ENTERTAINMENT NETWORK (INDIA) LIMITED
Analyst/Investor Conference Call – May 24, 2017
Results – Quarter ended March 31, 2017
Moderator: Ladies and Gentlemen, Good Day and Welcome to Entertainment Network (India) Limited Q4 FY17 Earnings Conference Call. We have with us today from the Management Mr. Prashant Panday – MD & CEO, Entertainment Network (India) Ltd. and Mr. N. Subramanian – Group CFO, Entertainment Network (India) Ltd. As a reminder, all participant lines will be in the listen only mode, there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal the operator by pressing '*' and then '0' on your touchtone telephone. Please note that this conference is being recorded. I now hand the conference over to Mr. Prashant Panday. Thank you and over to you, sir.
Prashant Panday: Thank you very much and welcome to this Investor Conference Call. I am happy to announce the numbers for Q4FY17 and FY17. As you would have seen from the investor presentation, we have achieved an 18.6% growth in Income from Operations in Q4FY17. You will notice that this is a very high number and I think in that respect at least the fourth quarter has been a good quarter for ENIL. In terms of EBITDA, it is down by 8.2% as compared to Q4FY16 and PAT is down by 42.2% as compared to Q4FY16. In absolute terms, we recorded Income from Operations of Rs.162.3 crores, EBITDA of Rs.35.2 crores and PAT of Rs.13.8 crores in Q4FY17. As I mentioned, our revenues grew by 18.6% and the radio industry revenues has grown by 4% to 5% in this quarter. This reflects that our market share has become stronger, much stronger in this quarter.
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Now coming to FY17, Income from Operations grew by 11.6% to hit Rs. 549.5 crores. Our EBITDA de-grew by 20.5% to hit Rs. 125.9 crores and PAT de-grew by 49.5% to hit Rs. 54.5 crores. While our revenue growth was 11.6%, the entire radio industry has grown by 9% to 10%. Now the numbers that I have mentioned to you obviously include old and new stations. Radio Mirchi has been a key participant in the auction process in the past and therefore the numbers given also include the contribution from new stations. Revenues from new stations were Rs.15.9 crores, this is part of the Rs.162.3 crores overall number that we have reported. This has come at an EBITDA loss of Rs.6.3 crores and this is part of the overall Rs.35.2 crores of EBITDA that we have reported for this quarter. So, if you do the calculation you will realize that the core business of Radio Mirchi other than new stations has delivered an EBITDA of approximately Rs. 41.5 crores.
Now let’s look at the revenue performance of these new stations for the whole year and that’s where it becomes interesting and very heartening. In FY17, the revenues from new stations was Rs.30.7 crores out of this the fourth quarter revenue as I mentioned to you earlier was Rs. 15.94 crores which means that the revenue in the first three quarters was Rs.14.76 crores. This shows that the new stations are already starting to show momentum. Now this obviously is because the stations were launched at different point in time and they are starting to take off as seen in the fourth quarter.
Now look at the EBITDA performance, in the full year the new stations have delivered a loss of Rs.29.8 crores and in the fourth quarter the loss is just Rs.6.3 crores. This indicates that the bulk of the loss was reported in the period before this quarter which was Rs.23.5 crores. Now again it is not surprising, because we have kept you informed about this in the past that when we launch a new station, we invest a lot in marketing, upfront. We invest in people and of course the revenues take four to ______
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eight quarters to build up. So, in the first few quarters EBITDA losses in the new station businesses are quite significant and then they start improving significantly. We believe that the breakeven is hit by the time the sixth or eight quarter is reached and then of course they turn profitable.
In the case of the entire radio industry itself, like I mentioned to you there is contribution from new stations. Now let me give you the growth numbers without the new stations so that you know how the radio industry has fared without the benefits of phase 3. In the fourth quarter the radio business actually fell by 2% to 3%, if you do not take the impact of new stations and in the full year of FY17 the radio industry has just grown by 4% to 5%. This is the slowest growth rate recorded in the last several years and clearly FY17 numbers as well as Q4 numbers show the effects of demonetization on the radio industry.
Now if you see the results released by various print companies and various television companies you will notice that even they have been impacted very severely by demonetization. Therefore, it can be safely concluded that demonetization impact was as strong, if not stronger in the Q4 as it was in Q3. Today Mirchi is operating in 49 radio stations in 39 cities. Till Sunday i.e. two days back it was 50 stations in 40 cities. As you may have read, we have surrendered Goa station but the decision to surrender the Goa station was taken, more than a year back when the renewal had come up for all phase 2 stations. We had decided back then and had informed the Government that we are not renewing the licence for Goa station. That licence ran its life of 10 years under phase 2 and expired on the Sunday that just went by.
Today we are operating 49 stations in 39 cities. In 9 cities of Bangalore, Hyderabad, Ahmedabad, Pune, Kolkata, Lucknow, Nagpur, Surat and Jaipur, we are operating two frequencies and in Hyderabad we are
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operating 3 frequencies. So, I am sure you are very curious to know how these new frequencies are doing, how the second brand is fairing so far. Now I am very happy to say that some of these frequencies have done phenomenally well. In fact, if I may be honest over here with you they have done better than what we had estimated at the time of their launch.
To give you some numbers, Mirchi 95 in Bangalore and Hyderabad are Hindi stations and the language of first station in this markets is Kannada and Telugu respectively. The Kannada and Telugu stations are clear leader in their market but the good news is that the Hindi stations are also doing exceedingly well. The Hindi station in Bangalore is the number one Hindi station in listenership terms and Hindi station in Hyderabad is also ahead of its single Hindi rival in that market.
In revenue terms, we believe that in Bangalore, we are already ahead of two or three incumbents in the fourth quarter, we are behind one incumbent in the Hindi Segment but that is a very quick progress. In Hyderabad, we are at the same revenue level as our competitor. However, we have followed a different strategy and I will come to that in just a minute. In Chandigarh where the Mirchi launched for the first time, it is already number one in the listenership, when we do listenership inside of cars. When we do research on listenership inside homes as per the latest report from IPSOS we have already pushed back one brand and we are at the number two position in Chandigarh. Again, in terms of revenue our performance has been very, very positive and we are snapping at the heels of number two player over there. So, we are making quick progress. It’s the same story in Guwahati, it’s the same story in Ahmadabad and Pune where we have launched Mirchi love as a brand and these brands are now gaining traction in these markets. So, in short I want to leave you with this thought that the second frequency brand that we have launched are doing very well. The new markets that we have entered are doing very well. Let me now give one other data ______
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point which is for four radio stations that we have acquired from TV today. Those four radio stations are doing exceedingly well since the time that we took them over. The revenues of these four stations have I think has doubled and today we are operating those stations at about 25 to 26% EBITDA margin in our fourth quarter.
New stations take about four to six quarters to breakeven but existing stations where Mirchi Brand is extended are delivering results so much faster. So, this is the thought that I want to leave you with we will of course answer all the questions that you may have on inventory and pricing. It has mostly been a pricing lead growth in this quarter. Our pricing has gone up by 12.4% in the this quarter. Our pricing in the full year is up by 7.6%. One other point I would like to tell you is that our non-Radio business or all the solutions business that we do on behalf of the clients are doing exceedingly well. In the fourth quarter, they have recorded a growth of nearly 36% so you can appreciate that the 18.6% growth number that I gave you a large part of that growth is coming from the non-Radio businesses. So, you know we stand today at a stage where Radio business will boom on back of phase 3 stations and with more auctions coming up and at the same time the non-Radio businesses are showing growth as the model of growth which is solutions led is working very well with clients. With that I will leave the floor for you to ask questions, Subramanian and I both are very happy to take any questions that you may have. Thank you.
Moderator: Thank you. Ladies and gentlemen, we will now begin the question and answer session. We will take the first question from the line of Amit Kumar from Investec Capital. Please go ahead.
Amit Kumar: Yes, thank you so much for the opportunity there. Just a couple of book keeping questions at my end. In FY17, overall what was the share of FM Radio and non FCT business?
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Prashant Panday: Approximately 70% was radio and 30% was non-radio.
Amit Kumar: I am sorry but last year that number used to be around 75-25, despite new stations non-radio business has performed that strongly.
N. Subramanian: Not much of a change from last year. It was around 69.5% then and it is about 70% now.
Prashant Panday : Also, for the new stations the non-radio business are very strong. One of our businesses is concert business and one of our initiatives in the new stations is to do concerts because this helps in building the brand and it also builds in the revenue. So, the ratio has remained pretty much the same.
Amit Kumar: All right sir. What was the contribution from new radio stations for FY17?
Prashant Panday: It is Rs.30.7 crores out of total of Rs.549.5 crores.
Amit Kumar: On the TV today radio network, I think that they also sort of went for a revamp about a year back or did you start the revamp, positioning it similar to Mirchi Love, essentially Ishq FM. You may not have done the revamp, TV Today might have done it but the bottom line that it’s a move towards similar sort of positioning with what we are seeking for Mirchi stations, Mirchi’s Love stations seems to be doing quite well but when I look at their business the Q4 numbers are not out but the first nine months’ performances were on the weaker side. So, any reason why they are not finding so much traction?
Prashant Panday: Yes, there is a reason for that. First you are right that Ishq is a re-launch which happened I think about nine months back and it was done by TV Today. As you know, we have an advertising sales agreement with TV Today and we are one of the agents responsible for selling the inventory on their station. The reason why the revenue growth has been slow in ______
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the past is that we have been trying to increase the pricing in those markets in accordance with the marketing inputs that they have provided, for instance they have positioned the channel as the premium channel, in which there is a lot of premium content and the advertising that what they have done is also very premium and therefore to match the premium positioning that TV Today has established for the brand we have an agreement with them to increase their pricing on that channels. Clearly it’s a matter of time before we start getting the volumes. We are not in a rush to get the volumes we have a busy season coming up in the next two to three months’ time and we will wait in patiently for the markets to accept the product. Let me tell you, from all the clients that I have met in the markets of Delhi and Mumbai the acceptance of Ishq FM is very, very strong. So therefore, I am very confident that in the season that comes up, the volumes will pick up. The pricing has already started picking up, Delhi for instance is getting about Rs. 900 net pricing and in Mumbai we are getting approximately between Rs.750 and 800 for Ishq FM. This price used to be in the region of Rs.300 before Mirchi started doing sales generation for them.
Amit Kumar: Sir my point was that these stations and some of the Mirchi Love stations that you have also launched, both sort of came out together. So seemingly the pricing of Mirchi Love stations has got implemented and volumes seem to have picked up but we are not seeing that in Ishq. So, where is that gap coming basically?
Prashant Panday: Well that’s not true because if you look at the Mirchi love stations or Mirchi 95 in Bangalore and Hyderabad, we have managed to keep the pricing premium over there but our volume built up is relatively slower than it would have been if we hadn’t held on to the pricing. Yes, now the volume built up is more than it is in the case of Ishq but that is also because of various others factors. Delhi and Mumbai, where Ishq is
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present are more competitive markets and therefore it takes a little bit longer for the volumes to build up over there. Nothing else.
Moderator: Thank you. We will take the next question from the line of Vikas Mantri from ICICI Securities. Please go ahead.
Vikas Mantri: I miss the numbers for this quarter legacy station growth? Other than that Prashant you did talk about your new frequencies performances, but the relative performance measurement is not helpful to us because we don’t know what the number 2s and number 3s are doing in that market. So, would it be better if you could give us some sense, how are the other frequencies doing with respective to our frequency in those markets?
Prashant Panday: Okay sure. Let me first give you the answer of the second question that you raised. Let’s take a market of Bangalore for instance where we have launched Mirchi 95. The pricing that I get for Mirchi 95 is 10% higher than the pricing I am getting for Mirchi 98.3, so that’s a very specific number I am giving you. However, I mentioned that the volumes are obviously smaller and the volumes in Bangalore in the fourth quarter are of the order of about 41 % capacity utilization. Obviously Mirchi 98.3 will be at much higher capacity utilization, so that’s with respect to Bangalore. Hyderabad for instance, my capacity utilization there is even small, between 20 and 25% but the pricing again at Hyderabad is about 5 to 10% higher than my Mirchi 98.3 pricing. If I talk about a station like Chandigarh, we have priced the product at approximately Rs. 400 for 10 secs which is about what My FM & Big FM were getting in the past before we were there. So, our pricing has been kept at the premium over there but again my capacity utilization in Chandigarh is just in the order of about one-third, about 33% thereabouts. The point I am making is that our launches have all been at premium pricing, we have always come at a price similar to what other players were charging. So, we do not want to undercut the market and when we have entered with our
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second brand in market where we were already present, we are trying to push the envelope and make it beyond the Radio Mirchi pricing. Radio Mirchi is usually the price leader in every market. The second product has been launched as the premium product, so that is the answer to your second question. The answer to your first question, out of the 18.6% growth the legacy stations account for about one third of that which is 6.2 % and the new stations have contributed about 12% so the bulk of the growth has come on the back of new stations.
Moderator: Thank you. The next question is from the line of Yogesh Kirve from B&K Securities, please go ahead.
Yogesh Kirve: Sir you have been talking about doing an inventory correction in the established stations, just wanted to understand the scale and scope of this correction, is the focus on the Prime time or peak season inventory or we could envisage a scenario where the ad volume itself could come off over last year or so?
Prashant Panday: Well let me explain the background to you for this. So, first and foremost, we did research in almost all the new markets that we launched in, in these markets there were other players already operating. The feedback we got is that listeners are getting disillusioned with FM radio because of the high volume of advertising. When we asked them what they want us to do when we launch a new station, the response from them was simple, please don’t play so many ads and I think that was a wake-up call for all of us. So, we went back to look at the top markets, the top 8 or 10 markets and see if we can cut the inventory level down significantly. So, we did research and found that across the world there is an effort going on by mainstream media to reduce advertising volumes because otherwise there is a chance that the key listeners or viewers may actually go away. I was just reading an article in the New York Times which says how Turner in the U.S. is reducing advertising volumes on
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its television business, because there the fear is that they may lose customers to Netflix and Amazon Prime. So, we took that message over here and we have decided to cut inventory in our top 8 to 10 markets immediately from 1st April. Now what we have done is that we have effectively knocked off about 4 min/hr of our advertising. And I am talking about peak advertising, so let’s say around Diwali time which is a peak season in the second half of the year, we were limiting our inventory to 22 mins in an hour. The maximum you would ever hear on Mirchi was 22 minutes in an hour in the past, we have decided to bring that down to 18 minutes, so you will not hear one ad above 18 minutes this year in Diwali or Christmas and the whole of H2. Competition is playing 35 minutes of advertising at times, so we will end up with a situation where we are between 50 and 60% of their volumes but we are quite okay with that. The logic we are carrying to the advertisers is very simple. If you are a print advertiser would you like to see your print ad in a 100-page newspaper or in a 24-page newspaper. Where do you think, it is going to be more effective? So, we have taken this game plan and now we are telling our advertisers to ask their broadcaster, how many minutes of advertising they are playing? I think the advertisers are very smart because they realize if the station is playing less ads then there will be more stickiness and therefore the listeners will consume the ad much better. So, it’s a stand we have taken. I am happy to also learn that many other radio broadcasters have taken similar stand. Some of them have decided to increase pricing and not reducing volumes, some of them have decided to also curtail volumes. So, I think the whole industry have realized the importance of the subject matter.
Yogesh Kirve: Appreciate that, so we talked about the festive season, I mean would there be some correction in the non-festive season as well like on a daily basis?
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Prashant Panday: Yes, even in the first half of the year we have knocked off four minutes, we used to have a cap of 18 minutes earlier, we are now keeping a cap of 14 minutes.
Yogesh Kirve: Secondly, we are focusing on pricing in news stations and in our existing station we are looking at cutting inventory, so do you see any risk of this considering that the market has been weak off late due to demonetization. How confident are we about sustaining this thing? Do you see the current weakness only quite temporarily?
Prashant Panday: Well, Subramanian and I were chatting about it. We both believe that the impact of demonetization was there in the fourth quarter but it’s very slowly varying off in the first quarter and I think it is not that strong. But of course, in the first quarter there is the subject matter of GST which Subramanian can throw some light on which is making advertisers to hold back a little bit. So yes, there was weakness in the fourth quarter there is weakness in the first quarter as well, there will be probably be some weakness in the second quarter as well after the GST rolls out. But the thing is when you run a business you run it in the long run and you run it for the betterment of the brand and we are convinced that with our initiatives Mirchi will be a far stronger brand in the quarters to come. Subramanian, do you want to talk about GST.
N. Subramanian: Yes, you know while there might be some sluggishness on account of GST, there is also another important factor that our non FCT businesses have started stabilizing and we also see margins there picking up. So, to the extent we are not able to offset a volume de-growth through pricing growth, we should be able to offset that to an extent through better realizations in non-FCT business. We have some mitigating measures and we are hoping that it will all pay off.
Moderator: Thank you. The next question is from the line of Ashish Kumar from Infinity Alternatives. Please go ahead. ______
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Ashish Kumar: The first question which I had was on the industry, you mentioned in your opening remarks that this year the industry revenues from the existing stations saw a fall, when do you see it going back with the historical trend lines of those single to low double-digit growths. Or do you think there is something more happening because of the new frequencies coming in and cannibalization happening on the revenues?
Prashant Panday: Well if it wasn’t for demonetization and if it wasn’t for GST then I don’t think that scenario would have changed. I think old stations would have continued to grow in the low double digits and the phase 3 stations would have added another 4 or 6% and therefore radio industry would have possibly grown at 16 or 18% as indicated by FICCI – KPMG report. So, that wouldn’t have changed and I don’t think that the scenario will change in the next 5 years but what could get impacted is Q1 and Q2 of this financial year, just like Q3 and Q4 of the last financial year were impacted.
Ashish Kumar: And the second one was essential on your non FCT business, wanted to understand with this change of GST, how do you see margins getting back to the non FCT business?
N. Subramanian: GST should be positive for our non FCT business because you know a lot of inputs taxes that we have in our non FCT business, there is VAT or entertainment tax and host of other taxes where we don’t get credit. I think GST will be positive for our non FCT businesses.
Ashish Kumar: Any indication of what percentage we are talking about?
N. Subramanian: So basically, based on our last set of numbers we think the impact of our GST would be at least 1% of our revenues and if the share of non FCT businesses increases that number will also increase in absolute terms.
Ashish Kumar: Okay. Thanks, a lot, and wish you all the best.
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Moderator: Thank you. The next question is from the line of Swati Hiroo from Ratnabali Capital. Please go ahead.
Swati Hiroo: I wanted to know about the fall in Employee Cost quarter on quarter?
Prashant Panday: In the past, we have mentioned that the Employee compensation scheme in ENIL has two components one of course is the fixed component and the other is the variable component. Now the variable component in ENIL is a very strong variable component. In years, in which we do well the Employees stand to make a lot from the variable components than the year in which we don’t do well, for instance in the year that went by. Despite our fourth quarter strong growth, since our third quarter was badly affected by demonetization we did not hit our annual numbers that we had set internally for ourselves and therefore the variable component has been much lower as compared to last year and that impact has been factored mostly in the Q4 numbers.
Swati Hiroo: Also, wanted to understand do you foresee any technological threat in this industry?
Prashant Panday: You know this is a question that we have been debating for many quarters now in every board meeting, we debated with every expert I met, debated with people from outside world we met, we debate this because there is the whole thing about whether digital and all of that is really going to make a huge difference or not. Let me tell you our view now, our informed view now as a company and as a board is that while digital is reality and digital tends to disrupt many of the traditional businesses, we believe that in our business digital represents a big opportunity for existing players. We are very well placed in understanding consumer needs, music and we are well versed with technology, so we think that we can transport our brand from traditional FM into the online world when it emerges. Now to that extent we have been very active in our online presence, we have a very strong Facebook, ______
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Twitter and Instagram presence. For instance, Mirchi Music Awards this time on Facebook generated 125 million impressions, if you look at our YouTube Channel for instance we did upwards of 300 million views last year, we have a close to a million followers on YouTube, I mean we compete with specialized video companies which are there in the country. So, Mirchi even today as we speak is no longer a Radio company. I mean look at it there is 70% of business which is Radio and 30% business which is non-Radio. And if I were to describe you the products, there is FM radio, there is non-FM radio and there is a huge online presence. We have 19 online radio stations, we have a full- fledged YouTube presence, a full-fledged social media presence, we are very big on the web, so in every which way we are looking at this as a big opportunity. We plan to go to 50 online radio stations very soon. Lot of planning and efforts are going in that direction; we look at it as an opportunity and not as a threat.
Moderator: Thank you. The next question is from the line of Manish Gandhi an individual investor. Please go ahead.
Manish Gandhi: Congratulations on decent set of numbers. My question is for Prashant, after the launch of new stations for Mirchi and other players do you have any data to share as to how many listeners we have added to Mirchi and at Industry Level or is it too early to comment?
Prashant Panday: No, we have research data available but let’s wait for the more formal research, IRS will come out towards the end of this year. We do a lot of car track, where we actually track people listening to Radio in the car and we figure out what is it that they are listening too. That’s the data I was mentioning to you for cities like Bangalore, Hyderabad or Chandigarh. Chandigarh for instance, we have already emerged as the leaders in listenership. I can give you another statistic that TV today shared with us for our clients, when they ran a recent contest, I think
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‘Propose in Paris’ at that point of time they got a lot of responses to their quiz or I think their contest on radio and they extrapolated that and they concluded that they have 1 crore regular listeners in Delhi, Mumbai and Kolkata. So, this are apparently very premium listeners about 35% of them own cars, about 20% of them are post graduates. There is data which is available in the industry and with us but I think there isn’t very much in terms of numbers that I can share with you right away.
Manish Gandhi: Do you feel that industry has a whole must have added some in this six months or one year?
Prashant Panday: Unfortunately, Manish I don’t think the industry have added too many listeners and I will tell you why, while new station launches will normally add listeners because there is a different format of music available, unfortunately because of the amount of advertising that incumbent radio stations are playing and to some extent Mirchi as well, I think we are actively throwing listeners out of the medium. So, on overall I think we are where we were but if the whole industry cuts on the advertising volumes then I think this industry can become much, much bigger in the next two or three years and I think that’s where everybody is going now.
Moderator: Thank you. The next question is from the line of Manjeet Buaria from Solidarity Advisors. Please go ahead.
Manjeet Buaria: Prashant, I had two questions, the first one, I get the strategy of cutting down on volumes to improve pricing and the user experience right but just mathematically, if you cut down from 18 minutes to 14 minutes you need to make up 22% more in pricing essentially.
Prashant Panday: That’s right.
Manjeet Buaria: What time does it to take to reach to that kind of pricing?
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Prashant Panday: Here is the interesting thing in what you said, let’s say our inventory is down by 22%, clearly, we need to increase the pricing by 22% or thereabout to go back to where we were in revenue terms. Now, will the client give you 22% higher outlay? No, the client will not give you 22 % higher outlay obviously but does he need to buy as many spots as he was buying in the past.? No. So, I will possibly get 22% increase in the pricing from the client but he will cut the number of spots down because he doesn’t need to buy that. Every spot will work much better and therefore the client’s outlay will remain pretty much the same. I gave an example on television today, so I will give you a similar example over here. Take out of home as a business, we buy a lot of out of home in Mumbai and I can tell you that if you want to run an effective campaign in Mumbai, you need anywhere between 70 to 100 hoardings because in Mumbai there are more than 4000 or 5000 hoardings, so to make an impact you need to buy 70 to 100 hoardings. Any movie launch that happens here, they buy more than 150 hoardings. Now if you go to Singapore or Dubai, there are very few hoardings there and client need to buy much fewer hoardings. Closer home if you go to Delhi, Delhi doesn’t have any out of homes hoardings, Delhi has bus queue shelters but relatively few bus queue shelters. You need to buy lesser number of bus queue shelters in Delhi to create an impact. So, the client who is buying radio from Mirchi will buy lesser number of spots. Yes, he will pay higher prices but the overall outlay will remain pretty much the same. That is the strategy over here.
Manjeet Buaria: A follow up on this, how much time do you estimate? Will it take 2 years, you can’t take 22% pricing increase in one go right it has to be maybe 10% - 10% every year, so I am just getting a sense of how much time does it take for them to reach that level?
Prashant Panday: Our estimate is that basically in season the volume builds up happens very quickly. We have a season coming up in another two months’ time, ______
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starting mid-August is when the season begins and the season goes on till March. I think that’s when the pricing will increase and the volume cut back will gain traction. A bulk of the job will be done by March 2018 but it will continue to the next year season as well. If you ask me the bulk of the job will be done in this financial year and the rest of it will be completed in the FY19.
Moderator: Thank you. The next question is from the line of Aliasgar Shakir from Motilal Oswal Securities. Please go ahead.
Aliasgar Shakir: I was looking for a little bit more color on our new channel, Prashant you gave a lot of insight on how the Hindi channel in Hyderabad and Bangalore are doing better in terms of listenership and in terms of pricing. I was just trying to look in terms of revenues scalability and in terms of profitability where you have highlighted that if you look at the quarterly basis, revenue scale up has helped you to reduce your losses but if you can give a little bit more color on how the revenues scalability or EBITDA breakeven will happen
Prashant Panday: Like I mentioned in my talk earlier, most of the new stations that we have launched could keep up the pricing premium and all this led to station’s capacity utilization being very low. I gave the example of Bangalore where it was 40% or thereabout. In Hyderabad, it was about 20 to 22%, Chandigarh was 30-33%, Ahmedabad 20%, Pune about 15% which means that from these levels we can grow our business by 3 times to 6 times depending on market. So, we have a long way to go on this.
Aliasgar Shakir: And on cost structure, this should not really move that much, in fact probably may come down given that you know the first year would have been high in terms of marketing intensity?
Prashant Panday: Exactly, because the marketing spending is mostly upfront and most heavy in the first quarter, then it tends to reduce. It remains fairly high ______
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in the first year, it starts dropping in the second year and so on so forth. Remember at the end of the day it is a 15 years’ license. The marketing investment is the steepest in the first year reduces in the second year and then tapers off in the third year.
Aliasgar Shakir: Do we expect the profitability from news stations to come in FY18?
Prashant Panday: Absolutely.
N. Subramanian: As Prashant mentioned in Q4 it was about Rs.6.3 Crores and you will see a gradual reduction in losses. Maybe for the full year there will be a marginal loss but we will be able to give you better guidance in the next quarter when we present our first quarter number.
Moderator: Thank you. The next question is from the line of Thwanil D from Turtle Capital. Please go ahead.
Thwanil D: The question that I have is that when we adopted the strategy of having the second stations in the city, one of the hypothesis that we had was that we cannot cannibalize the existing frequency. So, that was the hypothesis at the time of bidding and winning that frequency. Do you have any kind of a data or are you doing any research around that or did our hypothesis come true or not?
Prashant Panday: Well Thwanil, we haven’t seen any signs of cannibalizations in revenue terms yet. What we have seen is that in some markets there is a slight confusion in listeners about whether Mirchi Love is the second channel or it is a Love Show on Mirchi Channel itself. So, there is a certain amount of marketing work that needs to be done in these markets in establishing the second brand. In terms of the revenue, its early days but we haven’t seen cannibalization. In fact, in the way these brands are positioned makes them quite distinct. Radio Mirchi is a mass premium brand and it delivers large number of listeners. It delivers the latest
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music, it is a buzzing channel, it will talk about the latest happenings in the city and whatever is unfolding in the city. It is to this extent a fast- paced kind of channel. Now, if you look at Mirchi Love, it is pretty much diametrically opposite. It is love music, it will be much softer in its feel, it will be premium in content. There is almost 50% English talk in Mirchi Love channels and the advertising is at under 10 minutes and the kind of contest that we run are very premium contests. It’s like Star Plus and Star World except that this a very extreme example I gave you. Obviously, Star World is an English product so it’s very Alien but it’s like a mass premium product and a premium product so that’s how it is.
Dhawnil D: I understand on the revenue side but I think the revenues is the function of listenership so do you think that it is important to keep tab on it because the listenership in the industry is constant and if you are taking away market share or you are adding more listeners that means you are taking away the listeners from somebody else, right? Is it your own frequency or somebody else’s, how would you look at that?
Prashant Panday: Well we are very, very conscious of this fact and we keep an eye out for this. So far, we haven’t observed any cannibalization on revenue front as I mentioned to you earlier. On the listenership front, there is some work to be done but we are very conscious about that.
Moderator: Thank you. The next question is from the line of Karan Taurani from the Dolat Capital. Please go ahead.
Karan Taurani: I just wanted to ask you regarding the Digital part even I believe that it will be an opportunity for Radio than threat. But in terms of the content licensing part, digital has got different terms versus Radio so where do you see the cost moving in terms of Digital licensing?
Prashant Panday: Well it’s a very, very good question and you obviously know the answer to that. It’s a very onerous licensing environment in the Digital World. ______
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So quite clearly the way you approach Digital should be very smartly calibrated. We are already have like I mentioned 19 online radio stations, if I remember correctly we did more than 300 million streams last year and it’s easy for us to cross a billion streams. But when you cross a billion streams your royalty goes up but you don’t make any revenues at this point of time. So, its loss-making proposition and you need to work at curtailing the loss. Here are the interesting things about the Digital business, see you have to look at the digital business as being totally different from just music. For Mirchi, digital is not just online music stations, we do a lot of stuff on digital which we are unable to do on FM radio. We are making a lot of content for our clients which they can play on their social media pages or wherever they need to play it. We are doing a lot more video for instance and on video the revenue sharing mechanism is far more beneficial. We have 300 people in programming, I think some of them are the most creative people that we have and we are using those to develop audio-visual content. So, the cost of production is very low for us and we can monetize it much better. So, the whole digital play is not about audio, it is not about the music but it is about transforming Mirchi and realizing the potential of Mirchi as an entertainment power house more than just a radio broadcaster.
Karan Taurani: A follow up on that one, on the entertainment part if you see Saavn, Gaana and all the music platforms in the world today none of them are making any kind of money, because of higher licensing cost. So, if at all you start a station or you start having your own internet based radio stations how would you ever make money on that?
Prashant Panday: No, like I mentioned, if we only do online radio station than there is no way that we will make money and I started by saying that. Here is the difference between Mirchi online and Gaana, Saavn, Pandora, etc., that you mentioned, we have around 300 employees in the programming team we are already paying them on account of FM Radio. For me, to ______
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make content costs zero but for Gaana and Saavn if they have to make any content they will have to hire 300 people which will cost them a lot of money that’s point #1. Point #2 Gaana, Saavn are only music companies but we are not going to be a music company. We are going to be a full-on entertainment company with audio podcasting, video podcasting, video content, standup comedy and all that kind of stuff that we will do, there is so much that we can do using the talent pool that we have in-house. Third major difference is whatever content they will make in house for digital business when we go selling it to clients we are in the position to package it with the promotional plan on FM Radio. So, we supply the content which has come to us very cheap. We put the marketing strength of FM radio behind it and then we go to the client to sell it. Gaana- Saavn cannot do that, they don’t have an FM radio backbone.
Moderator: Thank you. The next question if from the line of Prasad Padala from Investec. Please go ahead.
Prasad Padala: Just a couple of bookkeeping questions, what is the effective prime time add rate on your Radio Mirchi network and new stations.
Prashant Panday: We don’t sell only primetime, it’s not allowed. If a client wants to buy only primetime then it will be very, very expensive, so we only sell blended. We sell blended (primetime & non-primetime), the blended rate is Rs. 10,727 for all of FY17. In the fourth quarter, it was Rs. 12,029.
Prasad Padala: Okay, so this would be overall, right?
Prashant Panday: This is for 32 stations, sum of each stations.
Prasad Padala: Can I get an Idea on how is it different for the new stations.
Prashant Panday: Like I mentioned earlier, in the new stations we are charging higher than our current stations. But if I were to add all the new stations put together ______
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which are our second frequencies as well as our first frequencies in new cities that comes to approximately about Rs. 4,250 in FY17. This will be in addition to the Rs. 10,700 that I mentioned earlier.
Moderator: Thank you. The next question is from the line of Vikash Mantri from ICICI Securities, please go ahead.
Vikash Mantri: Prashant just wanted to understand that what could be the timelines for profitability and what could be the levels of profitability for our second frequencies. We talked about breakeven in four to six quarters but just wanted to understand what should be the absolute level of margins that we expect for the second frequencies.
Prashant Panday: Okay Vikash, let me just tease you on this, I just mentioned that in the stations that we have launched the pricing that we are getting in the market is of the order of Rs. 4,250, these are only for about 13 new stations. Now remember that for 32 stations that we already have the pricing is about Rs. 10,700. If I could sell my 4,250 bouquet at the same volume level as the Mirchi then imagine that I’m adding 40% more in terms of revenue. So, that is the direction in which we are taking it but also remember that we are cutting inventory on Mirchi and here we are capping inventory at 10 minutes, so it will be an interplay of how much volume we allow and what pricing we get in the market. That’s on the revenue part. Now on the cost side as you know the incremental costs are relatively lower because here’s what happens, the variable costs are there for the second channel also but the overheads get shared and the overheads in a large company like Mirchi can be high. Remember we were in the preparation mode for Phase-3 for some time. So, we have got a whole sales team, a whole programming team, a regulatory team and legal team, there is a big bunch of people who have been focusing on growing the company. All those costs get shared and therefore, the incremental cost of the second frequency are much smaller.
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Vikash Mantri: I have tried to pencil in that way trying to factor in your variable cost component being overall low that your second frequencies can deliver north of 50 to 60% EBITDA margin, am I close?
N. Subramanian: 60 would be too high a number but because there would also be non- radio in the new stations, a 45% to 50% would be okay. We would want to target 60% but I am not too sure whether that’s likely in the next two years.
Moderator: Thank you. The next question is from the line of Ashish Kumar from Infinity Alternatives. Please go ahead.
Ashish Kumar: It’s just a follow up on what Vikash was talking about the new stations. What is the kind of revenue growth that we can pencil in for over next couple of years? Is 100% growth on the small base is something which is doable over the next couple of years?
Prashant Panday: A 100% on the Phase-3 small base you mean?
Ashish Kumar: Yes.
Prashant Panday: Well these are very new stations and they haven’t even seen 12 months and therefore obviously 100% growth rate on low base is certainly something that we should expect to happen. But imagine the larger picture I am talking about; this is like a second frequency in Bangalore. It has a potential of doing better than my first frequency in Bangalore. So, the opportunities are even bigger.
Moderator: Thank you. The next question is from the line of Manish Gandhi, an individual investor. Please go ahead.
Manish Gandhi: Prashant you talked about the radio growth over the next two three years, what can we expect from the Government in the next two three years, new auctions? and next April again the M&A opportunities will be open, ______
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so do you feel that we have an M&A opportunity? Are we ready to do it?
Prashant Panday: Manish, in auction terms the Government has many more smaller cities to auction but I think that these are not going to be successful. We had mentioned this to you about the second batch also and we were proven right. I think about 25% of the licenses were taken up, 75% was the failure rate for the government in the second batch. I think the future batches with smaller cities, the failure rates will be even higher. Don’t expect too much in terms of auction intensity in the next couple of years. In terms of M&A, yes, you are right, in April next year, there will be M&A opportunities available but honestly I think we have our hands full, right now we want to focus on consolidating and at least the next two or three years we don’t believe that we are going to be too keen on M&A, Subramanian any points to add.
N. Subramanian: Except that there is one that we have to close, the three stations of TV Today that will happen post the lock-in period.
Manish Gandhi: You touched upon pricing and our strategy to stick to premium pricing which I am very happy, leading the way as a leader should do but after what happened during Phase-2 and after 2009 when many new players entered the radio industry and the pricing scenario all went haywire. So now considering the new Phase-3 players, do you feel that at an industry level also the price behavior in the next five years should be good. As a leader, we are doing it but in isolation I don’t think that pricing can be increased beyond a point.
Prashant Panday: Okay Manish, just look at the scenario today, old players who have renewed their licenses are already running very full inventory. So, they cannot do anything, they have to increase pricing, that’s the first thing. New players who have come in with new channels they have come in at very high cost, for instance to us the Bangalore frequency cost Rs.109 ______
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crores. It’s not a cheap sum of money. If I have spent Rs.109 crores, I have to be really stupid to price it cheap. So, I cannot do it therefore I will hold my pricing up and I will focus on content, I will focus on brand building and I will say all of this is part of setting up cost but let me be patient and there is no point in trying to sell too quickly so I will hold onto my horses in the beginning or first couple of years. The third thing is look at the environment outside as well, in case of television pricing, GEC pricing has been rising for the last couple of years. If you look at let’s say films, tickets prices have been rising and remember the reason I am mentioning ticket prices simply because a lot of revenues we get come from the wallets of consumer directly. Look at the entire eco- system that’s happening over here, the pricing will rise. Look at newspapers when most brands used to take inside pages earlier now all of them want jackets and jackets come at a very high price. Look at television again impact properties, somebody from Star Group was telling me that for the 4th June India Pakistan match in Champions Trophy the going rate is Rs. 20 lakhs for 10 seconds. One spot of Rs. 60 lakhs, it’s the same advertiser remember. One other point I will tell you the same advertiser has seen his own business grow rapidly in the last several years. So, that is the reason why if you notice what advertisers are doing is that they are putting more and more money behind impact properties, behind on-ground activations, look at the number of sports league which have come up for instance, all of that takes money. There is a lot of money available with the advertisers. There is a reason for a price increase because there is no volume inventory. The licenses that have been acquired expensive and also in the case of Radio for the last so many years, where there has been a price increase, we are still at a level lower than 2009.
Manish Gandhi: Right I completely take your point at this, what we are doing is perfectly fine but you never know how the competition behaves.
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Prashant Panday: Manish for us the biggest challenge would be that there shouldn’t be too much of macroeconomic uncertainty, that is the most important thing.
Manish Gandhi: Right, so that is not in our hand, but anyway I am happy for what we are doing. Thank you very much.
Moderator: We’ll take the next question from the line of Neeta Khilnani from B&K Securities, please go ahead.
Neeta Khilnani: Sir since we are talking about inventory cutting, can you help us with the capacity utilization levels in the top 8 stations, how they are moved from FY16 to FY17 considering 13 minutes and 17 hrs.
Prashant Panday: In FY17, we didn’t have any restrictions on volume, even though we were voluntarily capping it at 22 minutes in season and 18 mins in non- season. In FY17, our blended capacity utilization based on 13 mins was 98% as compared to 99% in FY16, it was about 100% in Q3FY17 and about 95% in Q4FY17.
Neeta Khilnani: On the non-FCT business, so we have been talking about that business growing both in terms of revenues and profitability, so can you give us some sense on where this 30% contribution can go up to in the next couple of years and also what is the EBITDA margin like in that business?
Prashant Panday: We don’t want to grow this 30% too much but we believe about one- third, two-third kind of a spilt is a good number to go with. The profitability is what is of focus to us and at a composite level the profitability is about low-double digits but we need to take that up to about 30% levels and that’s what we are aiming to do in the next three to four years’ time.
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Neeta Khilnani: The 21 new stations that you have picked up in the second batch, what is the market potential like and if they were small then what is the thought process that has been gone behind purchasing these stations?
Prashant Panday: Well the second batch stations are indeed small no doubt about that. Therefore, our outlay also was small I think our total bid was about Rs.51.3 crores, so these are relatively small stations but these are all economically viable and the reason that they are viable is because we plan to do networking in most of these stations, so the content cost, people cost and marketing cost all of that will be really low, all the establishment costs will be very low and the only direct variable cost would be the sales team which we will employ in the selling the product so it is going to be a relatively low cost operation. Since, we have a network, for instance we have four stations in Gujarat so we have added six more in Gujarat, we have five stations in Maharashtra, we have added two more stations in Maharashtra and like that. So, we have built it around the core network that we already have and therefore the incremental costs are very low and therefore these businesses are viable. We did not find any stations viable beyond these 21.
Moderator: Thank you. The next question is from the line of Manjeet Buaria from Solidarity Advisors. Please go ahead.
Manjeet Buaria: Prashant I wanted to understand one thing from the advertisers view point, so people who listen to Radio if you have to segregate them, one is the people who commute and then one is background listeners like housewives, shopkeepers and others. In travel, I would say there are two big segments – the people traveling in car and people traveling in public transport. So, for the advertisers of these three main categories car travel, public travel and housewives, etc., who is the biggest target market and why I am asking you this question and where I am going essentially, each of these are at a different level of disruption risk from technology?
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Like a person traveling in a Metro or a local train could be viewing offline videos much more now then listening to radio which wasn’t there five years back essentially. So, I am just trying to see for an advertiser who is the most important segment?
Prashant Panday: For advertisers as well as for radio broadcasters I think the game has changed in the last five years. I think the biggest segment now is the car driving audience for 2-3 reasons. First is that the car driving audience is dependent on FM radio for entertainment and information, so they are very big on consumption of FM radio as a medium. In our research, we find that almost 75% of the car were tuned into FM radio. The second point is that the car production in our country is growing very rapidly, we produced 3 million cars in FY17, there is some forecast that this will go to 8 million cars in the next five or seven years’ time. As you know that the road within the cities are not growing that fast, so therefore you can expect more traffic jams, more time on the roads, more time spent listening to radio and the third thing is the car driving audience is the most premium segment of the audience, they are the real buyers in the economy and this is one category in which radio is unchallenged, except for out of home. Out of home is also targeting car driving audience in general, there is no other medium that can reach the car driving audiences, it’s only out of home and radio. Therefore, we are very buoyant about this. The second big segment that all radio broadcasters target is not housewives but the millennials. The millennials are the most exciting target group for any marketing managers because millennials are future customers. They are customers who try new products and they will then stick on with you for the next 20-30 years. Now the millennials love music and the millennials would love FM radio, I’m not saying they love it today, they would love FM radio if we cut the advertising down. If you go to New York, London, Sydney, Auckland or any of the countries where they put a cap on advertising volumes, the youngsters, the millennials love FM radio. I can tell you that with no hesitation and ______
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therefore, there is no reason why that should not be the case in India. We have a huge repertoire of music; we have a lot of youngsters and they love the medium. So, we believe that the second biggest segment is of course millennials. And then there is everybody, when Pepsi targets an 18-year-old, it doesn’t mean that the older people are not drinking Pepsi, I mean radio is available freely, radio is available everywhere. Today if you get into Ola cab you get to enjoy radio, if you travel in Shatabdi you get radio, if you pass through Delhi Airport you get radio, if you go inside the store you get radio. So, radio is going to be there everywhere in every way, in addition to it, like I mentioned, we are also going to be making a whole lot of audio, video products targeting the people who are on smart phones, who may be commuting in public transport and watching video, etc. There is a larger game plan that is at play in ENIL. ENIL has been a radio company in the past but it is now becoming more of an entertainment power house.
Moderator: We will take the last question from the line of Aliasgar Shakir from Motilal Oswal Securities. Please go ahead.
Aliasgar Shakir: I was just looking for the utilization rates for the 32 stations as well as the existing stations if you could give me that?
Prashant Panday: For 32 stations, it was 98% for the full year, 118% for the top 8 markets and 91% for growth 24 stations. For new stations, the capacity utilization is very small between 10% and 30%.
Aliasgar Shakir: Okay, any average that you can give since it’s a wider range for the entire news station?
Prashant Panday: 15% for the news stations.
Aliasgar Shakir: I was talking to few experts in the industry and I was given to understand that some of the large advertisers after demonetization are shifting their
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advertising, even from radio to as they call impact advertising medium particularly TV. Have we seen any impact because this or are we expected to see the impact more than any other medium going forward?
Prashant Panday: Well I think this is a part of constant marketing strategy evaluation that happens at every clients’ level. The fact of the matter is that whenever any promotions happen, whenever any events happen there is no option but to use radio in big way, which is why worldwide 80% of Radio’s revenues come from retail activities and retail clients and that is how India will emerge as well.
Prashant Panday: If there are any more questions, as always do write into us at [email protected]. Thank you very much.
Moderator: Thank you. Ladies and gentlemen with that we conclude today conference. Thank you for joining us.
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