ICRA Lanka assigns BBB rating with Stable Outlook to EAP Broadcasting

ICRA Lanka Ltd., a wholly-owned subsidiary of ICRA Ltd., a group company of Moody’s Investors Service, has assigned an Issuer rating of [SL]BBB for EAP Broadcasting Company Ltd. (EBC). The Outlook on the rating is Stable. 

The rating takes into account the extensive experience of the company’s management in the media industry and the strong positioning of some of EBC’s Television (TV) and radio channels which has enabled the company to generate repeat advertisement revenues from leading corporate houses in Sri Lanka. 

The company’s flagship channel – Swarnawahini – is estimated to be among the top three viewed TV channels in the island on the strength of its programming content and island wide reach. 

Despite lower reported market share, the company’s radio channels also count leading business houses as its customers, indicating healthy listenership levels for some of its prime time shows. 

The ratings also take note of the strong entry barriers in Sri Lanka’s media industry owing to significant capital investments required to build technical competence, curb on new media license issuances and strong linkages of incumbent market leaders with leading corporate houses which cumulatively bestow existing players with competitive advantages. 

EBC has been able to capitalise on these strengths and improve its financial profile which is currently characterised by robust profitability, healthy cash flows, moderate capital structure and comfortable coverage metrics. EBC’s revenue profile is also diversified, spread across a broad array of domestic and international corporate clients which mitigates revenue concentration risks to an extent.

These strengths are partially offset by concerns over increasing competitive intensity among existing players necessitating aggressive pricing and high marketing spends, regulatory risks given stringent annual review of media licenses, exposure to cyclicality in corporate ad-spending and volatile profitability of the company’s radio business on account of under investment in programming content and technology. ICRA also takes note of significant inter-Group (EBC is part of the EAP Group) balances due to and from EBC. 

Though the company has implemented measures to restrict such advances in the future, the outstanding advances expose EBC to the business/financial risks of Group’s firms which are engaged in non-related businesses. One of the Group’s businesses (ETI Finance) which was primarily engaged in pawning has incurred heavy write-downs in the recent past which accentuates spill over risks given considerable intergroup transactions. These risks are now being managed through the Group’s Treasury & Investments Committee, Board Risk Management Committee and Board Audit Committee. 

Ability of the Group to ensure strict control over such advances would be a key sensitivity to the ratings. In this context, ICRA Lanka derives comfort from the recent induction of experienced professionals across key verticals of the Group which would aid in strengthening strategy formulation besides also ensuring implementation of sound corporate governance practices.

In arriving at the rating, ICRA has assessed the EAP Group’s proposed restructuring plans under which EBC’s recently setup subsidiary – Galaxy Landmark – is likely to buy out several properties worth over Rs. 1,500 m from ETI Finance as part of recapitalisation efforts. The funding for the said transaction would be in the form of debt and equity from EBC. EBC is in turn expected to fund the same through a mix of accruals and external borrowings. Galaxy Landmark proposes to convert these properties into rentable commercial real estate assets. The first such project would be the construction of a mall in Rajagiriya (Impala Cinema) at a cost of Rs. 980 m, funded by incremental bank debt taken in Galaxy Landmark’s books.

The entry into the commercial real estate business increases the overall risk in the group, given the lumpy nature of cash flows and project specific risks inherent to the real estate business. However, ICRA has taken comfort from the expected healthy cash flow generation from EBC’s existing standalone business lines on the back of expected growth in corporate ad-spends led by economic growth, which is expected to be adequate to cover debt obligations.

EBC’s continuous efforts to improve programming content as well as expanding reach is also expected to help improve market share which would aid in sustaining wallet share with corporate entities and thereby improving EBC’s standalone financial profile. 

However, any unforeseen delays in the proposed mall construction which would require incremental funding support from EBC or inability of the Group to sustain the growth in profitability of the volatile radio business could adversely impact cash flows and hence would remain key sensitivities to the rating. ICRA would continue to monitor the progress of the mall construction and would re-assess the impact of any new developments on EBC’s cash flows on a case-to-case basis. 

EBC is a part of the EAP group of companies which has wide spread business interests across sectors such as financial services, jewellery retailing, cinema distribution, real estate and hotels. EBC is one of the flagship entities of the group and is engaged in the production, sourcing and broadcasting of content over television. It has two free-to-air (FTA) channels – ETV and Swarnawahini. 

Swarnawahini is considered to be market leader in several Sinhala based programs and is estimated to be ranked among top three channels in Sri Lanka. ETV on the other hand focuses on English channels.  EBC also produce and broadcasts content over three radio channels (E FM, Ran FM and Shree FM) for which licenses are held by EBC’s subsidiary Colombo Communications Ltd.

According to recently made available audited statements, on a standalone basis, for the FYE Mar-15, EBC reported a net profit of Rs. 442.5 million on a total income of Rs. 2.565.5 million compared to a net profit of Rs. 211.9 million reported on a total income of Rs. 2,088.2 million in FYE Mar-14.  

On a consolidated basis, for the FYE Mar-15, EBC reported a net profit of Rs. 433.8 million on a total income of Rs. 2,565.5 million compared to a net profit of Rs. 261.9 million reported on a total income of Rs. 2,388.1 million in FYE Mar-14.