Hold Music Broadcast, target Rs 53: ICICI Direct
Music Broadcast is a smallcap company, operating in service sector.
Shares of Music Broadcast traded at Rs 46.15 around 1 pm on 31 July, 2019. The brokerage has set a one-year horizon for the stock to hit the target price.
Rationale behind the 'hold' call:
"Revenues came in at Rs 69.8 crore (decline of 7.8 per cent YoY), lower than our expectation of 1 per cent YoY growth at Rs 76.5 crore," said the brokerage.
The underperformance was on account of the company’s emphasis on yield improvement (they reported 4 per cent yield improvement), the brokerage added.
Subsequently, the company let go a few low cost opportunities, which resulted in nearly 12 per cent volume decline for the quarter.
Ebitda for the quarter came in at Rs 22.4 crore (against the brokerage's estimates of Rs 25.3 crore) on account of negative operating leverage while margins came in at 32.1 per cent, lower than the brokerage's expectation of 33 per cent.
PAT came in at Rs 8.4 crore (against the brokerage's estimate of Rs 14.4 crore), further impacted by adoption of Ind-AS 116, which led to incremental depreciation and interest expenses of Rs 1.63 crore and Rs 0.6 crore for the quarter, respectively.
Underperformance of key categories drags numbers
The company indicated that there was moderate political advertisement, which could not recoup the government advertisement (20 per cent YoY category decline) drag on overall numbers.
Apart from this, categories like real estate and education also reported a decline in volumes, which added further to the woes. The brokerage believes that a recovery in local advertisement sentiments (60 per cent of mix) is key here.
However, the company’s strategy on yield improvement in an economically challenging environment may delay this recovery longer than expected.
"We revise our revenue numbers downwards (aligning as per Q1FY20) and now build in 5.5 per cent revenue CAGR over FY19-21E against 13.1 per cent earlier," said the brokerage.
Big FM acquisition to reap benefits in long term
The company recently announced its intention to acquire Big FM brand from Reliance Broadcast Network for an enterprise valuation of Rs 1,050 crore in an all-cash deal.
If the deal goes through, the combined entity will be the largest FM player in India with 79 stations.
There would be a primary investment of Rs 202 crore for 24 per cent stake in the form of preferential allotment while on receipt of regulatory approvals there would be an investment of Rs 348 crore for the remaining promoter stake.
"If the acquisition goes through, it is expected to provide long term benefits in terms of further yield improvement, cost synergies, etc.," said the brokerage.
Valuation & outlook
As per the brokerage, revenue de-growth for the quarter is a concern, especially in light of possibility of losing volume market share to its peers and the continued strategy of yield improvement may deepen this further.
The Big FM acquisition may provide some long term benefits but it hinges on regulatory approvals, which have been a bumpy ride.
"We downgrade the stock from buy to hold with a revised target price of Rs 53. A faster-than-expected revenue recovery is a key risk to our estimates," said the brokerage.