Music Broadcast is entering the primary market on Monday, 6^th March 2017 to raise Rs. 400 crore via fresh issue of equity shares of Rs. 10 each and an offer for sale (OFS) of upto 26.59 lakh equity shares by members of the promoter group, both in the price band of Rs.324 to Rs.333 per share. Representing 25.71% of the post issue paid-up share capital, at the upper end, the issue size is Rs. 489 crore and closes on Wednesday, 8^th March. Shares are expected to be listed on BSE and NSE on 17^th March.

Music Broadcast, 89.40% subsidiary of Jagran Prakashan group, owns and runs 39 private FM radio stations under the ‘Radio City’ and ‘Radio Mantra’ brands in 6 languages, reaching out to 50 million listeners across 37 Indian cities. Company’s sole income stream is advertisement revenue (as radio stations free-to-air), close to 50% of which is from 3 cities alone - Mumbai, Bangalore and Delhi.

Since coming under Jagran Group’s fold in 2014 (from India Value Fund), company’s financials have strengthened vastly, thanks to synergies in operations and management experience coming in handy. While revenue has grown at a CAGR of 25% between FY14-16 to Rs. 245 crore, EBITDA growth was much stronger at 42% to Rs. 92 crore, as EBITDA margin improved to 38% in FY16, from 29% in FY14. Thus, FY16 PAT of Rs. 43 crore, posted 32% CAGR over 2 years from FY14 to FY16, resulting in net margin and EPS of 17% and Rs. 9.95 respectively.

For first 6 months of FY17, company posted revenue of Rs. 137 crore, EBITDA of Rs. 47 crore and PAT of Rs. 30 crore, improving net margin to 21.5%. On then equity of Rs. 41.92 crore (30-9-16), EPS stood at Rs. 6.6 for H1FY17. In Nov 2016, it acquired 8 Radio Mantra FM stations from promoter group, via issue of 31.25 lakh equity shares (approx. consideration of Rs. 100 crore, at IPO price), which expanded equity to Rs. 45.04 crore. Of this, 96.34% stake is held by promoters (89.40% by Jagran Prakashan, balance by group directors).

At Rs. 333 per share, company will have a market cap of Rs. 1,900 crore. Its total debt, as of 30-9-16, was Rs. 250 crore, while cash and equivalents are Rs. 46 crore. Of the fresh issue proceeds, nearly Rs. 250 crore will go to retire debt in FY17 and FY18 and another Rs.50 crore in FY20. Thus, interest outgo of Rs. 16 crore per annum currently will be saved, which will directly augment bottomline, FY18 onwards.

Based on enterprise value of Rs. 1,900 crore, annualized H1FY17 earnings discounts the issue price by EV/EBITDA multiple of 20x and a PE multiple of 25x, on current year estimates. On one year forward estimates (FY18), these multiples are 19x and 24x respectively. 

Below is the comparative peer group analysis:

*proposed to be acquired by Zee Media from Reliance Broadcast, ^Total consideration price announced.

Times Group’s 42 Radio Mirchi FM stations, housed under Entertainment Network (India), command 30% market share and have a market cap of Rs. 3,950 crore. Since its margins have been fluctuating (9mFY17 EBITDA margin 27% vs 38% in FY16), the valuation multiple, especially PE (69x) is very steep (PE multiple based of FY16 EPS of Rs. 23 stands at 36x, FY16 net margin). In relation to ENIL, Music Broadcast’s pricing look attractive, on all counts – EV/sales, EV/EBITDA, PE and EV/station.

However, based on Subhash Chandra’s Zee Media Corp’s announced acquisition of Reliance ADAG’s 45 operational FM stations 92.7 Big FM for Rs. 1,592 crore last November, the pricing of the current primary offering appears rich. With whatever little financials available in the public domain for 92.7 Big FM, on similar topline of about Rs. 280 crore, EV/EBITDA of Music Broadcast’s 20x is much higher than Big FM’s 14x. However, Big FM was an M&A deal versus an issue to public investors here, while EBITDA margins in the industry are quite volatile given its nature of heavy dependence on advertisements.

Thus, based on pure play listed peer comparison, pricing is fair. Expected double digit growth, Jagran group pedigree, growth trajectory of radio industry and current market fancy for new ideas due to dearth of opportunities in the secondary space, market being just 4% off all-time highs, share looks promising and one may apply in the issue.

Disclosure: No Interest.