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Monday, May 31, 2010
Sunday, May 30, 2010
Value Investing in Large Caps
The 'Intelligent Investor' by Benjamin Graham has often been called the Bible for Value Investors. In an earlier post, I had mentioned it as one of the must-read books for value investors. The link to that post is available here.
In this book, Benjamin Graham has laid out in great detail why investing in large cap stocks going through a temporary difficulty, is a low risk way to achieve good returns.
In his own words:
"If we assume that it is the habit of the market to overvalue common stocks which have been showing excellent growth or are glamorous for some other reason, it is logical to expect that it will undervalue — relatively, at least — companies that are out of favor because of unsatisfactory developments of a temporary nature. This may be set down as a fundamental law of the stock market, and it suggests an investment approach that should prove both conservative and promising. The key requirement here is that the enterprising investor concentrate on the larger companies that are going through a period of unpopularity. While small companies may also be undervalued for similar reasons, and in many cases may later increase their earnings and share price, they entail the risk of a definitive loss of profitability and also of protracted neglect by the market in spite of better earnings. The large companies thus have a double advantage over the others. First, they have the resources in capital and brain power to carry them through adversity and back to a satisfactory earnings base. Second, the market is likely to respond with reasonable speed to any improvement shown. "
In essence, Graham is suggesting that investing in large cap companies going through difficulties (i.e. quoting at low p/e multiples relative to their usual valuation & relative to peers), is a good strategy. Large caps have greater resources and hence are unlikely to go bankrupt. Hence, by virtue of mean reversion, large caps are likely to reward the patient investor. Also, large caps are typically more diversified and hence a problem in one division/ product/ geography may not be large enough to drag down the whole firm.
Small and mid caps on the other hand, have lower capacity to face bad times. Hence, in the event of a recession/ fall in earnings, they are more likely to suffer higher erosion in earnings, and hence greater fall in stock price.
Some of Warren Buffett's greatest gains have come from exactly this strategy. For eg: his investments in Coca Cola, American Express, Washington Post, etc. I will post case studies on some of these investments in future posts.
In this book, Benjamin Graham has laid out in great detail why investing in large cap stocks going through a temporary difficulty, is a low risk way to achieve good returns.
In his own words:
"If we assume that it is the habit of the market to overvalue common stocks which have been showing excellent growth or are glamorous for some other reason, it is logical to expect that it will undervalue — relatively, at least — companies that are out of favor because of unsatisfactory developments of a temporary nature. This may be set down as a fundamental law of the stock market, and it suggests an investment approach that should prove both conservative and promising. The key requirement here is that the enterprising investor concentrate on the larger companies that are going through a period of unpopularity. While small companies may also be undervalued for similar reasons, and in many cases may later increase their earnings and share price, they entail the risk of a definitive loss of profitability and also of protracted neglect by the market in spite of better earnings. The large companies thus have a double advantage over the others. First, they have the resources in capital and brain power to carry them through adversity and back to a satisfactory earnings base. Second, the market is likely to respond with reasonable speed to any improvement shown. "
In essence, Graham is suggesting that investing in large cap companies going through difficulties (i.e. quoting at low p/e multiples relative to their usual valuation & relative to peers), is a good strategy. Large caps have greater resources and hence are unlikely to go bankrupt. Hence, by virtue of mean reversion, large caps are likely to reward the patient investor. Also, large caps are typically more diversified and hence a problem in one division/ product/ geography may not be large enough to drag down the whole firm.
Small and mid caps on the other hand, have lower capacity to face bad times. Hence, in the event of a recession/ fall in earnings, they are more likely to suffer higher erosion in earnings, and hence greater fall in stock price.
Some of Warren Buffett's greatest gains have come from exactly this strategy. For eg: his investments in Coca Cola, American Express, Washington Post, etc. I will post case studies on some of these investments in future posts.
Wednesday, May 26, 2010
Standard Chartered IDR: Known unknowns
Sandip Sabharwal, used to be the fund manager of the blockbuster SBI Magnum Mutual Fund, and made quite a name for himself by beating the benchmark indices for many years. He is currently the head of Portfolio Management at Prabhudas Liladhar. He is an IIT Delhi & IM Bangalore Alumnus.
He has an interesting post on his blog discussing some of the risks of investing in the Standard Chartered IDR. The post is available here.
In his view, the currency risk of investing in an instrument whose price is likely to closely track the performance of a stock listed on the London Stock Exchange is the biggest risk. Also, he points out that IDRs will receive differential tax treatment, and will attract both long term and short term capital gains tax. Unlike a common equity share, which does not attract long term capital gains tax in India at present, the Standard Chartered IDR will.
I would like to add another line of thought to the discussion. Unlike Unilever, Siemens and other MNCs which have listed their local subsidiaries in India, Standard Chartered has chosen to list a Depository Receipt, which is essentially equivalent to one-tenth of a share of Standard Chartered Plc, an entity which is listed on the LSE & the Hong Kong Stock Exchange. Unlike other Indian bank shares, the IDR is exposed to 2 major risks. The company stands exposed to the UK economy which is yet to fully emerge from the Great Recession, and which is staring at many years of tough economic reforms. This is likely to keep UK stocks depressed for the foreseeable future.
Also, the bank is listed on the HKSE. Hong Kong, by virtue of its exposure to the Chinese economy, is highly vulnerable in case the Chinese economy slows down, as a consequence of Government moves to calm the country's real estate market.At the end of the day, the IDR will move in tandem with the shares of Standard Chartered Plc in LSE & HKSE.
Value investors would be well advised to keep these factors in mind before investing in the IDR.
Saturday, May 22, 2010
Ajay Piramal's Value Investment
Ajay Piramal - the Chairman of Piramal Healthcare, is all over the news today for selling off the formulations business of his company to Abbott Labs for a mind-boggling valuation of USD 3.7 bn.
As I read about the deal, and the evolution of the company, I was struck by the similarities between value investing, and the approach taken by Ajay Piramal in building and then selling off the formulations business of his company.
Key takeaways:
Buy business only if they are available at a Margin of Safety: In 1988, when Piramal entered the formulations business, the company had a market cap of Rs 6 cr. Piramal came from a family with interests in textile manufacturing, which was under severe strain due to the strike by mill-workers led by Datta Samant. Piramal bought over the formulations business from Nicholas India Ltd. (an Australian firm which was exiting India). As such, he got the business at very cheap valuations, apart from getting an established business which he could grow.
Adopt a Contrarian Approach:At the time Piramal entered the business, the market for branded generics in India was very small. Major Indian pharma companies preferred to tap into the export opportunity, i.e. exporting generic drugs to developed markets.
When Valuations get very high - Sell: Abbott Labs offered 9x the Annual Sales of the formulations business of Piramal Healthcare, which was much higher than the 4x offered to Ranbaxy by Daiichi-Sankyo. The EBITDA multiple for the deal is 30x, as against Ranbaxy's 22x.
Ajay Piramal's patient investment in his company has provided a compounded annual appreciation of 44%, a record which even Warren Buffett would be hard-pressed to match over such a long period.
As I read about the deal, and the evolution of the company, I was struck by the similarities between value investing, and the approach taken by Ajay Piramal in building and then selling off the formulations business of his company.
Key takeaways:
Buy business only if they are available at a Margin of Safety: In 1988, when Piramal entered the formulations business, the company had a market cap of Rs 6 cr. Piramal came from a family with interests in textile manufacturing, which was under severe strain due to the strike by mill-workers led by Datta Samant. Piramal bought over the formulations business from Nicholas India Ltd. (an Australian firm which was exiting India). As such, he got the business at very cheap valuations, apart from getting an established business which he could grow.
Adopt a Contrarian Approach:At the time Piramal entered the business, the market for branded generics in India was very small. Major Indian pharma companies preferred to tap into the export opportunity, i.e. exporting generic drugs to developed markets.
When Valuations get very high - Sell: Abbott Labs offered 9x the Annual Sales of the formulations business of Piramal Healthcare, which was much higher than the 4x offered to Ranbaxy by Daiichi-Sankyo. The EBITDA multiple for the deal is 30x, as against Ranbaxy's 22x.
Ajay Piramal's patient investment in his company has provided a compounded annual appreciation of 44%, a record which even Warren Buffett would be hard-pressed to match over such a long period.
Saturday, May 15, 2010
When Blacksmiths made more money than Gold Miners
Gold was discovered in California 1848. As news spread to the rest of the United States, huge numbers of people rushed to the state to try their luck at making a fortune of a lifetime. Once they reached California, they set about buying digging equipment like pickaxes and shovels. (Mining at that time was highly primitive).
The initial prospectors discovered gold and their success attracted even more prospectors wanting a piece of the action. Eventually, there were so many people digging around the state that the amount of gold individual prospectors struck was meager. The riches had gotten fragmented due to the huge competition among people vying with each other.
However, two sets of people became very rich due to the Gold Rush. The blacksmiths who made the pickaxes and shovels found themselves unable to meet the demand from those out on the field. They prospered as a result of the seemingly never ending demand for their wares.
The other set of people who got rich were landowners who happened to have the good fortune of owning land around the sites of the mining. Their holdings skyrocketed in value, and created some great fortunes.
Applying this Idea in Modern Times
The reason for mentioning this story in this blog is that it holds a great lesson for investors. For example, the power sector is among the most promising sectors in the Indian markets today. However, competition is so great today, and the valuations of power companies are so high that investors may not really enjoy healthy returns. However, there are segments of the industry which may just provide better returns.
For example, while there are huge plans for setting up power plants in the country by the likes of Tata, Adani, Lanco, Reliance, etc, most of them will probably end up buying equipment from suppliers like BHEL. As is well known, BHEL's current order book is currently overflowing.
Further, as huge power capacity comes up, there will be demand for laying cables for transmitting and distributing this power. There are very few well known companies manufacturing cables. Finolex Cables & KEC International are among the better known names in cable manufacturing. Finolex trades at TTM P/E of < style="font-weight: bold;">Why this Strategy Works
Big investors with the ability to incur large capex are incurring expenditures to put up huge plants which will begin to generate revenues in 3, 4 or 5 years from now. Till then investors will have to be patient with their return expectations.
However, the "pickaxe" players like BHEL & Finolex will get their money upfront (or at least part of it) when they receive orders. These company use these upfront payments as working capital for their manufacturing operations, which helps them to reduce their borrowing.
Tata Power, Adani & Lanco - meanwhile - have to repeatedly visit their bankers and the capital markets to raise more and more money to spend on their capital expenditure. Eventually their plants will start to produce power, but by then the markets will begin to value them at lower multiples (which are typically associated with utility companies).
Value investors would be well advised to think of the blacksmith, the next time we go prospecting for Gold mines.
The initial prospectors discovered gold and their success attracted even more prospectors wanting a piece of the action. Eventually, there were so many people digging around the state that the amount of gold individual prospectors struck was meager. The riches had gotten fragmented due to the huge competition among people vying with each other.
However, two sets of people became very rich due to the Gold Rush. The blacksmiths who made the pickaxes and shovels found themselves unable to meet the demand from those out on the field. They prospered as a result of the seemingly never ending demand for their wares.
The other set of people who got rich were landowners who happened to have the good fortune of owning land around the sites of the mining. Their holdings skyrocketed in value, and created some great fortunes.
Applying this Idea in Modern Times
The reason for mentioning this story in this blog is that it holds a great lesson for investors. For example, the power sector is among the most promising sectors in the Indian markets today. However, competition is so great today, and the valuations of power companies are so high that investors may not really enjoy healthy returns. However, there are segments of the industry which may just provide better returns.
For example, while there are huge plans for setting up power plants in the country by the likes of Tata, Adani, Lanco, Reliance, etc, most of them will probably end up buying equipment from suppliers like BHEL. As is well known, BHEL's current order book is currently overflowing.
Further, as huge power capacity comes up, there will be demand for laying cables for transmitting and distributing this power. There are very few well known companies manufacturing cables. Finolex Cables & KEC International are among the better known names in cable manufacturing. Finolex trades at TTM P/E of < style="font-weight: bold;">Why this Strategy Works
Big investors with the ability to incur large capex are incurring expenditures to put up huge plants which will begin to generate revenues in 3, 4 or 5 years from now. Till then investors will have to be patient with their return expectations.
However, the "pickaxe" players like BHEL & Finolex will get their money upfront (or at least part of it) when they receive orders. These company use these upfront payments as working capital for their manufacturing operations, which helps them to reduce their borrowing.
Tata Power, Adani & Lanco - meanwhile - have to repeatedly visit their bankers and the capital markets to raise more and more money to spend on their capital expenditure. Eventually their plants will start to produce power, but by then the markets will begin to value them at lower multiples (which are typically associated with utility companies).
Value investors would be well advised to think of the blacksmith, the next time we go prospecting for Gold mines.
Thursday, May 13, 2010
Mere Pass Warrants Hai (I have got warrants issued from company)
Often we come across a term called Warrant .Not the typical Bollywood movie J arrest warrant where in the cop says to the villain mere paas tumhara arrest Warrant hai J but the financial term Warrant
A warrant is the right but not the obligation to buy or sell a certain quantity of an underlying instrument at an agreed-upon price.
For years this instrument has been used by smart promoters to pockets millions. It’s a Double edge money making instrument for promoters to use as per market directions.
Every second person down the street has become an analyst. Many to a certain extent shout their view and express their opinions as to the direction of the market ↑or↓.Thanks to flair for speculation not, many a times we hear anybody saying market will move sideways. If a normal person can say this with such high degree of confidence, I m sure the person who is running the company (Promoters) can say this with high accuracy for his company stock.
Let’s say I am a promoter of the company and I predict the stock prices have reached its peak as per rough estimates. I can use this instrument at my disposal. Sell a major stake at higher prices with an intention to buy back the same stake at the lower prices by the way of issuance of warrants.
The same can also be used when I expect a major growth in business and anticipate a sharp rise in the stock price. All I have to do is issue warrants at lower prices and increase stakes and then sell it at higher prices.
Retail investors should beware of this deadly instrument which can be used by promoters in a falling market or a rising market. The end result remains the same they make $$$$$$$ money Honey!
-Team IVI
Wednesday, May 12, 2010
Value Traps
Investors searching for value opportunities sometimes encounter a dreaded creature known as a 'Value Trap'. These so-called 'cheap' stocks appear to be valued very cheaply, but end up moving sideways for years on end, and never deliver superior returns. In this post, I will try to explore a few of the characteristics of 'Value Traps'.
Low P/E or P/B Trap
Companies trading at low multiples are probably trading at that valuation for a reason, which could range from low growth prospects, declining industry, hyper competition, high debt, etc. Some of these features are insurmountable, and hence the company/ industry might destined to remain at low multiples. Investing in low P/E companies is thus advisable only in companies with sound fundamentals, and is likely to lead to disappointments if followed as a mechanical strategy.
Lack of Catalysts
This is a follow-up to the previous point. Companies trading at cheap valuations usually do so for a reason. The way to get out of this is for the company to have some catalyst which leads to a re-rating of the stock. Catalysts range from launch of new products, a breakthrough R&D success, consolidation, deleveraging, etc.
Without a catalyst, a company is likely to remain cheap. It is when the catalyst is realised, that the company attains momentum in earnings, and catches the attention of the rest of the street. Anticipating potential catalysts and waiting for the company to harness them is what separates the value investor from the rest of the investing/ speculating community, and often leads to the best returns.
Low Proportion of Free-Float
Often, the best trigger for a re-rating of a company is when buzz starts to build up regarding a change of management through a takeover, merger or a management buy-out. Typically, in such cases, the market is frustrated with the management's inability to push through changes which unlock value. When a takeover opportunity appears, the market laps up the company's shares in the hope that new management will be able to change the fortunes of the company.
However, the above usually works when a significant proportion of the company's shares trade in free float. Incumbent managements and owners are normally reluctant to relinquish control, and it often comes down to an acquisition to unlock value. However, companies with high insider ownership can try to scuttle such takeovers by blocking it using their voting rights.
This prevents any re-rating from taking place.
Low P/E or P/B Trap
Companies trading at low multiples are probably trading at that valuation for a reason, which could range from low growth prospects, declining industry, hyper competition, high debt, etc. Some of these features are insurmountable, and hence the company/ industry might destined to remain at low multiples. Investing in low P/E companies is thus advisable only in companies with sound fundamentals, and is likely to lead to disappointments if followed as a mechanical strategy.
Lack of Catalysts
This is a follow-up to the previous point. Companies trading at cheap valuations usually do so for a reason. The way to get out of this is for the company to have some catalyst which leads to a re-rating of the stock. Catalysts range from launch of new products, a breakthrough R&D success, consolidation, deleveraging, etc.
Without a catalyst, a company is likely to remain cheap. It is when the catalyst is realised, that the company attains momentum in earnings, and catches the attention of the rest of the street. Anticipating potential catalysts and waiting for the company to harness them is what separates the value investor from the rest of the investing/ speculating community, and often leads to the best returns.
Low Proportion of Free-Float
Often, the best trigger for a re-rating of a company is when buzz starts to build up regarding a change of management through a takeover, merger or a management buy-out. Typically, in such cases, the market is frustrated with the management's inability to push through changes which unlock value. When a takeover opportunity appears, the market laps up the company's shares in the hope that new management will be able to change the fortunes of the company.
However, the above usually works when a significant proportion of the company's shares trade in free float. Incumbent managements and owners are normally reluctant to relinquish control, and it often comes down to an acquisition to unlock value. However, companies with high insider ownership can try to scuttle such takeovers by blocking it using their voting rights.
This prevents any re-rating from taking place.
Thursday, May 6, 2010
52 Week Lows List throwing up a lot of Well-known Companies
In an earlier post, I had mentioned that the 52 week low list might be a good source of ideas for value investors. In fact, I had mentioned that some famed value investors like Mohnish Pabrai use this list as one of their most important sources of value ideas.
Of late, my 52 week low RSS Feed has been throwing up a number of well-known names. Some of these names are in the table below:
Stock Recent Price 52 Week High 52 Week Low
Balrampur Chini Mills Ltd. 75.00 167.30 71.95
BSEL Infrastructure Realty Ltd. 12.59 28.00 12.30
Tanla Solutions Ltd. 42.30 87.50 41.50
Reliance MediaWorks Ltd. 199.85 463.50 195.45
Tata Teleservices (Maharashtra) Ltd. 22.30 41.80 22.40
Bajaj Hindusthan Sugar & Industries Ltd. 17.65 42.95 17.15
ICSA-India Ltd. 21.55, 229.90 15.65
Kirloskar Brothers Ltd. 334.25 370.0 225.25
Gujarat Ambuja Exports Ltd. 16.40 36.20 16.20
Zee News Ltd. 14.75 20.85 14.60
Asian Hotels (North) Ltd. 500.55 700.30 267.70
Given the prevalent bearish sentiment in the markets due to the Greek Debt crisis, the markets have been increasingly volatile, and many good stocks have been laid low. It is worthwhile to investigate the companies in this list to look for prospective turnarounds.
The 52 week low list is a great place to find ideas for further investigation.
Wednesday, May 5, 2010
Warren Buffet Coming to India - What Might be on His Shopping List
Recently, there were news reports that Warren Buffett plans to visit India next March, and has not ruled out making an investment in India.
These news reports went on to indicate that Buffett might consider entering India's insurance market through his insurance subsidiary, but that he was wary of India's foreign investment sectoral caps.
What Might be on His Shopping List?
Now, as lay people, we knew Buffett as an astute investor, known for his ability to identify companies with favourable long term prospects, solid cash flows, reputed management, and at a reasonable margin of safety.
In an earlier post, I had mentioned some of Buffett's stock picking criteria. My humble request to Mr. Buffett is to not get disheartened by India's myriad and sometimes counter-productive rules and regulations. Maybe he will be best served if he made a mobile phone call to Mr. Sunil Bharti Mittal.
Mr. Mittal's company - Bharti Airtel, is India's largest telecom company, enjoys superior cash flows and financial ratios, and has a great management team. What's more, it is currently trading at P/E ratios < 12, which is much below the Sensex & Nifty. The company has been one of the worst performers in the index over the past 1.5 years. Airtel is in a business which is probably going to be around for the next 50 years, and this is something Mr. Buffett really lays great stress on when he makes his investments.
So once again, this humble investor, would like to request Mr. Buffett to make the call to Mr. Mittal. He might just like what he hears.
These news reports went on to indicate that Buffett might consider entering India's insurance market through his insurance subsidiary, but that he was wary of India's foreign investment sectoral caps.
What Might be on His Shopping List?
Now, as lay people, we knew Buffett as an astute investor, known for his ability to identify companies with favourable long term prospects, solid cash flows, reputed management, and at a reasonable margin of safety.
In an earlier post, I had mentioned some of Buffett's stock picking criteria. My humble request to Mr. Buffett is to not get disheartened by India's myriad and sometimes counter-productive rules and regulations. Maybe he will be best served if he made a mobile phone call to Mr. Sunil Bharti Mittal.
Mr. Mittal's company - Bharti Airtel, is India's largest telecom company, enjoys superior cash flows and financial ratios, and has a great management team. What's more, it is currently trading at P/E ratios < 12, which is much below the Sensex & Nifty. The company has been one of the worst performers in the index over the past 1.5 years. Airtel is in a business which is probably going to be around for the next 50 years, and this is something Mr. Buffett really lays great stress on when he makes his investments.
So once again, this humble investor, would like to request Mr. Buffett to make the call to Mr. Mittal. He might just like what he hears.
Sunday, May 2, 2010
Dish TV - Largest Player in India
Recently, Media Partners Asia, a media industry consulting firm published a report, in which it projected that India will be the largest DTH market in the world by 2015. MPA also believes that the 6 player market as it currently stands is ripe for consolidation.
In this scenario, it is worthwhile to look at the industry, and try to identify companies which might be potential multi-baggers.
Dish TV
Dish TV is India's largest DTH player, with a 35% market share of subscribers. the company already has over 7 mn subscribers, with ARPU at ~ 140 and growing. It is expecting to hit 10 mn subscribers by end of FY '10.
Industry Outlook
The DTH Industry is witnessing exponential growth. As mentioned earlier, the MPA has projected that India is poised to become the world's largest DTH market by 2015. The industry has high Entry barriers on account of the Government having given licenses to only 6 players. MPA believes that even 6 players in the industry is untenable, and that the industry is poised for consolidation.
Dish TV is the only pure-play listed DTH player. All the other players are listed through their parent companies. Being the first player to enter the industry, it is also the first to become EBITDA positive. It is expected to be first player to be PAT positive (in 2-3 years), with high free cash flows and low requirements for re-investments.
The same growth pattern has been observed in the global DTH industry as well.
Dish TV has the lowest subscriber acquisition cost in the industry. It has a major presence in Tier - 2 & 3 locations.
Recently, the company received 100 mn USD investment from Apollo Management, which the company plans to utilise to significantly expand its customer base.
Outlook
The DTH segment is expected to witness exponential growth and is following the same lifecycle as the telecom sector. Analysts predict great traction for movement from regular cable connections to digital platforms among subscribers.Only competitor segment is the Conditional Access System, which has not really taken off.
The DTH industry is currently lobbying with the Government to move to royalty share structure rather than royalty structure, and this is expected to turn around the fortunes of the industry, just as the New Telecom Policy 1999, revolutionised the telecom sector.
The company has strong backing from the Zee Group, which is one of India's largest media companies.
In this scenario, it is worthwhile to look at the industry, and try to identify companies which might be potential multi-baggers.
Dish TV
Dish TV is India's largest DTH player, with a 35% market share of subscribers. the company already has over 7 mn subscribers, with ARPU at ~ 140 and growing. It is expecting to hit 10 mn subscribers by end of FY '10.
Industry Outlook
The DTH Industry is witnessing exponential growth. As mentioned earlier, the MPA has projected that India is poised to become the world's largest DTH market by 2015. The industry has high Entry barriers on account of the Government having given licenses to only 6 players. MPA believes that even 6 players in the industry is untenable, and that the industry is poised for consolidation.
Dish TV is the only pure-play listed DTH player. All the other players are listed through their parent companies. Being the first player to enter the industry, it is also the first to become EBITDA positive. It is expected to be first player to be PAT positive (in 2-3 years), with high free cash flows and low requirements for re-investments.
The same growth pattern has been observed in the global DTH industry as well.
Dish TV has the lowest subscriber acquisition cost in the industry. It has a major presence in Tier - 2 & 3 locations.
Recently, the company received 100 mn USD investment from Apollo Management, which the company plans to utilise to significantly expand its customer base.
Outlook
The DTH segment is expected to witness exponential growth and is following the same lifecycle as the telecom sector. Analysts predict great traction for movement from regular cable connections to digital platforms among subscribers.Only competitor segment is the Conditional Access System, which has not really taken off.
The DTH industry is currently lobbying with the Government to move to royalty share structure rather than royalty structure, and this is expected to turn around the fortunes of the industry, just as the New Telecom Policy 1999, revolutionised the telecom sector.
The company has strong backing from the Zee Group, which is one of India's largest media companies.
MIC Electronics - Profiting from a Warming Planet
- LED Video, Graphics and Text Displays
- LED Lighting Solutions
- Embedded, System and Telecom software
- Communication and Electronic Products
MIC's flagship products are LED Video Displays (indoor / outdoor / mobile), that have become an integral part of Sports Stadiums, Transportation Hubs, Digital Theatres and Theme Parks, Advertisements and Public Information Displays.
Headquartered in Hyderabad, it has a nation wide presence in the form of a vast network of marketing, sales and service support centres in all metros of India. To meet the demand of its products worldwide, it has offices in Australia,Korea and USA. Now the company is gradually setting up operations in other international markets.
The company has also been rated by Forbes Asia magazine as one of the 'Best Under a Billion'.Business Mix:
The company is present in 2 segments: Digital display solutions & LED based lighting solutions
The company's digital display business enjoys major presence in malls and commercial complexes in the country. These devices are set up in high footfall areas and are used to display advertisements and public interest messages. The company has an order in Delhi to set-up digital hoardings, which will be paid for through the advertising. Also, the company has entered international business, by tying up with sports event management companies in Australia, Latin America, etc for supplying digital signboards in sports venues. Going forward, Digital display business will produce regular predictable annuity income. Company has healthy order book in LED business also.
LED based lighting solutions is a segment which is seeing high levels of interest due to the increased focus on eco-friendly technologies. The main reason for this is the technical superiority of the LED technology. LED based lights are able to generate significant cost savings over their lifetime against the CFL & incandescent technology. LED bulbs have a life-span of 100000 hours, as compared to bulbs and tubelights, which last between 1000-10000 hours. Further, the electricity consumption is much less than traditional lighting and even CFL lamps. This leads to major savings over the life time of the bulbs, despite the higher up-front cost. LED lighting technology has a payback period of 1-2 years.
The company has received orders from Railways for replacement of in-coach lights and signages with LED lights. This is a major growth booster for the company. Also, the company has a relationship with Delhi Metro for lighting its stations.
Valuation:
The stock is trading much below its pre-crash highs. The main reason for the stock's fall was that the promoters had pledged a major part of their share holding in order to raise debt for expansion. In the wake of the Satyam scandal, this caused a steep fall in the price. Also, the company is in a growth stage, and therefore it has negative free cash flows.
The company is on the verge of a re-rating. On a consolidated basis, the company has declared earnings growth of 25% in the quarter ended March '09. The current TTM P/E is 7.5.
The company consistently achieves PAT margins > 20%, and Return on Capital > 20%. The stock had a lifetime high of stock is 217 (adjusted for splits & bonuses), vs its current price of ~ Rs 40.
The stock is expected to provide multi-bagger returns in the future. The company has steady earnings growth, and also is cheap by most valuation measures.
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