2018. The company made significant investments in these divisions, and they both reported operating losses in FY2019. ETV Bharat reported significant loss of Rs. 53.6 crore in FY2019 and is expected to continue to report losses for the next two to three years. ICRA would continue to monitor the turnaround in operations / profitability of both these business divisions.

Liquidity position UEPL’s healthy OPM and modest capital expenditure compared to its scale of operations has ensured comfortable cash flow generation in the past. The company’s liquidity profile remains strong as reflected by the availability of surplus cash reserves (cash and bank balance and liquid investments of Rs. 463.4 crore at the standalone level and Rs. 746.2 crore at the consolidated level as on March 31, 2019) and undrawn bank limits of Rs. 70.9 crore as on March 31, 2019. Overall, the liquidity profile of the company would continue to remain strong, with significant cash build up over the medium term despite planned modest capital expenditure and term loan repayments.

Analytical approach

Analytical Approach Comments Corporate Credit Rating Methodology Applicable Rating Methodologies Entities in the Print Media Industry Entities in the Media Broadcasting Industry Parent / Group Support Not Applicable For arriving at the ratings, ICRA has considered the consolidated financials of UEPL. Consolidation / Standalone As on March 31, 2019, the company had 2 subsidiaries, which are enlisted in Annexure-2.

About the company Incorporated in 1974, UEPL (on a standalone basis) has five divisions—Eenadu newspaper publication, Priya Foods (sale of pickles, spices, instant mixes and ready-to-eat products, commodities trading, branded edible oil trading, etc), renewable energy (wind and solar power plants), Eenadu digital (ETV Bharat, a digital platform for news and infotainment in 13 languages) and radio (four radio FM channels in Vijayawada, Rajahmundry, Tirupati and Warangal). Eenadu accounted for 67% of the company’s revenues in FY2019, followed by Priya Foods (31%), and renewable energy (2%). ETV Bharat was launched in March 2019 and the four radio FM channels were launched in July 2018, hence, they contributed negligible revenues in FY2019. UEPL’s consolidated profile includes the television broadcasting business under ETPL (in which UEPL holds 50.94% stake and TV18 Broadcast Limited (TV18) Group1 holds 49.06% stake). ETPL operates seven channels—ETV Telugu, ETV Andhra Pradesh, ETV Telangana, ETV Abhiruchi, ETV Cinema, ETV Life and ETV Plus.

At present, the Ramoji Group holds 97.56% stake in UEPL, while the remaining stake (2.44%) is held by the TV18 Group2. The Ramoji Group, to which UEPL belongs, has diversified its business with huge asset holdings in various companies such as the 1,700-acre land holding in Ramoji Film City. Currently, the Group consists of UEPL, Ushakiron Movies Limited (Ramoji Film City), Dolphin Group of Hotels, Kalanjali (Indian arts, crafts and textiles), Margadarsi Chit Fund Limited (financial services) and Mayuri Film Distributors (film distribution).

For the 12 months ended March 31, 2019 (as per provisional financials), UEPL reported a profit before tax (PBT) of Rs. 227.8 crore on an operating income (OI) of Rs. 1,599.4 crore on a standalone basis.

Key financial indicators (audited) Standalone Consolidated Rs. crore FY2017 FY2018 FY2017 FY2018 Operating Income (Rs. crore) 1571.8 1516.8 1897.2 1891.1 PAT (Rs. crore) 197.0 199.2 261.5 309.3 OPBDIT/ OI 22.3% 23.6% 24.0% 27.0% RoCE 23.1% 19.8% NA 20.6%

Total Debt/ TNW (times) 0.2 0.1 0.2 0.1 Total Debt/ OPBDIT (times) 0.8 0.5 0.7 0.4 Interest Coverage (times) 11.8 15.2 14.9 19.1 OI: Operating Income; PAT: Profit after Tax; OPBDIT: Operating Profit before Depreciation, Interest, and Taxes; ROCE: PBIT/Avg (Total Debt + Tangible Net Worth (TNW) + Deferred Tax Liability - Capital Work in Progress - Capital Advances)

1 Equator trading Enterprises Private Limited holds 24.5% stake and Teesta Retail Private Limited holds 24.5% stake 2 Equator Trading Enterprises Private Limited holds 1.36% stake and Shinano Retail Private Limited holds 1.08% stake

Status of non-cooperation with previous CRA: Not applicable Any other information: None Rating history for last three years Current Rating (FY2020) Chronology of Rating History for the Past 3 years Date & Date & Amount Date & Amount Rating in Rating in Date & Rating in FY2017 Instrument Rated Rating Type Outstanding FY2019 FY2018 (Rs. (Rs. crore)* November October crore) June 2019 - March 2018 2016 2016 Long- [ICRA]AA - [ICRA]AA [ICRA]AA [ICRA]AA 1 Term Loans 240.13 240.13 term (Stable) (Stable) (Stable) (Stable) Fund-based Short- - [ICRA]A1+ - [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ 2 135.0 Limits term Non-fund - [ICRA]A1+ - [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ Short- 3 Based 10.0 term Limits Long- [ICRA]AA Unallocated term 4 - - - - - (Stable) / - Limits / Short- [ICRA]A1+ term *As on May 31, 2019

Complexity level of the rated instrument ICRA has classified various instruments based on their complexity as "Simple", "Complex" and "Highly Complex". The classification of instruments according to their complexity levels is available on the website www.icra.in

Annexure-1: Instrument Details ISIN No Instrument Name Date of Coupon Rate Maturity Amount Current Rating and Issuance / Date Rated Outlook Sanction (Rs. crore) 1-year NA Term Loan-1 Sep-2015 Jun-2022 76.19 [ICRA]AA (Stable) MCLR+1.30% 1-year NA Term Loan-2 Feb-2019 FY2026 125.0 [ICRA]AA (Stable) MCLR+1.30% 3M NA Term Loan-3 Sep-2016 Dec-2021 38.94 [ICRA]AA (Stable) LIBOR+2.50% Short-term, Fund- NA NA NA NA 135.0 [ICRA]A1+ based Limits Short-term, Non- NA NA NA NA 10.0 [ICRA]A1+ fund Based Limits Source: Ushodaya Enterprises Private Limited

Annexure-2: List of entities considered for consolidated analysis Company Name Ownership Consolidation Approach L. Chimanlal Industries Private Limited 100.0% Full Consolidation Eenadu Television Private Limited 50.94% Full Consolidation

ANALYST CONTACTS Subrata Ray Kinjal Shah +91 22 6114 3408 +91 22 6114 3442 [email protected] [email protected]

Rachit Mehta +91 22 6114 3423 [email protected]

RELATIONSHIP CONTACT Jayanta Chatterjee +91 80 4332 6401 [email protected]

MEDIA AND PUBLIC RELATIONS CONTACT

Ms. Naznin Prodhani Tel: +91 124 4545 860 [email protected]

Helpline for business queries:

+91-9354738909 (open Monday to Friday, from 9:30 am to 6 pm) [email protected]

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