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Going digital but lacking focus - Views on News from Equitymaster
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  • Nov 17, 2001

    Going digital but lacking focus

    One of the key differentiating factors in the highly competitive consumer electronics segment is the ability to churn out technologically improved models so as to keep volume growth ticking. And improved technology is nothing new to BPL Limited, one of the market leaders in the durables segment. Nevertheless, the company has been losing out on various other fronts and thus has had to bear the brunt of competition.

    BPL is one of the leading consumer electronics major and is the market leader in the Indian colour television segment (CTV). Apart from CTVs, other interests range from audio systems, healthcare & medical equipment, telecom equipment, refrigerators, microwaves, alkaline batteries and gas tables. Through investment in its various associate companies, BPL has ventured into consumer electronics component manufacturing, telecommunication & wireless services, networking technology and power generation.

    Sales mix…
    Category FY99 FY00 FY01
    CTV 49.9% 57.5% 58.5%
    Home appliances 10.7% 8.6% 7.7%
    B&W TV 7.1% 8.0% 5.9%
    Refrigerators 10.3% 9.9% 9.5%
    Audio 7.2% 2.5% 1.7%
    Soft Energy 1.1% 2.7% 0.7%
    Total 86.4% 89.1% 83.8%

    BPL derives close to 93.1% of its turnover from the domestic market. Colour television sales contributed to 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 stiff competition. To put things in perspective, average realisation per unit has come down from Rs 13,712 in FY98 to Rs 9,784 per unit in FY01. The reasons for this are multifold. Firstly, the industry has become highly competitive, especially, after the entry of the Korean majors like Samsung and LG (not to leave out players like Akai, Aiwa and TCL). Secondly, exchange sets that have made their way to the rural markets are adding to the woes of TV manufacturers like BPL. Lastly, the economy has been slowing down over the last two years due to poor agricultural growth, thus resulting in lower CTV demand (FY99 was a exception thanks to the cricket world cup).

    But BPL plans to buck the trend in the current year by focusing on the 14, 20 and 21 inch segments that account for a bulk of the industry volumes. BPL has also addressed the issue of new models through introduction of 'Matrix' and 'Prima' range of sets. It plans to introduce one new model per quarter in the current year to keep volumes ticking. Through these initiatives BPL intends to increase its market share from 19% in FY01 to 21% in FY02 in the CTV segment.

    Since BPL is also 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 81% in FY01.

    Apart from CTVs, BPL is also a market leader in the frost-free refrigerator segment with a commanding 22% market share. Through new product introductions, it is aiming at a 30% market share in FY02. However, the company has been slowly losing out to multinationals and as a result margins have come under pressure. The same is the case in other areas like home appliances, audio systems and washing machines. Contribution from these divisions has come down from 26% of sales in FY99 to 18% in FY01. The trend is expected to continue in the coming years also.

    Exports is another area where BPL plans to create a strong foothold. Contribution of exports to sales have gone up from 2.8% in FY98 to 6.9% in FY01. The company intends to double exports in the current financial year to Rs 2.5 bn, a growth of 114%.

    However, exports had fallen in FY01 due to a slowdown in CTV demand by 5% (CTV exports accounted for 34% of total exports and 2.3% of BPL’s sales in FY01). Prospects in the current fiscal are not promising either. Given the slowdown in the global economy and the recent political unrest, the export target for FY02 seems ambitious.

    Even in the domestic market front, things are quite challenging. Though agricultural output, one of the key factors that determines rural demand for CTVs, is expected to increase on the back of a good monsoon, CTV volume growth is expected to be modest. Besides, value growth also seems rather unlikely and we expect a 5% fall in CTV realisations for the company in FY02. Further, with India coming under the purview of WTO, threat of cheaper imports cannot be ruled out.

    The performance of the company in the current year clearly mirrors this trend. BPL registered a sharp 46% drop in net profit for 1QFY02 on the back of a 19% decline in sales. Though it managed to improve its margins at the operating level, higher interest and depreciation costs dragged down net profit in 1QFY02. BPL has discontinued the sales of dry cell batteries and emergency lanterns, which are now being sold directly by the subsidiary company, BPL Soft Energy Systems Limited. The turnover of dry cell batteries and emergency lanterns during the corresponding period of the previous year was Rs 110 m. If one were to exclude the transfer of the division, sales have dropped by 16.8% in 1QFY02. For FY02, BPL is expected to report atleast a 15% fall in net profits.

    The slowdown effect…
    (Rs m) 1QFY01 1QFY02 Change
    Sales 3,721 3,003 -19.3%
    Other Income - (1)  
    Expenditure 3,371 2,645 -21.5%
    Operating Profit (EBDIT) 350 358 2.3%
    Operating Profit Margin (%) 9.4% 11.9%  
    Interest 79 175 120.9%
    Depreciation 66 73 10.0%
    Profit before Tax 205 110 -46.3%
    Tax 15 8 -46.7%
    Profit after Tax/(Loss) 190 102 -46.3%
    Net profit margin (%) 5.1% 3.4%  
    No. of Shares (eoy) (m) 27.7 27.7  
    Earnings per share (Rs)* 27.4 14.7  
    (* annualised)      

    One of the key concerns for BPL is its complex group holding structure. BPL has group companies like BS Appliances Limited (formerly BPL Sanyo Utilities), BPL Refrigeration and BPL Sanyo Limited operating in similar fields that compete with the parent company. Over the years, these companies have been continuously losing market share and profitability has also worsened. Also, the Securities Exchange Board of India (SEBI) has barred BPL from accessing primary markets in light of its involvement with the 1998 stock market scam. Further, the company’s investments in power, telecom and information technology have also raised apprehensions about the focus of management.

    Comparative valuations…
    (Rs m) BPL Philips MIRC
    Price (Rs) 69 59 490
    Number of shares (m) 27.7 45.5 7.0
    EPS (Rs) 29.3 (7.5) 424.0
    P/E (x) 2.4 - 1.2
    Sales 15,588 14,657 7,152
    PAT 812 (342) 297
    Market Capitalisation 1,911 2,686 3,443
    GPM (%) 11.0% 3.2% 7.7%
    Market cap/sales (x) 0.1 0.2 0.5

    The scrip is currently trading at Rs 53 on a P/E multiple of 3.5x 1QFY02 annualised earnings. Compared to a market capitalisation of Rs 15,235 m in August 1999, the current market capitalisation is just Rs 1,468 m. This is 90% erosion in value. Market capitalisation to sales works out to 0.1x and its price to book value is just 0.2x. Despite its leadership position and comparatively higher operating margins in the consumer electronics sector, it is one of the cheapest stocks available in the market due to the above reasons. It will take a while for BPL to address these issues and come out of the woods.



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