In a new report, Crisil said that the FM radio industry has the potential to nearly double revenues in the next 5 years from an estimated Rs 2,000 crore in 2015 to reach around Rs 3,900 crore.

The global analytics company said ad volume would get a fillip as Phase III regulations will help radio cover a proposed 294 cities, from 86 at present, and reach 85% of India’s population.

Crisil estimates an internal rate of return (IRR) of 11-14 per cent, and a payback period of 7-9 years for the big radio companies in metros. In the large ad markets the top radio companies are already operating at peak utilization and, an addition of one or two incremental frequencies, would keep their ad inventory utilization as high as 60-65 per cent in the first year.

"The ad rates in Tier II cities such as Kanpur and Lucknow are as low as Rs 250-660 per 10 second slot compared with Rs 1,150-1,900 in Delhi or Mumbai. Tier II cities will have to attract more local advertisers who do not buy in bulk," the authors of the report noted.

The radio industry has even earlier stressed the importance of local advertisers as a revenue stream.

For example, Prashant Panday, MD and CEO of ENIL (which operates Radio Mirchi), informed us that local advertising comprises 50 per cent of ENIL's ad revenues and around 60 per cent for the radio industry (Crisil puts it as 30-40 per cent). “It remains the strongest support base for radio. I see that growing to nearly 80 per cent in the years to come, in line with worldwide patterns," he said.

Harish Bhatia, CEO of MY FM also said that radio ad spends would continue to be split 60:40 between local and corporate advertisers, respectively, for the foreseeable future. He also agreed that with new stations expected to begin operations soon, a 15 per cent growth rate seems quite possible.

Similarily, when asked about his thoughts on Crisil's report, Panday agreed with Crisil's estimations but said that the growth rate could be as high as 18 per cent as opposed to Crisil's 15 per cent CAGR prediction.

"Crisil's projection is accurate provided industry raises rates YoY by 10 per cent minimum as the radio industry is underpriced resulting in huge inventory exceeding 30 minutes every hour in almost every station," opined Vineet Singh Hukmani, MD of Radio One.

This underpricingcould be a reason why Crisil predicts a flat 5 per cent YoY growth in ad rates (in large metros) for the next 5 years. However, it says that given the low set-up cost for players with already established operations, any new frequency will be EBITDA positive from the very first year.

“In large advertisement markets such as Mumbai and Delhi, the top players are operating at peak utilisation of 90-100 per cent. Therefore, an addition of one or two frequencies would keep their ad inventory utilisation as high as 60-65 per cent during the first year,” the authors stated. Crisil expects inventory utilization to increase every year and be 100 per cent by 2020.

A Radio City spokesperson said ad revenues for FM industry would grow at 15-18 per cent YoY; which could rise if economy exhibits buoyancy.

“Larger number of brands and categories are investing more on FM, which means that advertisers are leveraging the power of this medium better. This means a couple of things; greater belief and larger investment. Once the new players launch new cities, the footprint of FM is just going to get bigger and better. With the addition of the 11 cities we bid for in Phase III, our network presence would be in the important cities with high concentration of high profile audience. We are very bullish about the growth,” said the spokesperson.

However, the authors of the report caution that a lot depends on the health of the economy. “The industry has seen economic shocks such as those after the global financial crisis when ad rates fell 10-15 per cent across the board. Indeed, the rates have still not rebounded to levels seen in the second half of 2008 when players were charging anywhere between Rs 1,500 and Rs 2,500 per 10 seconds in the large ad markets. Any recurrence of economic slowdown would impact IRRs,” the report stated.

With lower ad rates in the Tier III cities, Crisil suggested that operators will need to look for local advertisers who do not buy in bulk. “Players that offer bundled portfolio of national and local frequencies as well as other advertising options such as print to advertisers would fare better,” it said.

Interestingly, Crisil suggested that established brands like ENIL could drop advertising rates to gain volume in case of competition, with marginal impact on profitability. It would be interesting to see if that actually turns out to be the case with operators like ENIL, who are known to charge premium rates. In an earlier interview, Panday had suggested that we would actually see an increase in ad rates given the investments made in Phase III and the fact that ad rates have not increased substantially since 2008. This is also a view shared by most other operators.

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FM revenues to reach Rs 3,900 crore by 2020?

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