Radio City is singing the expansion tune. With an eye on the upcoming phase III of FM radio auctions, it plans to make inroads into 20 additional cities by pumping in Rs 400 crore. It already has a robust presence in 20 cities and earned Rs 180 crore in revenues last year.
The licences of all FM players in India will expire by March 2015. They will be extended by 15 years as per the rules of the latest auction. Phase I of the auction promised licences for five years, but there was no penalty on speculative bidders. As a result, many quoted exorbitant amounts, skyrocketing the overall rates. And though these players did not launch their radio stations, the highest bidding amount became the annual licencing fee for operators, resulting in irrational pricing and losses for genuine players.
To counter the problem, the government ousted speculative players in the second phase in 2005 and made it mandatory for prospective operators to pay 50 percent of the bidding amount upfront. Phase II of the auctions saw players vie for a 10-year licence by paying OTEF (one-time entry fee) and later, four percent of their annual revenues as licence fee every year. The formula for license fee stipulated that the amount should be four percent of the revenues or 2.5 percent of OTEF, whichever is higher. Radio City added 16 cities to its kitty during this phase.
Radio City was earlier jointly owned by Star TV and Radio Vaani (Mittal group). They later sold it to India Value Fund Advisors in January 2005. Apurva Purohit joined Radio City in July 2005 and is now its CEO. She was the first president of AROI (Association of Radio Operators for India). Purohit spoke to Forbes India about Radio City’s expansion plans and how it is different from the other players.
Q. Why do you need Rs 400 crore for further investment?
We require Rs 200 crore for extension of the current stations and another Rs 150 crore for bidding for new licences in phase III of the auctions. We paid Rs 120 crore in phase II and, as per the new rules, we will have to pay OTEF plus four percent of our annual revenues to the government every year. So, that figure of Rs 200 crore can go up or down by 10-15 percent. Some part of the Rs 400 crore will be raised from our promoters and bankers and the remaining from an IPO if the management and promoters feel the need for it. A KPMG report says our industry will grow by 18-20 percent in the next five years. That gives us the confidence to invest more.
Q. Where does Radio City stand today in terms of revenues?
In the 20 markets that we have a presence in, our revenue share is 26 percent. Radio Mirchi is on top with about 30 percent. Last year, our revenue was Rs 180 crore from 20 cities. In terms of profits, our margins are around 30 percent and we have grown at a 15 percent CAGR in the last three years.
Q. What gives you the confidence to invest more when the industry has not grown substantially over the last decade?
There are two things: Let’s assume that the industry does not grow fast enough and regulations don’t change. We are still sitting pretty; we are profitable and debt-free. Even if nothing happens, we are still the second-largest player in the market.
Advertising to GDP ratio is very low in India and there is enough room for growth in the radio industry. If TV increases advertising rates, we will too. With that, even in a subdued economy, we will grow by 7-8 percent. In case of a normal economy, we will grow by at least 10-12 percent even if the phase III of auctions do not happen.
In the first half of this year, we have grown at 28 percent compared to eight percent last year. That gives us the confidence to invest more. We grew at 18 percent CAGR year before last; by the end of the year, we estimate to grow at 25 percent.
Q. Is internet radio a threat to your business? The cost of setting it up is very little and broadband prices are falling too.
People don’t tune in to FM just for music. They also hear it for the local information provided by radio jockeys. Only a local FM station set up in, say, Mumbai, Bangalore or Delhi will be able to give you information on traffic, weather, news, festivals, shopping deals or emergencies. Local news and information provided by FM channels is the reason why people tune in. The core reason to switch on to FM is music, but the key differentiator is localisation.
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(This story appears in the 28 November, 2014 issue of Forbes India. To visit our Archives, click here.)