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Philips: Will it turnaround? - Views on News from Equitymaster
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  • May 16, 2001

    Philips: Will it turnaround?

    Philips India lost a significant portion of its market share to its competitors in FY00. But the company has plans to focus on the lower end of the CTV market to boost sales in FY02 and hope to regain market share. This seems to be paying off as the company managed to cut its loss in the first quarter of the current year backed by a decent volume growth. Is this a sign of things to come?

    Philips India derives more than 75% of its revenues from the electronics segment, which includes TVs, audio systems, domestic appliances, lightning and accessories for electronics. But the contribution from its lightning division has been on the uptrend (20% of sales in FY97 to 30% in FY00). But the worrying fact is the company's declining share of consumer electronics division, which is one of the core business segments.

    Philips India had reported a 6% growth in sales in the first quarter of the current year to Rs 3,465 m. The growth in topline despite a sluggish market, though encouraging, is not expected to continue in the coming quarters. This is based on the fact that CETMA, the television manufacturers association, expected the colour TV sales to fall by 10% in FY02. The prospects of the other segments of the industry like B&W TVs and audio recorders are also bleak as CETMA expects sales to drop by 30% and 12% respectively.

    (Rs m) 1QFY01 1QFY02 Change
    Sales 3,262 3,465 6.2%
    Other Income 4 1 -75.0%
    Expenditure 3,250 3,321 2.2%
    Operating Profit (EBDIT) 12 144 1100.0%
    Operating Profit Margin (%) 0.4% 4.2%  
    Interest 76 76 0.0%
    Depreciation 59 47 -20.3%
    Profit before Tax (119) 22 -118.5%
    Extraordinary item   (86)  
    Tax - -  
    Profit after Tax/(Loss) (119) (64) -46.2%
    Net profit margin (%) -3.6% -1.8%  
    No. of Shares (eoy) (m) 45.5 45.5  
    Earnings per share* (10.5) (5.6)  

    The company has a commanding 82% market share in the CD portable segment, which is one of the fastest growing markets primarily because this segment falls between the complete CD system and mono cassette recorders. But, the audios and CDs contributed to just 14% of the company's sales in FY00 compared to 15% in FY99 (18% in FY97). Besides volume growth have been on the decline for the last three years (audio's and CD volumes dropped by 26% in FY00).

    Operating margins in the first quarter of the current year have gone up to 4.2% due to the company's ongoing restructuring exercise. It has managed to prune its workforce to 3,255 employees through a series of voluntary retirement schemes starting from FY98 (the company had a employee strength of 5,042 in FY98). The extra-ordinary item refers to the write-off of Rs 86 m on account of the VRS expenses. As a result, the company has managed to bring down its losses to Rs 64 m in 1QFY02 compared to Rs 119 m in 1QFY01.

    It has plans to focus on the 14, 20 and the 21 inches CTV segments in the coming year apart from upgrading its products on the premium segment, where 29 inch TVs are witnessing good response from the customers (currently the 21 inch CTV segment contribute to almost 75% of the total CTV sales). If Philips succeeds, it would regain its lost market share from counterparts like BPL, Videocon, Aiwa and Samsung. But this seems to be an uphill task.

    The availability of second hand CTVs in the rural areas at B&W TV prices has been affecting the B&W TV sales of the industry (these are typically the exchange sets, which are sold in the rural markets). The company is already feeling the heat in this market. The other major concern is that Philips also has interests in semiconductors, home appliances and mobile phones, where competition is in full swing. This has led to a continuous erosion in realisations in recent years.

    The stock is currently trading at Rs 53 at a P/E multiple of 27.8x on the annualised first quarter earnings (excluding extraordinary item). Given the intensity of competition in the television and the audio segment coupled with the slowing down economy, we expect the company to report a marginal 3% growth in topline. Margins, however, are expected to improve given the reduction in workforce and the fall in operating expenditure to sales in the current year. So, the turnaround is still sometime away.



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