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 (http://www.bseindia.com/bseplus/AnnualReport/511389/5113891211.PDF)
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 ( https://www.bourse.lu/application?&_flowId=SignEmetDocumentsFlow&numEmet=228665#SignEmetDocsInstr_showMoreDetails).
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(http://www.dishtv.in/Library/Images/DishTV-Investor-Presentation-Apr'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 (http://www.edelweiss.in/IEReport/common/content/reports/current/sector_&_company/media/2011/11/15/15112011142151/Videocon_d2h_-_visit_note-Nov-11-EDEL.pdf)
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(http://www.dealcurry.com/2012076-Videocon-To-Exit-DTH-Biz.htm)
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
