BPL is one of the key losers on the bourses over the last two years. Compared to a market capitalisation of Rs 15,235 m in August 1999, the current market capitalisation is just Rs 1,080 m, a 92% erosion in value. What are the reasons for such a drastic fall?
The colour television sales contributed to around 56% of BPL’s FY01 turnover. Though volumes have increased at a CAGR of 15% over the last five years, prices have been on the decline due higher competition. Going forward, majority of the consumer durable companies are aggressively tapping the 14, 20 and 21 inches segments, which account for a bulk of the CTV market. However, over the last few years, the 29’ inch models as well as flat screen TV sales have gone up leaps and bounds. Infact, it is believed that flat screen CTV sales will account for as high as 50% of the upper end industry volumes in coming years. BPL has also addressed the issue of new models in all these segments through introduction of ‘Matrix’ and ‘Prima ‘ range of sets. The company plans to increase its market share to 21% in FY02 from 19% in FY01.
Since BPL is integrated backwards, it plans to leverage on its costs advantage. Over the years, raw material sourced through imports has been on the decline. Indigenous value of raw materials, spares and components as a percentage of total raw materials consumed stood at 80.8% in FY01 as compared to 80.6% in FY00. However, backward integration also has its inherent disadvantages. The costs of components manufactured in the South East Asian markets are believed to be amongst the lowest in the world. Given the slow down in the US economy (one of their key consumer segment), these countries could lower their costs even further in light of falling sales. This might pressurize margins of BPL.
Towards improving margins, a major thrust on exports has been envisaged. BPL plans to achieve an export target of Rs 2.5 bn (Rs 1.2 bn in FY01 or 6.9% of sales) in the coming year through higher CTV, refrigerators and component sales. But given the slow down in the global economy, doubling exports seems to be unlikely. Infact, in FY01, exports had come down by 4.9% to Rs 1.2 bn.
On the domestic front also, the slow down in the economy and higher competition have had a significant impact on realisations of the company. While CTV and home theatre system sales fell by 12.7% in FY01, per unit realisation was lower by 20% at Rs 9,806 per CTV (Rs 10,108 per CTV in FY00). The scenario is no different for all the other segments like refrigerators, audio systems, soft energy products and consumer telecom products. Though the company managed to increase margins in 1QFY02 by shedding flab, sales fell by a sharp 19.3% to Rs 3,003 m.
Though CTV volumes seem to have shown positive growth in the last two months it remains to be seen whether volumes sustain throughout the year. But there is one consolation. Agricultural output, one of the key factors that determine rural demand for CTVs, is expected to increase on the back of a good monsoon. Though this might result in higher volumes, value growth seems rather unlikely (a 3%-5% fall in CTV prices is the industry norm on a yearly basis). Besides, the second hand CTVs have flooded the rural markets in recent years on account of promotional schemes by durable companies, which also might add to the woes of BPL.
The other key concern in the group’s complex holding pattern. BPL has group companies like BS Appliances Limited (formerly BPL Sanyo Utilities), BPL Refrigeration and BPL Sanyo Limited operate in similar fields like BPL Limited. This combined with the recent ruling by the Securities and Exchange of Board of India (SEBI) of banning the company from the primary market in relation with its alleged involvement in 1998 scam has affected valuations of the company.
The scrip is currently trading at Rs 39 at a P/E multiple of 2.6x annualised 1QFY02 earnings. The price to book value works out to 0.2x. Market capitalisation to sales is a meager 0.1x. Though the company has taken an aggressive stand to increase its market share, concerns still cloud positives.