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BPL: Trouble brewing - Views on News from Equitymaster
 
 
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  • Sep 2, 2002

    BPL: Trouble brewing

    Ever since the entry of Korean consumer durable majors, the Indian counterparts have had a run for their money. BPL is one of them. After the Cricket World Cup in 1999 when it posted record numbers, net profits have fallen at a CAGR of 28% in the last three years.

    (Rs m) 1QFY02 1QFY03 Change
    Net sales 3,003 2,113 -29.6%
    Other Income (1) 0 -
    Expenditure 2,645 1,747 -33.9%
    Operating Profit (EBDIT) 358 366 2.1%
    Operating Profit Margin (%) 11.9% 17.3%  
    Interest 175 245 40.4%
    Depreciation 73 95 31.0%
    Profit before Tax 110 26 -76.7%
    Tax 8 2 -75.0%
    Profit after Tax/(Loss) 102 24 -76.9%
    Net profit margin (%) 3.4% 1.1%  
    No. of Shares (m) 27.7 27.7  
    Diluted Earnings per share* 14.7 3.4  
    P/E Ratio (x)   15.6  
    (* annualised)      

    Despite the entry of MNCs and inroads into market share by cheaper brands like Akai and Aiwa, BPL has maintained its leadership position in the 20' inch CTV segment that account for a bulk of industry volumes. However, while the company claims that it has maintained its market share in the 20' inch segment, growth in CTV sales over the last few years have come from higher-end models, like the 29' inch category. Drastic fall in higher-end model CTV prices combined with attractive financing options have increasingly led consumers in buying such models despite higher price. To put things in perspective, MNCs like Sony with a superior product quality and brand are offering higher end CTVs with EMIs of as low as Rs 1,000 per month. It is not the case only in CTVs but also in other categories like refrigerators, audio systems, washing machines and appliances where BPL once had notable market share.

    The effect of competition is apparent in 1QFY03 performance of the company. Net sales have declined by 30%. But operating profits rose marginally in the same period on the back of surprise rise in margins. Infact, operating margins have been on the rise since 1QFY02. Crisil, one of the top rating agencies in India, downgraded BPL's non-convertible debenture issue rating in December 2001. The rating agency sighted high leverage ratios and concealment of debts during the debt issue, as the key reasons for the financial downgrade. A 40% rise in interest cost could be attributed to the same reason, as BPL was forced to raise debt at higher interest costs. This has resulted in a 77% fall in net profits in 1QFY03.

    While competition has played its part in the company's dismal performance in recent years, the management themselves are to blame for on aspects like corporate governance, which is gaining importance with investors. The involvement of the company in the 1998 stock market scam and the recent downgrade by Crisil have affected confidence in the company. Besides, conflict of interest with other group firms and unprofitable divisions like soft energy will continue to weigh heavily on BPL's future profitability. But there is still a reason to cheer. The company has stake in BPL Cellular, the second largest player in the Indian cellular industry, which is in talks with IDEA (formerly BATATA) for a possible merger. BPL might decide to capitalise on this opportunity to dilute its stake in IDEA to raise cash and retire debt.

    Nevertheless, the fundamental concerns remain intact. Firstly, the management's past track record has not been impressive and secondly, increased competition will continue to have an impact on prices and thus on profitability. Therefore, if one were to take a long-term view, it is an uphill road ahead. The stock currently trades at Rs 53 implying a P/E multiple of 15.6x 1QFY03 annualised earnings.

     

     

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