Philips: Challenges galore - Views on News from Equitymaster

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Philips: Challenges galore

Dec 20, 2001

The consumer durable companies, after a disappointing FY01 and 1HFY02, were betting on the festive season for a higher offtake in the second half of the current fiscal. They were also pinning their hope on higher rural demand in light of higher agricultural output. But durable demand has remained subdued. We take a look at the performance of Philips India, one of the market leaders in the colour television segment (CTVs), in 1HFY02 and its future growth prospects.

(Rs m) 3QFY00 3QFY01 Change 9mFY00 9mFY01 Change
Sales 4,051 3,796 -6.3% 10,953 10,934 -0.2%
Other Income 3 11 229.4% 15 15 2.1%
Expenditure 3,919 3,569 -8.9% 10,703 10,388 -2.9%
Operating Profit (EBDIT) 132 228 72.6% 250 546 118.4%
Operating Profit Margin (%) 3.3% 6.0%   2.3% 5.0%  
Interest 58 42 -27.6% 173 132 -24.0%
Depreciation 73 71 -3.2% 221 203 -7.8%
Profit before Tax 5 127 - (129) 226 -274.7%
Extraordinary items (51) (0) -99.6% (110) (251) 128.4%
Tax (6) 17 - (45) 17 -138.2%
Profit after Tax/(Loss) (41) 109 - (194) (42) -78.4%
Net profit margin (%) -1.0% 2.9%   -1.8% -0.4%  
No. of Shares (m) 45.5 45.5        
Diluted Earnings per share* (3.6) 9.6        
P/E Ratio   10.6        

One of the significant aspects of the company's performance in the current year is the improvement in margins. The company has been emphasising on cost reduction and improving efficiency standards for quite sometime. The voluntary retirement scheme and a standardised sourcing of raw materials seems to be paying off. Margins have increased in 3QFY01 to 6%, which has been the case over the last three quarters. But margins at the operating level are significantly lower when compared with peers like BPL and MIRC whose operating margins are in the range of 7.5% to 10%. We expect the company to progressively fare better at the operating level in the coming years.

Quarterly trend...
(% YoY change) 1QFY01 2QFY01 3QFY01 9mFY01
Sales 6.2% -14.9% -6.3% -0.2%
OPM 4.1% 4.8% 6.0% 5.0%

Net loss for the first nine months of the current year stood at Rs 42 m. But if one were to exclude extraordinary items, the performance of the company is commendable (net profit of Rs 209 m). Exceptional items include - payment under employees' voluntary retirement scheme - Rs 17 m, provision for writing down the value of certain plant and machinery - Rs 101 m and profit on the sale of property - Rs 6 m.

But the prospects, going forward, are challenging indeed. Philips 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 has been on the decline for the last three years (audio's and CD volumes dropped by 26% in FY00).

On the CTV front also, the company has lost market share in the 20' and 21' inch segments in the current year. In an attempt to push growth, CTV companies have gone on an aggressive pricing spree, which has resulted in a significant fall in CTV prices in recent years. A 21' inch model, which was available in the range of Rs 11,000-Rs 12,000 around two years back is currently available at Rs 8,000-Rs 9,000. And is expected to fall further. Imports, though not a big threat at the current stage, are only going to be cheaper and consumer durable companies have it on the back of their mind. Though the cost cutting initiatives are a positive for the company. In such a competitive environment, it is a must.

We expect the company to report a 0.5% growth in sales for FY01 to Rs 14,726 m and a net loss of Rs 117 m. Operating margins are expected to touch 4.6% in FY01 as compared to 3.2% in FY00. In FY02 and FY03, Philips is expected to register a 1.9% and 2.7% growth in sales respectively.

The scrip currently trades at Rs 102 implying a P/E multiple of 10.6x annualised 3QFY01 earnings. Market capitalisation to sales works out to 0.3 times (market capitalisation is Rs 4,641 m).

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