Entertainment Network (India) Limited (ENIL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Entertainment Network (India) Limited Q3 FY '20 Earnings Conference Call. We have with us today Mr. Prashant Panday, MD and CEO, Entertainment Network (India) Limited; and Mr. N. Subramanian, Executive Director and Group CFO, Entertainment Network (India) Limited. [Operator Instructions] 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.

Thank you very much, and welcome to this investor conference call, ladies and gentlemen. Let me just start with giving you the highlights of the quarter. I had mentioned earlier in the press statement that this has perhaps been the worst quarter in the -- for the entire media and entertainment industry in the last 10 years. And when I said that I was actually referring to the period of September 2008, which was the year when the global financial crisis had hit the world. The difference between the crisis of that year and the situation today is, of course, that the crisis then was caused by global factors, the Indian economy has continued to remain fairly buoyant. And with the result that the slowdown back in 2008, '09 had last year for barely 4 or 5 months. This slowdown, on the other hand, is entirely on account of -- or mostly on account of domestic factors that too factors connected with consumption. And as you know, the advertising industry and the media and entertainment industry depend very strongly on consumption and products -- consumer products. And it's a result of that, that we are finding that this has been a very bad quarter for the entire media and entertainment industry. The slowdown really started in the first quarter itself. So we've had 3 bad quarters, except that for the radio industry, the months of April and May were good because of the political advertising that we got around the general elections. But from June onwards, the results of the media and entertainment industry have generally been pretty poor. The television industry has -- had a good 2 or 3 quarters, simply because of the new telecom order, which was -- which came into effect sometime around February last year. But going by what has been happening on the regulatory side, it appears that they will also have a troubled next 12 months on the distribution side, if the new telecom order is indeed implemented, the revised new telecom order is indeed implemented. The print business continues to be in trouble. Overall, the third quarter has been bad for every segment of the media industry. And with that background, I want to just come to ENIL and tell you very briefly about the numbers, but then really take the opportunity to talk to you about our strategy about how we are actually using this tough period to become stronger and how as soon as the environment improves, we should bounce back really strongly. And I want to talk about -- focus on that more than on anything else. But first, the quarter's revenues overall were INR 145.7 crores. The reported number last year was INR 200.9 crores. Now if you remember, we had done 2 big international concerts or concerts featuring international artists last year, one was the Bryan Adams concert and the other was featuring Martin Garrix. Now the 2 concerts were an experiment that ENIL had undertaken. We have experimented with several products in the last several years, and that is the way we have managed to grow our product portfolio. Unfortunately, this experiment with international artists was not a successful one, not a happy one. And we had incurred a loss of almost INR 9.5 crores on a top line of about approximately INR 30 crores on these 2 concerts last year. Since we have discontinued that business, at least in the -- at least in this year and in the near future, it would be better to remove those numbers, both at the revenue and margin level and then compare the business performance of this quarter. So if you were to do that, then the revenue in the same period last year would be INR 171.4 crores, which would reflect that the revenues this quarter are down by 15%. And the -- within that 15%, the radio business is down by 19%, the reported solutions business is down by 5.5%. However, I must qualify here that there were a couple of delayed IPs, 1 related to the SBI Green Marathon, where a few cities have been pushed from Q3 to Q4. And 1 related to the Mirchi Music Awards South edition, which again has got pushed from the third quarter to the fourth quarter. Had it not been for this period-ship, the Solutions business would have actually reported plus 3.1% growth. So the Solutions business in short remains strong and has given support to the radio business, which clearly has been on a weak footing in this particular quarter. In the radio business, the biggest contributor to the shortfall has been the central government advertising, which contributes to nearly approximately 35% of the shortfall in revenues or a big drop in revenues that we've seen in this particular quarter. Now coming to EBITDA. The reported EBITDA was -- not reported, the underlying EBITDA was INR 31.7 crores. The reported underlying last year was INR 40.4 crores. However, in fairness, if we were to remove the loss incurred on account of the concert featuring international artists, then the correct base of last year was INR 49.9 crores, which means that the EBITDA this quarter has fallen by 36.5%. It is not a very surprising thing in the radio business, as you know by now, that when the revenues fall, the impact on EBITDA and PAT tends to be larger because of the operating leverage that guides this business. If you were to look at -- however, now let me come to some of the better talking points about the quarter. The first, I already mentioned to you was that the Solutions business, if you were to remove the period effect, has actually grown by 3.1%. Even on a reported basis, it has degrown by nearly 5.5%. I think that the Solutions business continues to remain on a very strong footing. And I must make the point over here that in today's weak market, brands and companies, which are able to think about the client-first and the client's problem first are the ones that are likely to succeed and the ones which will gain in strength going forward. The Solutions business that we've got, which accounts for almost 1/3 of the quarter's revenue, is built on basically addressing the clients' problems first. And that is the reason why it has been reporting sustained growth over the last 3 to 4 years. Now the other thing I wanted to talk about is that the share of the Radio business in the -- has grown by about 1.2 percentage points compared to last year. The Mirchi share is now approximately 30.3% of the revenues of the radio industry compared to 29.1% last year. Coming to a very important attribute, again, a very good story is how the radio listenership numbers overall continue to grow. As you know, the IRS came out after a gap of several years for the first time in January 2018, a research, which they call IRS 2017. It has subsequently been followed by 3 waves of IRS quarter '19. And if I were to look at the latest IRS numbers and compare that with the 2017 numbers released in Jan 2018, the radio listenership has actually grown by 7.3%. The weekly radio listenership has grown by 7.3%. So any fear that you may have that music OTTs like Saavn and Gaana and Spotify are eating into FM radio listenership, they are unfounded. FM radio has its own place, and it has grown at 7.3% in approximately the last 1.5 to 2 years. But the good news is that in the same period of time, Radio Mirchi's listenership has grown by 16%. In other words, we have beaten the market growth by a factor of more than 2.2% -- 2.2x, which again shows that the brand is becoming stronger. As you know, when the conditions go -- become very tough, the weaker players tend to become weak and the stronger players become stronger. We are actually seeing that in operation right now. Another part of -- another indicator of the strength of the Mirchi business is that despite the weakness of the quarter, Mirchi's pricing has not suffered. It has remained absolutely flat compared to the same period last year. In fact, if I take the top rate markets, the pricing is slightly up at 1.3%. If I will take the entire 35 legacy stations of Mirchi, the pricing is down 0.7%. So broadly speaking, the pricing has been flat, which is very good news because, otherwise, it becomes very difficult to recover pricing. The slowdown this time has a very peculiar nature. The drop has been in volume terms, not in pricing terms, unlike in 2008, '09 when we had suffered a huge erosion in pricing. The volumes have -- of 35 legacy stations are down by approximately 20%. The capacity utilization is at a pretty low 78% at this point in time, which means that we are waiting for the recovery to happen. As soon as the recovery happens, we are all -- we will come out all guns blazing in recovering the lost ground that this quarter has witnessed. I must tell you one other thing that advertising is classically the kind of spend that clients find easy to cut for a temporary period of time when the slowdown hits their business, but advertising is also the kind of medicine that you cannot live without for very long. So it's a question of time before advertisers start coming back to the media and spending on advertising because the market will open up, the advertising business will regain its strength. And when that happens, like I mentioned to you, Mirchi will be right at the forefront. Now one very, very important and very good news to share with you is that the margins on the Solutions business have been constantly growing. In the third quarter of this year, the margins have now touched 35.3%. These are gross margins. They've touched 35.3%. The comparative number last year in the third quarter was 29.6% and in the third quarter of FY '18 was 25.1%. So that's 3 quarters of successive growth in margins. If I were to take full year numbers, FY '18 had ended at 30.0% margin, FY '19 was an improvement at 32.1%. And for the 9 months of FY '20 the margin is 39.5%. So this is a really strong improvement in gross margins of the Solutions business. And this has come about because of a concerted effort the company has made in keeping the costs down and in selling better. So as you know, margins improved when revenues go up or when costs come down, we are working at both those fronts. The important thing to remember is that our -- that the company is now very, very strongly positioned as a solution provider. And what I mean is the following: Let's say, if you're a brand called Pepsi or Hindustan Lever some brand, say, Lux, and you have a marketing challenge, let's say, in Coimbatore or in Vadodara or in Jalandar, you come to Mirchi, Mirchi will give you a solution specific to these cities. And we can give you 3 different solutions for these 3 different cities. And the solution will have radio, it will have digital, it will have videos, it will have our influencers, which are our RJs, it will have an on ground element as required. And if required, we can even buy and package in print or local television. So it's a whole full 360-degree approach we take to solutions. That's the positioning of ENIL. We don't have any competition or we have very limited competition in this space, and this is the reason why the Solutions business has been growing. One last point is that the strength of our YouTube business or in other words, the video business, we have a channel called Filmy Mirchi, which is now India's largest independent entertainment channel on YouTube, with 4.8 million subscribers. We have a channel called Mirchi Murga, which is an inch away from touching 2 million subscribers. We have strong Tamil and Bangla channels going towards 1 million subscribers. It's a matter of time before ENIL becomes the biggest MCN, having 1 million-plus vernacular channels in several languages. That's the unique strength of our Solutions business, that we have a strong YouTube channel to back our Solutions business. With respect to the company's stock price, the stock price has been down. The board is aware about the matter. But in the past also, we've seen that when the advertising business is under pressure, the stock does go down. But every time that the economies come back and the advertising business has come back, the stock has actually scaled new highs. So we remain optimistic about the performance of the stock going forward. And last point is with respect to the company's dividend policy. As announced in the previous quarter's investor conference call, the Board is seized of the matter, and we will stick to our schedule announced earlier, which is to announce the dividend policy -- the dividend declaration policy by the end of the financial year. With that, I open the floor up for any questions. I have Subramanian with me, who is our group CFO, as you're aware. Thank you very much.

[Operator Instructions] First question is from the line of Manoj Dua from Geometric Securities.

Sir, in the Solutions business, earlier, we were growing despite bad economic conditions. And if we -- so it was growing very fast. It shows we are good at it, and we have increased our margin that shows we are efficient also in it. So going forward from Q4, how to look at it? Is it an aberration that Solutions business will grow in this quarter? Or we will start growing continue as previous quarters?

Well, Manoj, thank you for the question. And I think it is an aberration. And like I mentioned to you, there were a couple of events -- event IPs that got pushed from the third quarter to fourth quarter for entirely unavoidable reasons like rains in Chennai and other such things. So I don't think that this will repeat. We do expect that the Solutions business should grow consistently in the quarters to come.

Okay. Secondly, you have mentioned that you have -- you will formulate dividend for this year at the end of the year. So this is a request from shareholders it should be done as soon as possible, you're also increasing it, because most of the time the stock prices are down, investors have to sometime sell their share despite -- because of need of some cash or something. Fortunately, we have cash as a company, we generate cash as a company and we don't need cash to grow, even our targets are high. So thank you for taking into consideration.

Correct. Thank you, Manoj.

[Operator Instructions] Next question is from the line of [ Senthil Kamaraj ] from [ ithought Financial ].

So how do you view central government's spending pattern? So is it up for revival or how long do you think that the spending will be same as neutral?

Well, frankly, we don't have any response from the government yet on this. And to be honest, we are surprised by the very, very low spending. Currently, we don't have any indication that they are opening up the spending. I think they will also wait for the economy to grow a bit because possibly that's the reason why they are not spending, but the government has announced many, many programs. And sooner or later, they have to communicate those programs. So maybe it's a temporary period of no advertising or less advertising, but it will -- we expect that it will go back to regular advertising in a few months' time.

Okay. So my second question is with respect to the digital platforms like you're planning to produce content and sell it to other streaming OTT platforms. So how is it shaping up?

Well, it's been a very, very good experience we've had so far. We sold content last year. This year also, we've done a deal with MX Player to sell them 10 different shows, which totaled almost 15 hours of video content, original video content. We are in talks with several other brands and other platforms, and we have a pipeline of nearly 20 other shows that we are picking in the market, and we do expect to get some closures on that. So yes, it's early days, but we see rapid expansion in the original content business.

The next question is a follow-up question from the line of Manoj Dua from Geometric Securities.

Sir, we've read your interviews in Business Standard also that you are quite confident about Solutions business going forward. Now we have achieved some margin also, but market as a whole is still not able to understand your business, Solutions business. So why not we do some analyst call annually to explain [indiscernible] something where you can more able to explain what is a Solutions business, what gives you confidence that this can grow for the next 4, 5 years in double digits, so I think that would be nice.

Well, we have, Manoj, a lot of case studies that we show and showcase to investors as and when we get a chance to meet with them. So yes, we would be very happy to take your idea and go -- roll with it. And if anybody is interested in understanding this business more, we're happy to meet them face-to-face and give them many examples of this.

[Operator Instructions] Next question is from the line of Srinivas Seshadri from Mirabilis.

One, on the Solutions business, like, can you share like what is the contribution of the Solutions business to the top line on a 9-month basis?

So it is around 32% during the quarter. And as Prashant had explained over several phone calls, the share of the Solutions business heading to around 50% in the next 2, 3 years. So -- because we expect this segment to grow faster. See, what we are looking -- the Solutions business, as Prashant explained, has got multiple elements. It's a video component, it's got a digital component, it's an on-ground component. While there are challenges in scaling up the on-ground component quite significantly for a company like us, what we are trying to do now is to increase the share of digital in all our solutions. And this is what clients also need. So on the back of a higher digital component, we expect the Solutions business to grow stronger and also improve our margin. Importantly, in the Solutions business, we are looking to add 1 very high-margin activity. Discussions are on. If that happens, we will see even more faster growth in our Solutions business. At the moment, we are in talks. We do not know how it will conclude, but if it does happen, we will see a faster growth in our Solutions margin.

So this -- can you give us some more clarity on what you're talking about here when you're saying higher-margin activity, like...

So basically, if you look at our Solutions business, it has broadly 3 components. It has got media solutions, it has got IP products, and it is -- it also has got a digital leg. Typically, the media solutions component has higher margins. The IP component, clients love it. They want more of it, but then it takes time to gain traction there, and that has a slightly lower EBITDA margin, right? And digital, of course, in our case, has a good margin. But in terms of scale, it is smaller. We expect to add a few more media solutions, which will improve the overall margin profile of this business even further. We've seen good traction in the margin side. This quarter has been a bit of an aberration on the revenue side because we've seen a big crash in media spend. So given that, we believe that the performance of our Solutions business is pretty good, because if you account for the postponement, there is a positive growth. I'm not aware of a single media company, which has seen an advertising growth during the quarter. So given that context, I think, it has done well, but we are working on improving margins and also scale in our solutions business.

Okay. And sir, just to understand the overall impact on the FCT business also now how much of the FCT business comes as a bundled kind of service, which includes Solutions and FCTs all together?

So there are all types of deals that come in the market. There are a lot of clients who basically are just looking at getting a radio deal from us, and we do give them the radio deal, but -- in which case, typically, the client will buy other media, and they will create their own solution. But increasingly, what clients are wanting is that they want to actually their media partners to give ideas and solutions on solving particular problems. Now normally, what happens is that the creative agency creates solutions for the client, the media agency buys the media. But in today's world, if a company like us goes and gives a city-centric solutions, like I was mentioning earlier in the call, if the client has a problem let's say only in Kolkata then it is unlikely that they will use their creative agency and media agency to address the problem. Because typically, creative agencies and media agencies work on very big ideas and big pitches and big budgets and all-India level kind of operations, but they don't have the requisite skills to find solutions at a city level. Like it would be very difficult for a media agency to find -- to shoot a video in the city of Kolkata alone and to find influencers in Kolkata, who would actually be able to spread the message or to find YouTube channels in Calcutta, which would be able to carry that content, it's very difficult. And media owners -- and media agencies will struggle to do it, which is where we step in, because we not only have creative ideas, but we also have the assets to carry those creative ideas. So we have the YouTube channels, we have the influencers, we have the radio station. We have 20 years of experience in on-ground. So we combine all of that, and that is what actually works. So that's why the Solutions business is going to be the thrust for us in the future.

Okay. And sir, just one clarification here. Like, can you also talk about the working capital metrics of the Solutions business or even the fixed capital, if anything meaningful, how does that compare with the FCT business for us?

Srinivas, as we've mentioned, the investment in this business is very, very low. It is largely working capital-led or, I should say, almost working capital-led because the only investments that we have is, some of the digital assets, the cameras that we need to sort of buy for this purpose, right? So in terms of investment-specific amounts, with this quarter, we had an investment of approximately INR 19 crores in our non-FCT business.

INR 19 crores?

1 9.

Okay. And that corresponds to a revenue of, you said, 1/3 of the...

Exactly, yes. So basically, you can assume an investment of about INR 20-odd crores and last year -- so this year, we should close over INR 200 crores of non-FCT revenue.

In this quarter, our non-FCT revenue was INR 47 crores.

40 -- okay. So around INR 200 crores of revenue and a margin of -- like sustainable margin of like high teens on that, the capital deployed corresponds together.

So basically, if you look at our EBITDA margin in this business, okay, this quarter has been 17%, the EBITDA margin is 16.9% and YTD has been 18.9%, right? So we expect our -- this year, FY '20 number to be a little shy of 20%, right? But as we said, we are adding lot of components to our non-FCT business, which should get us to a much better number than where we are currently.

So on a return on capital basis, this business is, say, accretive to the overall?

Yes, absolutely. And it also adds value to the clients. So automatically, you see a good margin profile for this business.

[Operator Instructions] We have a follow-up question from the line of Manoj Dua from Geometric Securities.

You have increased your gross margin in Solutions business by approximately 9%. Can you contribute what are the factors which help you to bring the gross margin [indiscernible]? Solutions business is becoming a big part of your business, what changes you are taking at the company level to go forward on this?

I couldn't hear your question very clearly, but from what I gather, you're asking us about the factors which have contributed to the margin expansion. Is that right?

Yes, yes, yes.

Okay. So like I mentioned earlier, the margin contribution depends on 2 things, obviously, revenue generation and the cost management. On the cost management, because we are a very large spender on these Solutions businesses now, we are extracting more value from our vendors on the back of a stronger spend pattern that we've got. So we are working at getting more margins out from our vendors. But more importantly, on the revenue side, we are designing better IPs. We are launching them earlier in the market. We are selling them for longer. And therefore, we are able to monetize them much better. So the margin enhancement comes from both these factors.

Okay. What are the changes you are doing in the company for going forward, because the Solutions business is now becoming a big part of your revenue?

Yes. Good question, Manoj. Basically, the strategy of the company has been to build a Solutions business into a strong pillar. To support this strategy, there is a huge people structure that has been created, but -- so that we do not add too much overhead or too much cost to the Solutions business, what we are basically doing is that we are replacing people from the radio business into the Solutions business wherever it is possible. So since the radio business is an area of major strength for us and because our revenue market share is rising, and we know all the clients, so we are able to basically withdraw a few people from the radio business, especially in some of the cities that -- where we have some room to do that. And the room that they're creating is something that we are pushing -- putting behind the Solutions business. So this year as well and in the years to come, we expect that the Solutions team will become bigger and stronger in every area, be it in selling, be it in product designing, be it in creative, be it in commercial negotiations, we expect the Solutions team to become stronger. And we expect that the radio team will proportionately become more efficient and better organized.

Okay. And Subramanianji told that we invested INR 19 crores in Solutions business this quarter. Is this right?

Yes. So that is the closing investment, that's not an additional investment that is 1 9. That is the working capital position.

[Operator Instructions] The next question is from the line of Rohit Dokania from IDFC Securities.

I'm sorry, I joined the call a bit late, if you could repeat -- can you give the breakup of core radio revenue and Solutions revenue and the EBITDA also for both the segments?

So on the EBITDA margins, we have put that out in the hand out. If you -- the hand out that we have circulated, the non-FCT EBITDA margin this quarter, the gross margin and the EBITDA margin, both we've given. The gross margin is 35.3% and the EBITDA margin is 16.9%. Our non-FCT revenues degrew by 5.5%. And -- but that was also due to some postponement and also without considering international concerts. Net of postponement, we actually saw a growth of 3.1%. There are 2 activities that we have planned to do in the current quarter, they're getting done in the subsequent quarter, that is the January, March quarter.

So, this is timing issue basically.

It's a timing issue, right. Our FCT business has declined by approximately INR 22 crores.

Okay. Got it, sir. The other question that I had, sir, I mean, if I look at your overall revenue growth for the first 9 months, it's about a 9% decline and the employee cost I think, as far as that's concerned, it's about flattish odd. So I was just wondering, will Q4 generally see a large sort of write-off? I would assume that you continue to provision for employee bonuses and all that, assuming that your targets for the year will be met. But let's say, if the targets are not met given the overall slowdown, could there be a large reversal that one could see as far as Q4?

Not this year. In the earlier years, you were seeing a larger reversal closer to quarter 4, if the numbers were not met, okay? This year, we have done it based on each quarter. So you won't see the size type of reversals that you saw last year.

[Operator Instructions] Next question is from the line of Depesh Kashyap from Equirus Securities.

Sir, so radio revenues declined by 19%, and you said the pricing was stable, so that's mainly led by volumes, is that correct, sir?

Yes, entirely led by volumes, yes.