IPO Review Rating matrix Rating : Unrated Issue Details Issue Opens 6-Mar-17 Issue Closes 8-Mar-17 Issue Size ( Crore) 486-488 Fresh Issue 400 Offer for Sale 86-88 Price Band ( ) 324-333 No of Shares on Offer (crore) 1.20-1.23 QIB (%) 50% Non-Institutional (%) 15% Retail (%) 35% Minimum lot size (No. of shares) 45 Objects of the issue Objects of the Issue a) Redemption of listed NCD's b) Early redempiton of the JPL NCD's and repayment/prepayment of JPL ICD's c) General corporate purposes d) Offer for sale Amount 486-488 Crore Shareholding Pattern Pre-Issue Post-Issue Promoter & promoter group 96.3% 71.0-71.4% Public 3.7% 28.6-29.0% Financial Summary Crore FY13 FY14 FY15 FY16 Net Sales 138.1 154.2 200.8 232.3 EBITDA 33.9 42.4 62.2 78.6 EBITDA Margin (%) 24.6 27.5 31.0 33.8 PAT 11.6 24.3 47.1 42.5 Valuation Summary (at upper price band: 333) (x) FY13 FY14 FY15 FY16 P/E 163.5 78.1 40.4 44.7 EV/EBITDA 62.6 50.0 34.1 27.0 Research Analyst Bhupendra Tiwary bhupendra.tiwary@icicisecurities.com Sneha Agarwal sneha.agarwal@icicisecurities.com March 1, 2017 Music Broadcast Limited Price band 324-333 Music Broadcast (MBL) is one of the first private FM radio broadcasters in India and operates under the brand Radio City. The company has 39 frequencies currently (37 operational) including eight stations acquired from Radio Mantra and 11 acquired via Phase III auctions. The company migrated all its Phase II licenses to the Phase III regime, which has a validity of 15 years. In addition, MBL also has a sales alliance with ITM Software and Entertainment Pvt Ltd, which operates Suno Lemon 91.9 FM in Gwalior and Ananda Offset Pvt Ltd, which operates Friends 91.9 FM in Kolkata. The company also operates ~40 web radio stations via its internet portal planetradiocity.com and has a listenership base of 16.94 million. Jagran Prakashan acquired the company in FY15. MBL s operating revenues and EBITDA have grown at 18.9% and 32.4% CAGR, respectively, in FY12-16 to 232.3 crore and 78.6 crore, respectively. It is coming out with a fresh issue of 400 crore (1.20-1.23 crore shares) and offer for sale (OFS) of ~ 86-88 crore post which the promoter stake would be in the range of 71.0-71.4%. Investment Rationale Strong leadership position and pan-india presence in radio industry Radio City is the first and oldest private FM radio broadcaster in India with over 15 years of expertise and a pan-india presence spanning 39 frequencies (two yet to be operational). As per RAM data, it has consistently been the No. 1 radio station in terms of average listenership share in Bengaluru & Mumbai with 24.1% & 17.2%, respectively, among private players. The company is also present in 12 of the 15 most populated cities in India and has been able to reach out to over 49.60 million listeners and covers 62% of India s population with access to FM radio in 302 towns (post Phase III). New markets of Phase III to drive revenues, capitalise on radio growth The radio industry is expected to grow at a CAGR of 16.9% in CY15-20 to 4360 crore (Ficci KPMG) driven by commencement of new radio stations, increase in listenership in tier-ii & tier-iii cities & an overall increase in ad rates. MBL being a key player would see incremental revenues from Phase III and underlying radio industry growth. Strong financials, cash flows MBL s operating revenues and EBITDA has grown at 18.9% and 32.4% CAGR, respectively, in FY12-16 to 232.3 crore and 78.6 crore, respectively, and has generated positive operating cash flows over the past five years. MBL has registered 15.0% CAGR in FY14-16 in its advertisement volumes with the total number of seconds advertised in its top 14 cities at 63.72 million (as per AirCheck). MBL s advertiser base has increased from 4,118 in FY14 to 5,211 in FY16. Key risks and concerns The loss of one or more significant advertisers or advertising agencies could have an adverse effect on the business Reliance on third parties to source sound recordings imposes content sourcing risks Outstanding litigation pursuant to the grant of compulsory licenses The business is subject to government guidelines and conditions Priced at FY16 PE multiple of 44.7x on higher band At the IPO price band of 324-333, the stock is available at a multiple of 43.7-44.7x FY16 EPS.
Company Background Radio City is the first private FM radio broadcaster in India and operates under the brand Radio City. The company has grown its presence from four cities in 2001 to 37 cities as on February 15, 2017. These radio stations include eight Radio Mantra Stations transferred from Shri Puran Multimedia (SPML) pursuant to the scheme of arrangement and nine out of 11 Phase III new radio stations. Jagran Prakashan (JPL) acquired a majority shareholding in the company in 2015 and the radio business was demerged into a separate entity pursuant to the Scheme of Arrangement. The company is present in 12 out of the top 15 cities in India by population. As on March 31, 2016, it reached over 49.60 million listeners in 23 cities covered by AZ Research. The company has successfully migrated all its Phase II Radio City Stations to the Phase III Policy and now enjoys an extended license period of 15 years. Moreover, under the Phase III regime, radio stations are permitted to carry news bulletins of AIR and also network their radio stations in all cities. It has, in the past, networked its stations in Sangli, Nanded, Jalgaon, Sholapur and Akola in Maharashtra and operates it from a single hub at Ahmednagar. The company intends to use this experience to network some of the stations in other states as well. Exhibit 1: Cities in which MBL possesses radio frequencies Phase II Phase III Radio Mantra Bangalore Jaipur Patna Agra Lucknow Vadodra Kanpur Bareilly Mumbai Coimbatore Madurai Gorakhpur New Delhi Vizag Nasik Varanasi Chennai Admegnagar Kolhapur Jalandhar Pune Sholapur Udaipur Ranchi Hyderabad Sangli Ajmer Hisar Ahmedabad Nanded Kota Karnal Surat Jalgaon Bikaner Nagpur Jamshedpur Akola Patiala Source: DRHP, ICICIdirect.com Research In addition to the above stations, MBL has a sales alliance with ITM Software & Entertainment Pvt Ltd (ITM), which operates Suno Lemon 91.9 FM ( Suno Lemon ) in Gwalior and Ananda Offset Pvt Ltd (AOPL), which operates Friends 91.9 FM (Friends FM) in Kolkata. The company also operates online web radio (40 web radio stations) Fun Ka Antenna on its web portal www.planetradiocity.com (Planet Radio City). The same was launched in 2010. The company has certain popular in-house shows such as Love Guru and Kal Bhi Aaj Bhi and pre-programming features such as Babber Sher and Joke Studio in its repertoire. The radio stations are operational throughout the year and the company has hired 108 RJs, including three web radio RJs to conduct its shows. Financials As a free to air FM radio broadcaster, MBL s main source of income is advertisement revenue. It does not earn any subscription from its listeners. MBL s operating revenues and EBITDA have grown at 18.9% and 32.4% CAGR in FY12-16 to 232.3 crore and 78.6 crore, respectively. For the six months ended September 30, 2016, the company generated operating revenues of 136.8 crore and an EBITDA of 45.5 crore, thus leading to an EBITDA margin of 33.2%. Page 2
Exhibit 2: Revenue and EBITDA trajectory ( Crore) 250.0 200.0 150.0 100.0 50.0 138.1 33.9 154.2 42.4 200.8 62.2 232.3 78.6 136.8 45.5 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 (%) 0.0 FY13 FY14 FY15 FY16 H1FY17 - Source: DRHP, ICICIdirect.com Research Net Sales EBITDA EBITDA Margin (%) Exhibit 3: PAT and PAT margins ( Crore) 50.0 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0-47.1 42.5 29.8 24.3 11.6 FY13 FY14 FY15 FY16 H1FY17 25.00 20.00 15.00 10.00 5.00 0.00 (%) PAT PAT Margin (%) Source: DRHP, ICICIdirect.com Research Radio industry The radio industry is enjoying a steady CAGR (2011-15) of 14.5% and grew by an estimated 15.1% in 2015 to reach a revenue of 1980 crore. Growth has been driven by both volume enhancements in tier-ii and tier- Ill cities and an overall increase in advertisement rates. Radio's share in the overall media and entertainment industry pie is ~4% of the total advertisement market size. The completion of the Stage I & II of the Phase III auctions, migration of existing operators from Phase II to Phase III and announcement of the hike in foreign direct investment (FDI) cap for FM radio has benefited the industry. Companies spent ~ 1157 crore to acquire 97 new stations in Part I of Phase III and 200 crore in Part II of Phase III auctions. Page 3
Exhibit 4: Indian radio industry size and projections ( Billion) 50 45 40 35 30 25 20 15 10 5 0 23.4 28.4 CAGR (2015-2020) of 16.9% 32.7 FY16E FY17E FY18E FY19E FY20E 37.8 43.3 Radio revenues Source: DRHP, FICCI KPMG, ICICIdirect.com Research The chart below represents the growth in advertising volume for different radio stations as well as the radio industry as a whole for the given period: Exhibit 5: Advertising volumes across players 14 5 year CAGR % (FY11-16) 12 10 8 6 4 2 0 12.5 9 10.9 10.4 6.8 Radio City Radio Mirchi Big FM Red / S Fm Industry Advertising Volume Source: DRHP, ICICIdirect.com Research Following the new stations licensed in Phase III and consolidation in the industry, radio is transforming from a coverage media to a reach platform. Major radio stations have been operating at high advertisement inventory utilisation levels. This, coupled with growing advertiser interest has enabled an increase in advertisement rates. Additional inventory from the launch of new stations will stabilise rates but result in continued advertisement inventory pick up. The Indian radio industry is expected to grow at a CAGR of 16.9% and is expected to post strongest growth among traditional sectors due to an increase in reach in the long term supplemented by increased advertising inventory. In addition to traditional advertising, radio players are exploring other non-traditional avenues for revenue generation such as live concerts, award shows, reality shows, etc. Non-music based content is emerging as a key trend among radio players to garner higher revenues. Page 4
Objects of issue The offer consists of a fresh Issue and an offer for sale (OFS) by selling shareholders with a total issue size ranging from 486 crore to 488 crore. The company intends to raise 400 crore at a price band of 324-333 leading to fresh issue of 1.20 1.23 crore shares. Objects of fresh issue: The details of the proceeds of the fresh issue are summarised below: a) redemption of listed NCDs, b) early redemption of the Jagran Prakashan (JPL) NCDs and repayment/pre-payment of JPL ICDs, c) general corporate purposes and d) offer for sale Offer for sale: The selling shareholders will be entitled to the proceeds of the offer for sale after deducting their portion of the offer related expenses and relevant taxes thereon. MBL would not receive any proceeds from the offer for sale. In addition to the aforementioned objects, MBL intends to strengthen its capital base and expects to receive the benefits of listing of its equity shares on the stock exchanges, including among other things, enhancing the visibility of its brand and company. Page 5
Key risks and concerns MBL heavily dependent on advertisements at effective rates MBL is a free to air FM radio broadcaster and does not earn any subscription from listeners but is heavily dependent on advertisements as the main source of revenue. MBL sources advertisements and customers through advertising agencies, which account for a significant portion of its income. For instance, in FY16, the top five advertising agencies contributed 32.20% of its revenue from operations. The company has contracts with only a fewer advertising agencies. For the ones with which it has contracts, such contracts typically have a validity period of a year and can be terminated at a short notice (30 days). The loss of one or more of these significant advertisers or advertising agencies or a reduction in ad-spend by the advertisers/reduction in effect advertising rates due to market forces, competition, excess inventory, inability to maintain market position or inability to attract new advertising customers could have a adverse effect on its business. Strong reliance on third parties towards content sourcing The primary content of the company s radio stations is the sound recordings that are broadcasted. A majority of these sound recordings are licensed by third parties. MBL pays royalties/license fees to these third parties for the right to broadcast these sound recordings. MBL has entered into licensing agreements with companies such as Shemaroo Entertainment, Triple V Records, Track Musics, Giri Digital Solutions Pvt Ltd, Ashwini Media Networks and Zee for such a license. The licensing agreements are typically on a non-transferable and non-exclusive basis and have a period of 12-36 months. The business is exposed to the risk of non-renewal of license agreements, which would prohibit the company from broadcasting content owned by the said licensor, thus putting it at a competitive disadvantage vis-à-vis peers. Outstanding litigation pursuant to grant of compulsory licenses... PPL has initiated litigation to challenge and/or terminate the compulsory license and compulsory license orders on various grounds before various forums. In addition to this, certain music production companies that are members of PPL, have also separately instituted various litigations challenging the applicability of compulsory license order. Any unfavourable outcome on the litigation may entail higher licensee fee and other commercially disadvantageous terms and conditions affecting MBL s business. Business subject to government guidelines and conditions The company migrated all its existing radio stations to the Phase III Policy, which imposes certain eligibility criteria and conditions on business operations. The failure to comply with the conditions stipulated under Phase III Policy could lead to the licenses of the company being revoked or suspended. Page 6
Financial Summary Exhibit 6: Profit and Loss Statement ( Crore) FY12 FY13 FY14 FY15 FY16 H1FY17 Revenue from operations 122.2 138.1 154.2 200.8 232.3 136.9 Total Revenues 122.2 138.1 154.2 200.8 232.3 136.9 License fees 6.8 7.5 8.2 9.5 17.2 9.4 Employee benefits expense 29.8 34.6 36.3 43.0 51.6 32.4 Other expenses 59.6 62.1 67.3 86.0 84.9 49.6 Total Operating Expenditure 96.2 104.2 111.8 138.5 153.7 91.4 EBITDA 26.0 33.9 42.4 62.3 78.6 45.5 EBITDA Margin (%) 21.3 24.5 27.5 31.0 33.8 33.2 Other Income 2.6 2.4 3.1 6.7 13.2 1.3 Interest 6.8 4.8 5.7 6.2 19.0 8.1 Depreciation 23.5 19.9 15.5 15.7 16.7 9.0 Exceptional Items 0.5 - - - 13.6 - PBT (2.2) 11.6 24.3 47.1 42.5 29.8 Total Tax - - - - - - Net Profit / (Loss) (2.2) 11.6 24.3 47.1 42.5 29.8 Exhibit 7: Balance Sheet ( Crore) FY12 FY13 FY14 FY15 FY16 H1FY17 Equity Capital 38.9 38.9 38.9 38.9 38.9 41.9 Share capital suspense account 0.0 0.0 0.0 0.0 3.1 3.1 Reserves and surplus -65.6-52.6-28.3 18.7 65.4 95.1 Total Shareholders Funds -26.7-13.7 10.6 57.6 107.4 140.2 Total debt 139.3 118.0 103.2 284.8 255.7 250.2 Sources of Funds 112.6 104.3 113.8 342.4 363.1 390.4 Assets Total Fixed Assets 60.9 43.5 31.9 19.0 296.0 290.6 Non-current investments 0.0 0.0 0.0 0.0 0.0 0.0 Long-term loans and advances 31.9 32.0 35.5 234.1 60.0 73.0 Debtors 62.4 64.5 62.8 77.2 95.0 114.2 Current investments 0.0 0.0 0.0 0.0 14.2 16.5 Cash and bank balances 12.3 22.0 33.9 54.3 15.8 29.5 Other current assets 1.2 0.5 1.1 3.4 0.1 0.4 Total Current Assets 76.0 87.0 97.9 134.9 125.0 160.6 Creditors 28.6 29.2 23.1 33.9 39.3 50.5 Provisions 1.9 2.3 2.6 3.6 5.3 6.1 Current liabilities 37.7 34.9 30.5 17.8 77.6 80.8 Total current liabilities 68.2 66.5 56.2 55.3 122.2 137.4 Net Current Assets 7.8 20.5 41.7 79.6 2.9 23.2 Other non-current assets 12.0 8.3 4.6 9.7 4.2 3.6 Application of Funds 112.6 104.3 113.8 342.4 363.1 390.4 Page 7
Exhibit 8: Key Ratios Year End March FY12 FY13 FY14 FY15 FY16 H1FY17 Valuation P/E NA 163.5 78.1 40.4 44.7 NA EV/EBITDA 81.6 62.6 50.0 34.1 27.0 NA P/BV NA NA 178.9 33.0 17.7 NA Operating Ratios EBITDA Margin 21.3 24.5 27.5 31.0 33.8 33.2 PAT Margin -1.8 8.4 15.8 23.4 18.3 21.7 Return Ratios RoE (%) NA NA 229.0 81.7 39.6 NA RoCE (%) 4.6 15.8 26.4 15.6 20.7 NA Source: DRHP, ICICIdirect.com Research Page 8
RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 400 093 research@icicidirect.com Page 9
ANALYST CERTIFICATION We /I, Bhupendra Tiwary MBA, Sneha Agarwal, MBA Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. ICICI Securities Limited is a Sebi registered Research Analyst with Sebi Registration Number INH000000990. ICICI Securities is a wholly-owned subsidiary of ICICI Bank which is India s largest private sector bank and has its various subsidiaries engaged in businesses of housing finance, asset management, life insurance, general insurance, venture capital fund management, etc. ( associates ), the details in respect of which are available on www.icicibank.com. ICICI Securities is one of the leading merchant bankers/ underwriters of securities and participate in virtually all securities trading markets in India. We and our associates might have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. ICICI Securities generally prohibits its analysts, persons reporting to analysts and their relatives from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on a reasonable basis, ICICI Securities is under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities might be acting in an advisory capacity to this company, or in certain other circumstances. This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities accepts no liabilities whatsoever for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. ICICI Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months. ICICI Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction. ICICI Securities or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the companies mentioned in the report in the past twelve months. ICICI Securities encourages independence in research report preparation and strives to minimize conflict in preparation of research report. ICICI Securities or its associates or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither ICICI Securities nor Research Analysts and their relatives have any material conflict of interest at the time of publication of this report. It is confirmed that Bhupendra Tiwary MBA, Sneha Agarwal, MBA, Research Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months. Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. ICICI Securities or its subsidiaries collectively or Research Analysts or their relatives do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report. Since associates of ICICI Securities are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject company/companies mentioned in this report. It is confirmed that Bhupendra Tiwary MBA, Sneha Agarwal, MBA, Research Analysts do not serve as an officer, director or employee of the companies mentioned in the report. ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Neither the Research Analysts nor ICICI Securities have been engaged in market making activity for the companies mentioned in the report. We submit that no material disciplinary action has been taken on ICICI Securities by any Regulatory Authority impacting Equity Research Analysis activities. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. ICICI Securities Limited has been appointed as one of the Lead Managers to the initial public offer of Music Broadcast Limited. This report is prepared on the basis of publicly available information. Page 10