The Hindu Business Line : Entertainment Network

Benevolent policy framework: Radio Mirchi will now operate in a policy environment that is friendlier to private sector players in FM radio. The new arrangement put in place by the government is likely to create a space for commercially viable FM operations.

And no one is better placed than Entertainment Network to capitalise on this significant change in the industry. Its investment in developing the business over the past five years, despite high licence fees and crippling losses, may prove rewarding in the new environment.

Clean, mean balance sheet: The massive losses accumulated by Radio Mirchi, principally due to licence fees that rendered operations unviable, were taken out of the equation ahead of the IPO. By reducing shareholder funds and offsetting the losses, Entertainment Network has a trim balance-sheet and the financial strength to capitalise on growth opportunities. This exercise has also ensured that legacy costs are not a drag on valuation.

A popular brand: Perhaps the biggest benefit that Entertainment Network enjoys is an established brand in Radio Mirchi.

None of the other players, such as HT Media, South East FM and Adlabs Films, has this advantage. They have to invest significantly larger sums to just create visibility for their brand, especially in markets such as Mumbai, Delhi, Chennai and Kolkata.

The presence of other established players in these markets is likely to push up brand creation costs.

Attractive footprint: Radio Mirchi will be the only player with a presence in all the 13 cities with a population of over two million. It may eventually move to about 20 locations by picking up a few lucrative locations with a population of less than two million.

This footprint will also enable it to provide advertisers with attractive rates and packages that cover one or more specific locations or all properties. It will prove advantageous in sourcing and programming content in a cost-effective manner.

Lower entry fee advantage: The entry cost for Entertainment Network will also be substantially lower than for its competitors in the four metros and other cities where it has a presence.

For the new licences it bagged recently, Entertainment Network will fork out a sizeable sum only in Bangalore. This is, however, one of the more attractive markets and there is only one player at present.

Revenue share basis: The major cost advantage will, however, be in the basis for revenue-sharing with the government.

In key markets such as Mumbai and Delhi, as well as other cities such as Ahmedabad, Pune and Indore, the company may have to part with only 4 per cent of revenues.

Given its experience, established brand name and ability to scale up ad revenues, it is likely to move to a similar arrangement sooner than competitors in other cities, too.

Significantly, its major competitors — Radio Mid Day, Adlabs Films, HT Media and South Asia FM — may have to part with a higher share of revenues to the government, at least in the initial years; their payments could be linked to the entry fee of the highest bidder till advertisement flows are scaled up to make this peg irrelevant as the basis for revenue-sharing.

Established presence: A well-entrenched operation in seven cities has ensured that Entertainment Network now boasts an earnings card that is notable for the robust growth in advertisement revenues, driven mainly by its operations in Mumbai, Delhi and Pune, where it has a dominant share in listenership.

On a revenue-share basis, as opposed to the stiff licence fee it has had to pay so far, shareholder earnings will also be in the black from this year.

We expect the robust growth in revenues to continue, as the FM radio space is likely to garner a greater share of advertisement spend.

With its first-mover advantage, Entertainment Network also has a headstart in capitalising on the ad splurge by players in financial services, insurance, retail, automobiles and telecom.

Roster of advertisers: The relationship that it has built with an advertiser base that exceeds 750 is likely to stand the company in good stead as it marches into new territories.

We expect Radio Mirchi to be the preferred choice for advertisers in most markets, barring Bangalore and Chennai, where it will have to fight for listenership and the advertisers' purse strings.

We do not expect pressure on ad rates in Mumbai and New Delhi with the entry of more players, as the top two players will attract a large proportion of ad spend.

Risks and background

THE principal risks to our recommendation are a spike in employee costs, loss of star employees to competition, which is likely to increase manifold, and any regulatory complications and costs that may arise, as the company moves to a more liberal policy framework for its existing operations. Its transition to the new framework and ongoing litigation with content suppliers may also lead to one-time charges.

Offer Details: Entertainment Network is offering 1.2-crore shares. It will mobilise between Rs 175 crore and Rs 195 crore depending on the pricing. The offer is intended to bankroll its entry into new markets and also fund the event management business. The books running lead managers are JM Morgan Stanley and Enam Financial Consultants. The offer opens on January 23 and closes on January 27.

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