Money Tunes

Investors will soon have a second private FM radio player to bet on. Nearly a decade after the Bennett Coleman & Co-owned Entertainment Network India (ENIL) went public, Jagran Prakashan-owned Music Broadcast (MBL) is planning to raise Rs.400 crore through an IPO which will comprise fresh sale of shares and part exit by existing investors.

Unlike peers who have a very long history in the radio business, Jagran Prakashan scaled up its radio business pretty fast with the acquisition of Radio City in December 2014 and later merged its own eight Radio Mantra stations. The media house bought MBL, which owns Radio City, from private equity firm India Value Fund Advisors and Star Group, a part of Rupert Murdoch-controlled 21st Century Fox.

Today, MBL’s 39 radio stations reach out to 49.60 million listeners across 29 cities. In fact, Radio City is the oldest private FM radio broadcaster in the country and has been in business for 15 years now after going on air in July 2001. Though ENIL continues to dominate the market with close to 30% share, Radio City, too, enjoys a sizable 13% market share. The company’s revenue grew at a compounded annual growth rate of 18% from FY12 to FY16. Last fiscal's revenue stood at Rs.245.50 crore with a net profit at Rs.42.50 crore. In the first half of the current fiscal, MBL clocked a revenue of Rs.138.21 crore and a net profit of Rs.29.75 crore. By end of the current fiscal, the 11 new stations that it acquired in the Phase III auction are expected to be operational.

While the new owners will not sell their stake, the earlier promoter and investors are collectively selling 26.58 lakh shares or about 6% of pre-issue share capital. A part of issue proceeds will go towards repaying close to Rs.250 crore of debt, which, in turn, will result in interest savings. In FY16, MBL had incurred an interest cost of Rs.19 crore.

The debt knockdown is expected to reflect in its equity valuation. In the current fiscal, even assuming a marginal 10% growth in operating profit, MBL would end up making an annualised operating profit of Rs.91 crore in FY17. ENIL, which owns Radio Mirchi, is currently trading at an FY17 EV/Ebitda of 21x. Attributing a similar multiple to Radio City’s operating profit, the EV works out to about Rs.1,827 crore. Since the company proposes to redeem the debt in three tranches stretching till FY20, debt is not taken into consideration while calculating the EV.

Assuming a market cap of Rs.1,800 crore, for the shareholders of Jagran Prakashan, the share price of MBL works out to Rs.56, almost 33% of Jagran’s current market price at Rs.175 a share. Though the launch of new stations will impact operating margin in the short run, over the long term, a number of factors augur well for Jagran Prakashan, including its prudent investments in the digital business, and the successful turnaround of Mid-Day Multimedia, which owns afternoon daily Mid-Day. Acquired in 2010, the business had incurred a loss of Rs.14.3 crore in FY14, but turned profitable in FY16, posting a profit of Rs.15 crore.

Though the IPO of MBL is likely to hit the market early next year, those with an appetite for adventure can play it through Jagran Prakashan, which is currently trading at 14x estimated FY17 and 12x estimated FY18 earnings.