Saturday, July 28, 2012

Time to buy Videocon now at present valuations.

Videocon is perceived largely as a consumer goods company. But often, it has been in the news for its GDR issues, new new petroleum/natural gas findings of its JVs etc. Given the company’s low price to book of 0.6, possible natural resources upside, and very good technology and its grabbing market share in the digital TV market; I just had to analyze this as a potential multibagger given the possible upsides. But finding data was so difficult that I had to often remind myself of the old warning ‘If you gaze into the abyss long enough, the abyss becomes part of you’ i.e the psychological danger of getting attached/anchored to something where analysis/research has taken a lot of time. That said, lets plunge into the company itself.
The latest annual report for year ended Dec-11 can be downloaded from the BSE website ( while the Luxemburg May-12 GDR prospectus can be obtained from this link after free registration-tellingly neither this nor the annual report are uploaded on the company website but that is an indictment of the IR team actually ( The data I use is sourced from these hard to find documents, and summarized below

Hence, even stripping out the capital invested in other businesses(telecom, energy, power), the question is given the strong underlying performance of the consumer appliances division, is the market penalizing Videocon too much by assigning an equity valuation of just Rs 5355odd crores?  But then, remember the huge debt of around Rs 27000 crores(consolidated FY11 figure). Lets go business by business

1.    Consumer Electronics:- This is the mainstay of the company. Unfortunately we do not have segment profit figures to value the company. Still, even taking a profit of standalone figures to value the company of Rs 3600crores,  that needs just a P/E ratio of 9x to achieve the combined valuation, which does not seem such a challenge. Even the standalone EBITDA is around Rs 2200crores, which would entail EV/EBITDA multiple of 15x(seems much steeper challenge here).
2.     Crude Oil:-  On the energy assets of the company(details available in the annual report and press release), I’m not an energy buff, so really do not know how to value them.  I welcome comments from energy investors on this front on what multiples to assign proven reserves! Presently, the Ravva Oil & Gas Field is currently the only source of revenue in our Oil & Gas Business, so valuing this is a challenge. Still, given the May-12 board announcement of a possible spinoff to unlock value, we can get clarity about what the management has done with the funds and how the assets are  working! This segment contributed around 500crores to the company’s bottomline, as evident from standalone P&L(before interest expense). Still, given the capital commitments in the next year, spinoff would improve cash flows
3.    Telecom-Post the license cancellation, the temptation would be to assign zero value to this business, given that the mobility business is not very strong. However, a silver lining exists in telecom. As per Dish TV’s investor relations presentation('12.pdf), Videocon had 12% of the market share for digital TV. While we do not know the active base/ARPU for this business, anecdotal evidence praises both the quality and the distribution efficacy of the business. With 29% market share, Dish TV had a enterprise value of around Rs 9400 crores(equity 7200crores, debt 1200crores). Given that metric, and assuming the superior technology/subscriber adds of Videocon DTH allows the same multiples(a very big assumption but then we do not have comparable metrics for DTH), the DTH business itself should be valued around Rs 4000 crores, much more than the negative book value assigned to it as a part of telecom. Of course, as I blogged earlier, DTH is a loss leader but investors assign it a valuation for some weird reason. Even Edelweiss praises the DTH operations in this research report (  
4.    Power-With land acquisitions, coal linkages and PPAs pending for the project, it is a Herculean task to value the two power projects which Videocon has entered into. Still, book value is fair.

What works against the company is the qualitative factors like
1.    this nugget on pg6 of GDR prospectus In the past, we have made loans and advances to, and given guarantees for, and have received loans and advances from and benefited from guarantees given by certain Promoter Group entities. Some of these loans and advances are undocumented and may therefore be more difficult to enforce than if they were documented
2.     Also, we do not know much about the contract manufacturing operations revenue(presumably sale of components which makes up 11% of revenue). As described in the risk factor, We rely on the income generated by manufacturing and sales under licensed international brand names for a significant proportion of our income. If the marketability of the licensed brand names diminishes, this could have an adverse effect on our sales and results of operations. We also manufacture finished goods on an OEM basis and components for third parties. We also produce products under the brands “Electrolux”, “Philips” and “Kenstar”, which are marketed by the members of the Promoter Group. One would need more clarity on this, before giving the generous 9x P/E multiple!
3.    Promoter owns the brand, and perpetual license terminates if control changes. Also, the promoter holding is 60%+, which does not permit easy change of control(not that India business families sell out that often)

Upside triggers for the stock seems
1.    Sale of DTH business-if rumours like this one come true(
2.    Spinoff of oil and gas assets-no more expensive capex. Also, it may reduce the complexity discount/conglomerate discount attached to the stock. 
3.    Resolution of telecom 2G auction issues and possible compensation

With all 3 looking possible, this is certainly a good speculative bet. INVEST