Going global

SPECIAL STORY

Videocon International is poised to ride the boom in the consumer durable segment.

Videocon International, one of the leading consumer durable companies in the country, has been in the news.

Last week, the Videocon group announced its acquisition of the colour tube manufacturing business of France's Thomson SA. The deal was struck for euros 240 million, which in rupee terms translates into about Rs 1,265 crore.

Videocon International manufactures televisions, washing machines, refrigerators, air conditioners, air coolers, VCRs, VCPs and audio systems.

The acquisition of Thomson's colour television tube businesses spread over China, Mexico and Poland will be done through the Videocon group's off shore entity in which Videocon International has a 19 per cent stake. Earlier this year, the group had bought Thomson's tube manufacturing facility at Italy for an undisclosed amount.

According to the deal, Thomson's tube business will be transferred to Videocon free of net cash or debt. Thomson SA will then put in euros 240 million (the value of Thomson's tube business) into two listed Videocon companies in return for shares and an option to get out after three years.

Of this, euros 225 million will go into Videocon Industries (which is mainly in the energy sector) and euros 15 million (Rs 79 crore) into Videocon International.

According to analysts, the impact of this deal on Videocon International would largely depend on how the acquired business will perform.

As mentioned earlier, Videocon International will have only a 19 per cent exposure to the acquired business and hence will benefit to that extent.

The acquisition will give Videocon CPT (colour picture tube) manufacturing capacities of 19 million a year - translating into euros 850 million (Rs 4,547 crore) in annual sales - spread over Poland, Mexico and China, along with R&D facilities in Europe and China.

Along with its existing 17-million capacity in India, being expanded to 24 millions, this acquisition will make Videocon the fourth-largest CPT maker in the world after Matsushita, Samsung and Philips.

Even before the acquisition the counter witnessed active buying interest, following reports of the company's intention to buy out the troubled Indian subsidiary of Swedish white goods company AB Electrolux.

However, nothing has been confirmed on that front yet. The buzz about company's overseas forays has proved a boon to the stock in the short term.

The Videocon International stock, which has the third-highest weightage in the BSE Consumer Durables Index at 16.72 per cent, has risen about 125 per cent in the past year to its current levels of Rs 72.

The consumer durable stock has not been alone in its ascent, when one considers the fact that it was more of a sector phenomenon. In fact, the BSE Consumer Durables Index has been the biggest gainer among all major indices in the BSE and the NSE.

The index has been the only one to clock three-digit growth returns (124.64 per cent) during the period, with the next best returns posted by the CNX Midcap 200 Index (96.67 per cent).

Thus it is clear that it has also benefited from the good sentiment prevailing in the markets in general and especially in the consumer durable sector.

For the quarter ended March 31, 2005, Videocon International posted an 8.30 per cent rise in net profit to Rs 50.34 crore on net sales of Rs 1,135.26 crore which went up by 8.77 per cent.

While the consumer electronics division registered a 10.08 per cent rise in sales to Rs 3,297.99 crore, the company's glass shell (used in the manufacture of TVs) business posted a 14.33 per cent rise in revenues to Rs 692.48 crore.

Analysts note that the Rs 200 billion consumer durable industry has been on an upswing in 2004. Videocon, being one of the significant players in the industry, is expected to ride the boom in the sector. As of last year, the company has a market-share of more than 10 per cent in colour televisions and refrigerators.

It is also one of the top players in the washing machine segment with more than 20 per cent market-share.

Considering the low penetration levels, the market is expected to surge for domestic as well as foreign companies, say analysts. But on the downside, the companies in the sector, including Videocon, will be facing the heat from foreign white goods players like LG and Samsung. 
 

Financials
(In Rs cr)	Q2FY05	Q2FY04	% change	FY04	FY03	% change
Net sales	1135.26	1043.68	8.77	3990.4	3601.53	10.8
Other income	3.82	1.58	141.77	7.49	2.69	178.44
Operating profit	160.95	159.57	0.86	607.48	569.39	6.69
OPM (%)	14.18	15.29	-	15.22	15.81	-
Net profit	50.34	46.48	8.30	177.48	104.94	69.13
NPM (%)	4.43	4.45	-	4.45	2.91	-
EPS (Rs)	7.07	6.53	-	24.92	14.95	-
Trailing 12-month P/E						2.67

In terms of valuations, the company is one of the cheapest in the sector and trades at a trailing 12-month P/E of 2.67, which is attractive when compared to other players in the market like Samtel Color (6x) and Mirc Electronics (9x).

"The stock has resistance levels at Rs 73 and it needs to trade consistently above that level to maintain its momentum," notes Vijay Bhambwani, chief executive of BSPLIndia.com.

"The stock has support levels at Rs 66 and if it manages to stay above that it could go up to Rs 82 in the short-term," he adds.

SPL IPO looks good
IPO REVIEW

Faridabad-based garment export company SPL Industries is the latest in the the IPO market. The offer for 90 lakh equity shares comes at a price band of Rs 60-70.

The money raised (Rs 54-63 crore) through the issue will be used for setting up a yarn-dyeing plant and a plant to manufacture garments from woven cloth, apart from expanding its existing capacities in knitting, dyeing and manufacture of home furnishings and embroidery.

Currently, SPL has five factories in Faridabad which manufacture T-shirts, sweat shirts, polos, golfers, sweaters, ladies' tops and kids' garments. SPL sells almost 95 per cent of its total production to overseas markets like USA, Europe, Canada and Japan. Its major customers are Gap, JC Penney, Kohl's, Haggars, Sears and PVH.

At present SPL has a capacity of 9 million knitted garments per annum, which is slated to increase to 13.2 million after the expansion.

Knitted dyed fabric capacity is expected to increase from 6000 tonnes to 8500 tonnes. The expansion will enhance the company's woven garment capacity to 1.8 million units and home furnishings capacity to 1.2 million sets.

According to analysts, textiles exports to US have picked up substantially after the quota regime was abandoned in the beginning of this year. India's competitive strengths in the textiles business is well known.

However, exporters have been facing pressure on margins despite the strong demand. This has prevented many players from setting up enough additional capacity.

However, sustained demand is expected from US and EU because the plants in those regions have been closing down, which has shifted focus to cost-competitive manufacturers like India.

In FY05, SPL clocked sales of Rs 171.12 crore. Sales growth was a modest 11.2 per cent. However, earnings grew at a faster clip (177 per cent) to Rs 11.9 crore. Based on FY05 earnings per share of Rs 6, the P/E ratio for the stock should be around 10.

Compared to the valuations of other textiles companies like Welspun India: 19.22 and Nahar Spinning: 21.86, the SPL IPO looks favourably priced.