Description
Research Report on Videocon Industries
BUY
VIDEOCON RESEARCH REPORT
Highlights of Videocon Industries
1. India’s no 1 consumer electronic and home appliances company. 2. Videocon operates through four key sectors: Consumer Durables, Thomson CPT, 3. CRT Glass, and Oil and Gas. 4. In the consumer durables segment, the company offers products such as televisions, 5. DVD players, multimedia speakers, washing machines, refrigerators, microwave 6. ovens, and air conditioners 7. 30% market share in consumer electronics 8. Serves lower, middle and premium segment 9. Wide distribution network 10. Largest TV producer in the world but the Tv technology is getting outdated and hence it has to go into LCDs
Investment arguments
1. 2. 3. 4. 5. Foray into retail and telecom Huge capital expenditure Leading sales in Television and other consumer durables Foray into DTH Maintanable PBT
Videocon products portal
1. 2. 3. 4. 5. 6. 7. 8. 9. Consumer Durables & Electronics Appliances Oil & Natural Gas Exploration DTH Retail Telecom Power Broadband Semiconductors Photovoltaic cells
10. 11. 12. 13. 14.
Digital Imaging SEZ Steel News Channel Hospitality
Share price
Beta = 0.86 The share price of the company ahs been moving in accordance with the Sensex. However, there have been events when the share price has shown extraordinary variance with the Sensex. The following events explain the deviation of the share price from the sensex movement: 1. June 2004 to September 2004 : amalgamation of Petrocon cash rich company with videocon 2. March 2005 to May 2005 : After payment of dvidends 3. Dec 2007 : Due to rumors of acquisition of onida 4. Sept 2008 : Vediocon Bharat petroleum venture aquire brazilium firm Encana firm 5. April 2009 : Video con to launch DTH service
Share holding pattern
Financial performance
1. Sales turnover is Rs 8198.808 cr as compared to Rs 8197.53 cr
last year. This is because of 58% dip in revenues in crude oil and natural gas segment in the last 3 quarters 2. EBITDA margin is 18% as compared to 22% last year PBIT as a percentage Consumer Electronics & Home Crude Oil & of sales Year Appliances Natural Gas 2005 8.10% 19.91% 2006 4.19% 34.92% 2007 5.73% 31.40% 2008 11.49% 30.11% 3. Oil and gas segment achieves higher operating profit margin. 4. The electronics segment margins are getting shrinked. 5. Huge capital expenditure has been done for the oil and gas exploration and expected further more in the next 2 years in telecom. Future expansions • Videocon is eyeing 1 crore DTH subscribers, 15 lakhs in 2009 and continuing with the same addition every year. • The company has already got 2G licenses in GSM telecom in 21 circles and has applies for 3G licenses via its subsidiary Datacomm.
• •
The company has huge capex plans for telecom(6000 cr. In next two years)and oil business. The company plans to expand the wholesale cash and carry business with the setting up of 60 stores at an investment of Rs 2000 crores in the next 3 years.
Key financial highlights
Videocon 2006 2007 35.20 % 12.97 % 6.08% 4.8% 6.0% 5% 36.69 % 16.75 % 5.74% 4.3% 5.0% 6% LG 2007 34.2 % 4.7% 2.0% 8.6% 10.1 % 21% SAMSUN G 2008
2005 Gross Profit Margin Operating Profit Margin Net Profit Margin Return on Assets Return on Investment ROCE 37.07 % 13.67 % 6.67% 4.1% 5.1% 5%
2008 44.82 % 21.82 % 9.25% 6.0% 6.0% 6%
29.7% 3.8% 1.6% 5.7% 13.6% 23%
Dupont: Net Profit Margin Asset Turnover Ratio Financial leverage ROE
2005 0.0667 0.7425 57 2.3665 41 12%
2006 0.0607 91 0.7425 57 2.4355 09 11%
2007 0.0574 33 0.7425 57 2.3639 01 10%
2008 0.092459 189 0.647382 401 2.670172 854 16%
2007 0.0197 19 3.3987 98 1.6487 35 23%
2008 0.0160 39 5.1252 69 1.3010 54 42%
Thus from the above table it is very evident that the ROE of the company if increasing and this is due to the increase in debt that the company has undertaken. Also, the net profit margin has decreased and the asset turnover ratio has increased.
The sales turnover has been increasing except for the last year as this effect was due to the decrease in the revenues from the balance sheet
The asset turnover decreased drastically in the last year. This is due to reduction in sales and increase in the assets.
The EBITDA as a % of sales has decreased in the last year again due to the less revenues and more costs.
Product Segment overview
Consumer Durables and Electronics Appliances The products under the consumer durables and electronic appliances for the company are as follows:
Brown goods White goods
Small domestic Appliances
Colour televisions, CDs, DVDs, Camcorders,Video game consoles Air conditioners, Refrigerators, Dish washers, Drying cabinets, Microwave overs, washing machines. Iron, vacuum cleaners and purifiers
The total turnover of the consumer and durables industry is <> The growth rate of this segment is <> Oil industry: The company has a good venture in the oil business. The total turnover of the segment is 19076 crores.
Financial Statement Analysis Liquidity Ratios
Liquidity Ratios Sep Sep 30th 30th 2007 2008 4.18 8.19
Ratio
Analysis Current Ratio
The current ratio gives the Quick Ratio: 3.18 6.78 liquidity position of the company. It Cash Ratio 0.91 1.43 indicates the ability of Cash Debt the firm to pay their coverage 13% 2% short term liabilities. Debt income The current ratio for ratio 4.57 4.88 Videocon Industries was 4.18 for the year Working capital 6,216.21 7,946.88 ended 30th Sept, 2007 Working capital and increased to 8.19 from operations for the year ended to current liabilities 38% 21% 30th Sept, 2008. i.e. it has doubled. Ideally the current ratio should be 2:1, but with proper cash management and CCC management it could be lower. The current assets have increased. This is mainly due to increase in Loans and Advances. Of the other items Inventories, Sundry debtors and Cash at Bank have reduced indicating that they are collecting from their debtors at a much faster rate. This is evident from their Days Receivable which has decreased. The current liabilities, on the other hand, have decreased. There is a drastic reduction in the sundry creditors and in the bank overdraft from 2007 to 2008.
Current Ratio:
Quick ratio
The quick ratio does not take into consideration the inventories, only the readily liquid assets. The quick ratio for Videocon is 3.18 in 2007 and 6.78 in 2008.
Cash Ratio:
This measures the immediate cash available to satisfy short term debt. The cash ratio of the company has increased from 0.91 on 2007 to 1.43 in 2008. Though the cash at bank has reduced over the period, the current liabilities have decreased by a higher proportion hence leading to an improvement in the cash ratio.
Cash Debt Coverage ratio:
This ratio gives the percentage of debt that current cash flow can offset. In the year ended 2007, the percentage is 13 i.e. 13% of the debt can be borne by the current cash flow. This has reduced to only 2% for the year ended 2008. This is because the cash flow from operations has decreased drastically over the year. There is a decrease of 72%. This is mainly due to a change in the loans and advances (more conceded) and the current liabilities.
Debt income ratio:
This measures the amount of debt as a proportion of the net income. Videocon has a debt of 6952 Cr in 2007 which increased to 11,339 Cr in 2008. But the net income has also increased in a similar proportion hence this ratio is roughly same for both the years, 4.57 in 2007 and 4.88 in 2008.
Working capital:
The working capital has increased by 28%. Working capital indicates the amount of capital available for the company’s day-to-day activities. An increase of 28% in the working capital is an indication of better profits realised and better management of current assets and liabilities.
Working capital from operations to current liabilities:
This ratio measures the degree to which internally generated working capital is available to satisfy obligations. This ratio dropped from 38% in 2007, to 21% in 2008. The operating profit before working capital changes is higher in 2008 than in 2007. But since the changes in working capital are more in 2008, the net cash generated from operations is lesser in 2008.
Efficiency ratios:
EFFICIENCY RATIOS Inventory Turnover Days Inventory in stock Receivables Turnover Days Receivables Payables Turnover Days Payable Operating cycle Cash To Cash Cycle Payment period to operating cycle 4.12 87.38 5.56 64.74 4.55 79.17 152.12 72.96 4.09 88.08 6.72 53.57 5.70 63.11 141.65 78.54
0.52
0.45
Asset turnover ratio
74%
65%
Inventory turnover:
This ratio measures the liquidity of the inventory i.e. the number of times the inventory is sold during the period. This has pretty much remained the same over the 2 years. It was 4.12 in 2007 and has decreased slightly in 2008 to 4.09. This is because the COGS and the Inventory has reduced from 2007 to 2008. For the consumer durables industry and the Oil& Gas industry, an inventory turnover ratio of 4-5 indicates good performance.
Days Sold Inventory:
This converts the inventory turnover into days. Gives us the number of days required to sell the entire inventory in a period. This was 87.38 days in 2007 and has increased slightly to 88.08 in 2008.
Receivables turnover:
This ratio determines the effectiveness of the company to collect from their debtors i.e. the number of times the company collects its receivables in the given period. For Videocon it has increased from 5.56 in 2007 to 6.72 in 2008.
Days Receivables:
This ratio indicates the number of days that the company takes to collect the receivables from their debtors. This number was 64.74 in 2007 and reduced to 53.57 in 2008. This is a sign that they started collecting sooner.
Payables turnover:
This determines the number of times the company pays its creditors the amount it owes them. In 2007 it was 4.55 in 2007 and has increased to 5.70 in 2008. i.e. they are paying more number of times in a year.
Days payable:
This gives the actual days taken to pay back what the company owes to its creditors. In 2007 it was 79.17 days and in 2008 it has reduced to 63.11 days. This indicates that they are paying earlier. This violates the rule of “pay as late as possible”. This is the reason why their net cash from operations has suffered.
Operating cycle:
The operating cycle is the average time between purchasing or acquiring inventory and receiving cash proceeds from its sale. In 2007 the operating cycle was 152.12 days and has reduced to 141.65 in 2008.
Cash to Cash Cycle:
This cycle shows the number of days the company has to finance its own stocks. It measures the number of days between the initial cash outflow (when company pays suppliers) to the time it receives cash from customers. In 2007 it was 72.96 and has increased to 78.54 in 2008. This is not a good sign. The CCC should always be less.
Payment period to operating cycle:
This indicates the company’s vulnerability to the supplier’s terms of payments. A high value indicates that the company is more vulnerable. In 2007 it was 0.52 and in 2008 it reduced to 0.45. This indicates that the risk of supplier changing the terms of payment reduced over the period.
Profitability Ratios:
PROFITABILITY RATIOS Gross Profit Margin 37% Operating Profit Margin 8% Net Profit Margin 6% ROE Dupont: Net Profit Margin Asset Turnover Ratio Financial leverage 2.36 ROE Return on Assets Return on Investment Times interest earned ratio 10% 6% 74% 2.67 10% 4% 5% 2.02 2.40 16% 6% 6% 45% 11% 9% 16% 9% 65%
Gross Profit Margin:
It indicates the proportion of profits over the sales. Profit a business makes on its cost of sales. It was 37% in 2007 and increased to 45% in 2008. This is not a clear indicator of profitability since the sales have reduced.
Operating Profit Margin:
The operating profit margin indicates how much profit a company makes after paying for variable costs of production such as wages, raw materials, etc. It shows the efficiency of a company controlling the costs and expenses associated with its business operations. It was 8% for the year ended sept 2007 and increased to 11% for the year 2008. Also known as Return on Sales.
Net profit margin:
This indicates how much profit a company makes after interest, depreciation and taxes. It was 6% in 2007 and increased to 9% in 2008.
Asset turnover ratio:
This is a measure of how much a company’s assets are being sweated. For Videocon Industries, it decreased from 74% to 65%. This is due to reduction in sales by 2% and increase in the assets. Going forward this ratio should increase.
ROE ( Return on Equity):
This ratio indicates the proportion of income that results out of the equity. Equity includes shareholders’ funds and reserves& surplus. This value was 10% in 2007 and increased to 16% in 2008.
Dupont Analysis:
• • • ROE can be broken into 3 parts Net profit margin Asset turnover Financial leverage
Thus ROE = Net profit margin * Asset turnover * Financial leverage = 0.06 * 0.74 * 2.36 = 0.1
Return on Assets:
It is a measure of a company’s profitability expressed as a percentage of total assets. In 2007 it was 4% and grew to 6% in 2008. This is due to increase in PAT.
Return on Investment (ROI)
ROI is a measure of the performance of any investment, indicating the benefit vs the cost of the investment. It has increased from 5% to 6%.
Times interest earned ratio:
This is a measure of a company’s ability to honour its debt payments. It has increased from 2.02 to 2.4%. Generally it is a warning sign if the times interest earned ratio falls lower than 2.5. SOLVENCY RATIOS SOLVENCY RATIOS Debt to equity ratio 1.00 1.65 Defensive interval period 763.52 760.25 Equity
multiplier
2.36
2.67
Debt equity ratio:
This ratio indicates how much the company is levered. Solvency is the ability of the company to pay the long term obligations. The debt equity ratio has increased from 1.0 to 1.65 during the period.
Defensive Interval Period:
This indicates how long a company can operate on liquid assets without revenues. For Videocon this ratio was 763 days in 2007 and reduced to 760 days in 2008.
Equity multiplier:
The equity multiplier ratio is the factor by which the assets grew from the use of debt. This has increased from 2.36 to 2.67. Quality of Earnings: The concept of earnings quality has roots in the judgmental nature of accounting, which can be seen in the fact the different parties may interpret the economics underlying a transaction differently, and different firms may have different business characteristics. Other ways accounting choices can lower a firm's earnings quality include[1] ? Recording revenue too soon or of questionable quality,
? ? ? ? ? ?
Recording fictitious revenue, Boosting income with one-time gains, Shifting current expense to a different period, Failing to record or improperly reducing liabilities, Shifting current revenue to a later period, and Shifting future expenses to the current period as a special charge
1) A recent circular (New Circular) dated 8 June 2007 issued by the Reserve Bank of India (RBI) states that only those preference shares that are fully and mandatorily convertible into equity shares within a specified time will be considered a part of the investee company’s share capital. Also only such preference shares will be issued to foreign investors under the automatic approval route (that is, without requiring permission from the ministry of commerce).
Foreign investments in non-convertible, optionally convertible or partially convertible preference shares are now considered to be debt finance, that is, akin to a loan, and are required to conform to the stringent guidelines relating to external commercial borrowings (ECBs). Videocon industries has successfully incorporated this norm. Their share capital reflects equity shares and only those preference shares which are fully convertible into equity.
Quality of earnings
Repeatable and controllable earnings:200 4-05 Adjusted 381 PBT(Unconsolidated) .35 6.8 As a percentage of sales 9% Other income as a percentage of total income Income from exchange rate fluctuation as a percentage of total income 6.89 % 0.33 % 200 5-06 748. 23 9.87 % 9.87 % 0.23 % 200 6-07 916 .55 10. 52% 10.5 2% 1.01 % 20 07-08 12 65.96 12. 53% 12 .53% 0. 00%
Earnings adjusted for exceptional and non-recurring, non-operational items are showing a growth trend as a percentage of sales. Uncontrollable earnings due to fluctuation in exchange rate are excluded. This shows that the earnings are maintainable and sustainable in the core business of consumer durables and home appliances and crude and natural gas. Bankable earnings:2 2 2 2 00400500600705 06 07 08 Cash flow from 1 1 operations 1814.08 351.72 133.68 1193.44 Cash flow from operations is not showing a favorable trend although it was positive in 2005-06 and 2006-07. Cash flow was negative in 2007-08 primarily because of exchange rate fluctuations, huge debtors, inventories and loans and advances. 200 2 2 200
4-05 Doubtful debts as a percentage of sales 0.46 %
00506
006-07 7-08 0 0. .51% 47%
0.45 %
Doubtful debts are not changing as a percentage of sales. This shows that the quality of earnings is consistent. Off balance-sheet risk:The company has a whopping (5,057.10) crore Rs. of contingent liabilities and
negligible amount of operating leases. Hence contingent liabilities are a potential risk to company’s healthy earnings.
External risk:2 00405 Net Forex earnings / -expenditure 3 068.31 1 3 330.97 8 297.5 1 00506 741.8 6 2 2 2 006-07 007-08 558.29 789.31
Loans in Indian rupees Loans in foreign currency
This shows that company’s earnings are exposed to exchange rate risk. Company provides for fluctuations in currency as and when required. Company has outstanding sales tax deferment loan from which it will benefit from future foregoing interest obligations. Company has Outstanding 41820 FCCBs of US $1000each due on 7th March, 2011 at 116.738% of its principal amount. The bonds are convertible at the option of the bondholders at any time on and after 20th March 2006 upto the close of business on 28th February, 2011 at a fixed exchange rate of Rs.44.145 per 1 US$ and at initial conversion price of Rs.545.24 per share being at premium of 15% over the reference share price. It also has Outstanding 66,651 Foreign Currency Convertible Bonds of US$ 1000 each (Bonds) due at least 130% of the accreted principal amount. The bonds are convertible at the option of the bondholders at any time or after 2nd September 2006 until 18th July 2011
except for certain closed periods, at a fixed exchange rate of Rs.46.318 per 1 US$ and at initial conversion price of Rs.511.18 per share being at premium of 22% over reference share price. The company has to reduce the share price over which the bonds can be converted otherwise they will not be converted and as a result the company will have a huge debt obligation which will ruin its earnings quality. The input to raw materials to crude oil business is dependent on commodity prices.
Acquisitions:Videocon has done 11 acquisitions in 2007-08. All of the subsidiaries have led to a negative effect on P & L. Hence the management needs to focus more on their profitability. Valuations:The valuation of the company to find out the intrinsic value of the share has been calculated by three methods:• Market comparable(PECV) • • • Net Asset Value Discounted cash flow Market price method Videocon Value per Share
Method
Weigh t
Product
Net Assets Method PECV Method Market Price Method Discounted cash flow Total
144.89 792.02298 36 209.59 325.80382 61
1 2 2 3 8
144.89 792.0229836 419.17 977.4114782 2,333.50
Fair Value per share
291.69
The fair value of share comes out to be 303.78 which shows that it is a buy recommendation as the share is trading at 255 Rs. Discounted Cash flow:• Three stage growth model using percentage of sales method for independently consumer durables and oil based on past four years average and for telecom based on market players in telecom(Bharti Airtel) • • Telecom sales projections are done conservatively based on ARPU taking inflation into consideration. Consumer durables and home appliances division:-Growth rate for next 4 years is taken as 15% as the company is foraying into DTH which will lead to increase in growth in sales. 15% is a very conservative figure when market is expected to grow at 22% CAGR. Thereafter for next 6 years till 2019 the growth is reduced from 10% to 4% and then a steady growth of 2% is taken for ever in maturity as per current growth in US. Crude oil division is estimated at 5% as natural gas market is expected to grow at 7.5% and oil business at 2.5%. Cost of capital comes out to be 9.07% using market premium of 11% and beta of .8 and risk free rate of 7.4%. PECV:Maintainable PBT adjusted for exceptional and non-recurring, nonoperational items is calculated and adjusted for investments, contingent liabilities and deposits. PE multiple of 4.37(intrinsic value) is taken as expectation. • NAV:Net asset value is taken for valuing the share price.
• •
•
•
Future expansions:• Videocon is eyeing 1 crore DTH subscribers, 15 lakhs in 2009 and continuing with the same addition every year. • • The company has already got 2G licenses in GSM telecom in 21 circles and has applies for 3G licenses via its subsidiary Datacomm. The company has huge capex plans for telecom(6000 cr. In next two years)and oil business.
DUE DILIGENCE
Legal due diligence As per the terms of the 42,00,000 Non Convertible Debentures of Rs.100/- each, aggregating to Rs.420.00 million shown under “Secured Loans”, the date of redemption is 20th November, 2006. These debentures were held as such pending the implementation of the arrangement for the equity contributions into a group company by its JV partner, pending regulatory compliances. There are series of disputes between the said group company and its JV partner, currently in the arbitration. The company has been legally advised that there will not be any liability either on account of the redemption or as the case may be, for the coupon payments pertaining to these debentures. In view of this, although the principal amount of debentures has been shown under the head “Secured Loans’, no provision for interest payable on the same and towards the redemption amount has been made in the books of accounts In respect of joint ventures in the nature of Production Sharing Contracts (PSC) entered into by the Company for oil and gas exploration and production activities, the Company’s share in the assets and liabilities
as well as income and expenditure of Joint Venture Operations are accounted for according to the Participating Interest of the Company as per the PSC and the Joint Operating Agreements on a line-by-line basis in the Company’s
Financial Due diligence
The financial statements are prepared under historical cost convention, except for certain Fixed Assets which are revalued, using the accrual system of accounting in accordance with the accounting Principles Generally Accepted in India (Indian GAAP) and the requirements of the Companies Act, 1956, including the mandatory Accounting Standards issued by the Institute of Chartered Accountants of India, as referred to in Section 211 (3C) of the Companies Act, 1956. The Company provides depreciation on fixed assets held in India on written down value method in the manner and at the rates specified in the Schedule XIV to the Companies Act, 1956 except a) on Fixed Assets of Consumer Electronics Divisions other than Glass Shell Division and; b) on office buildings acquired after 01.04.2000, on which depreciation is provided on straight line method at the rates specified in the said Schedule.
Tax due diligence: MODVAT/ CENVAT / Value Added Tax Benefit is accounted for by reducing the purchase cost of the materials/fixed assets. Sale of Crude Oil and Natural Gas are exclusive of Sales Tax. Other sales/turnover includes sales value of goods, services, excise duty, duty drawback and other recoveries such as insurance, transportation and packing charges but excludes sale tax and recovery of financial and discounting charges. Income tax comprises of Current Tax, Deferred Tax and Fringe Benefit Tax. Provision for Current Tax and Fringe Benefit Tax is calculated on the basis of the provisions of local laws of respective entity. Deferred tax assets and liabilities are recognised for the future tax consequences of timing differences, subject to the consideration of prudence. Deferred tax assets and liabilities are measured using the tax
rates enacted or substantively enacted by the balance sheet date. The carrying amount of deferred tax asset/liability are reviewed at each Balance Sheet date. Systems due diligence All the new manufacturing facilities of the Company are equipped with hi-tech energy monitoring and conservation systems to monitor usage, minimize wastage and increase overall efficiency at every stage of power consumption. Environmental due diligence The health and medical services are accessible to all employees through well-equipped occupational health centers at all manufacturing facilities. Safety and security of the personnel, assets and environmental protection are also on top of the agenda of the Company at its manufacturing facilities. Human Resource due diligence The Company continues to improve daily living and to create a workplace where every person can reach his or her full potential. The work environment gives employees the freedom to make the most of them. Learning and relevance are key principles at the Company. The Company believes in talent acquisition and retention, to augment its plan of making its presence more prominent to global markets. The Company has developed a HRD Plan with the parameters to achieve Excellent Results. The steps have been taken to create a sense of belongingness in the minds of the employees, which in turn gives maximum contribution per employee while gearing them to face the challenges in the competitive business environment and achieve the desired goals. The Company is poised to take on the challenges with its work force of around 8,500 employees/workers in the business environment and march towards achieving its mission with success.
doc_858706578.doc
Research Report on Videocon Industries
BUY
VIDEOCON RESEARCH REPORT
Highlights of Videocon Industries
1. India’s no 1 consumer electronic and home appliances company. 2. Videocon operates through four key sectors: Consumer Durables, Thomson CPT, 3. CRT Glass, and Oil and Gas. 4. In the consumer durables segment, the company offers products such as televisions, 5. DVD players, multimedia speakers, washing machines, refrigerators, microwave 6. ovens, and air conditioners 7. 30% market share in consumer electronics 8. Serves lower, middle and premium segment 9. Wide distribution network 10. Largest TV producer in the world but the Tv technology is getting outdated and hence it has to go into LCDs
Investment arguments
1. 2. 3. 4. 5. Foray into retail and telecom Huge capital expenditure Leading sales in Television and other consumer durables Foray into DTH Maintanable PBT
Videocon products portal
1. 2. 3. 4. 5. 6. 7. 8. 9. Consumer Durables & Electronics Appliances Oil & Natural Gas Exploration DTH Retail Telecom Power Broadband Semiconductors Photovoltaic cells
10. 11. 12. 13. 14.
Digital Imaging SEZ Steel News Channel Hospitality
Share price
Beta = 0.86 The share price of the company ahs been moving in accordance with the Sensex. However, there have been events when the share price has shown extraordinary variance with the Sensex. The following events explain the deviation of the share price from the sensex movement: 1. June 2004 to September 2004 : amalgamation of Petrocon cash rich company with videocon 2. March 2005 to May 2005 : After payment of dvidends 3. Dec 2007 : Due to rumors of acquisition of onida 4. Sept 2008 : Vediocon Bharat petroleum venture aquire brazilium firm Encana firm 5. April 2009 : Video con to launch DTH service
Share holding pattern
Financial performance
1. Sales turnover is Rs 8198.808 cr as compared to Rs 8197.53 cr
last year. This is because of 58% dip in revenues in crude oil and natural gas segment in the last 3 quarters 2. EBITDA margin is 18% as compared to 22% last year PBIT as a percentage Consumer Electronics & Home Crude Oil & of sales Year Appliances Natural Gas 2005 8.10% 19.91% 2006 4.19% 34.92% 2007 5.73% 31.40% 2008 11.49% 30.11% 3. Oil and gas segment achieves higher operating profit margin. 4. The electronics segment margins are getting shrinked. 5. Huge capital expenditure has been done for the oil and gas exploration and expected further more in the next 2 years in telecom. Future expansions • Videocon is eyeing 1 crore DTH subscribers, 15 lakhs in 2009 and continuing with the same addition every year. • The company has already got 2G licenses in GSM telecom in 21 circles and has applies for 3G licenses via its subsidiary Datacomm.
• •
The company has huge capex plans for telecom(6000 cr. In next two years)and oil business. The company plans to expand the wholesale cash and carry business with the setting up of 60 stores at an investment of Rs 2000 crores in the next 3 years.
Key financial highlights
Videocon 2006 2007 35.20 % 12.97 % 6.08% 4.8% 6.0% 5% 36.69 % 16.75 % 5.74% 4.3% 5.0% 6% LG 2007 34.2 % 4.7% 2.0% 8.6% 10.1 % 21% SAMSUN G 2008
2005 Gross Profit Margin Operating Profit Margin Net Profit Margin Return on Assets Return on Investment ROCE 37.07 % 13.67 % 6.67% 4.1% 5.1% 5%
2008 44.82 % 21.82 % 9.25% 6.0% 6.0% 6%
29.7% 3.8% 1.6% 5.7% 13.6% 23%
Dupont: Net Profit Margin Asset Turnover Ratio Financial leverage ROE
2005 0.0667 0.7425 57 2.3665 41 12%
2006 0.0607 91 0.7425 57 2.4355 09 11%
2007 0.0574 33 0.7425 57 2.3639 01 10%
2008 0.092459 189 0.647382 401 2.670172 854 16%
2007 0.0197 19 3.3987 98 1.6487 35 23%
2008 0.0160 39 5.1252 69 1.3010 54 42%
Thus from the above table it is very evident that the ROE of the company if increasing and this is due to the increase in debt that the company has undertaken. Also, the net profit margin has decreased and the asset turnover ratio has increased.
The sales turnover has been increasing except for the last year as this effect was due to the decrease in the revenues from the balance sheet
The asset turnover decreased drastically in the last year. This is due to reduction in sales and increase in the assets.
The EBITDA as a % of sales has decreased in the last year again due to the less revenues and more costs.
Product Segment overview
Consumer Durables and Electronics Appliances The products under the consumer durables and electronic appliances for the company are as follows:
Brown goods White goods
Small domestic Appliances
Colour televisions, CDs, DVDs, Camcorders,Video game consoles Air conditioners, Refrigerators, Dish washers, Drying cabinets, Microwave overs, washing machines. Iron, vacuum cleaners and purifiers
The total turnover of the consumer and durables industry is <> The growth rate of this segment is <> Oil industry: The company has a good venture in the oil business. The total turnover of the segment is 19076 crores.
Financial Statement Analysis Liquidity Ratios
Liquidity Ratios Sep Sep 30th 30th 2007 2008 4.18 8.19
Ratio
Analysis Current Ratio
The current ratio gives the Quick Ratio: 3.18 6.78 liquidity position of the company. It Cash Ratio 0.91 1.43 indicates the ability of Cash Debt the firm to pay their coverage 13% 2% short term liabilities. Debt income The current ratio for ratio 4.57 4.88 Videocon Industries was 4.18 for the year Working capital 6,216.21 7,946.88 ended 30th Sept, 2007 Working capital and increased to 8.19 from operations for the year ended to current liabilities 38% 21% 30th Sept, 2008. i.e. it has doubled. Ideally the current ratio should be 2:1, but with proper cash management and CCC management it could be lower. The current assets have increased. This is mainly due to increase in Loans and Advances. Of the other items Inventories, Sundry debtors and Cash at Bank have reduced indicating that they are collecting from their debtors at a much faster rate. This is evident from their Days Receivable which has decreased. The current liabilities, on the other hand, have decreased. There is a drastic reduction in the sundry creditors and in the bank overdraft from 2007 to 2008.
Current Ratio:
Quick ratio
The quick ratio does not take into consideration the inventories, only the readily liquid assets. The quick ratio for Videocon is 3.18 in 2007 and 6.78 in 2008.
Cash Ratio:
This measures the immediate cash available to satisfy short term debt. The cash ratio of the company has increased from 0.91 on 2007 to 1.43 in 2008. Though the cash at bank has reduced over the period, the current liabilities have decreased by a higher proportion hence leading to an improvement in the cash ratio.
Cash Debt Coverage ratio:
This ratio gives the percentage of debt that current cash flow can offset. In the year ended 2007, the percentage is 13 i.e. 13% of the debt can be borne by the current cash flow. This has reduced to only 2% for the year ended 2008. This is because the cash flow from operations has decreased drastically over the year. There is a decrease of 72%. This is mainly due to a change in the loans and advances (more conceded) and the current liabilities.
Debt income ratio:
This measures the amount of debt as a proportion of the net income. Videocon has a debt of 6952 Cr in 2007 which increased to 11,339 Cr in 2008. But the net income has also increased in a similar proportion hence this ratio is roughly same for both the years, 4.57 in 2007 and 4.88 in 2008.
Working capital:
The working capital has increased by 28%. Working capital indicates the amount of capital available for the company’s day-to-day activities. An increase of 28% in the working capital is an indication of better profits realised and better management of current assets and liabilities.
Working capital from operations to current liabilities:
This ratio measures the degree to which internally generated working capital is available to satisfy obligations. This ratio dropped from 38% in 2007, to 21% in 2008. The operating profit before working capital changes is higher in 2008 than in 2007. But since the changes in working capital are more in 2008, the net cash generated from operations is lesser in 2008.
Efficiency ratios:
EFFICIENCY RATIOS Inventory Turnover Days Inventory in stock Receivables Turnover Days Receivables Payables Turnover Days Payable Operating cycle Cash To Cash Cycle Payment period to operating cycle 4.12 87.38 5.56 64.74 4.55 79.17 152.12 72.96 4.09 88.08 6.72 53.57 5.70 63.11 141.65 78.54
0.52
0.45
Asset turnover ratio
74%
65%
Inventory turnover:
This ratio measures the liquidity of the inventory i.e. the number of times the inventory is sold during the period. This has pretty much remained the same over the 2 years. It was 4.12 in 2007 and has decreased slightly in 2008 to 4.09. This is because the COGS and the Inventory has reduced from 2007 to 2008. For the consumer durables industry and the Oil& Gas industry, an inventory turnover ratio of 4-5 indicates good performance.
Days Sold Inventory:
This converts the inventory turnover into days. Gives us the number of days required to sell the entire inventory in a period. This was 87.38 days in 2007 and has increased slightly to 88.08 in 2008.
Receivables turnover:
This ratio determines the effectiveness of the company to collect from their debtors i.e. the number of times the company collects its receivables in the given period. For Videocon it has increased from 5.56 in 2007 to 6.72 in 2008.
Days Receivables:
This ratio indicates the number of days that the company takes to collect the receivables from their debtors. This number was 64.74 in 2007 and reduced to 53.57 in 2008. This is a sign that they started collecting sooner.
Payables turnover:
This determines the number of times the company pays its creditors the amount it owes them. In 2007 it was 4.55 in 2007 and has increased to 5.70 in 2008. i.e. they are paying more number of times in a year.
Days payable:
This gives the actual days taken to pay back what the company owes to its creditors. In 2007 it was 79.17 days and in 2008 it has reduced to 63.11 days. This indicates that they are paying earlier. This violates the rule of “pay as late as possible”. This is the reason why their net cash from operations has suffered.
Operating cycle:
The operating cycle is the average time between purchasing or acquiring inventory and receiving cash proceeds from its sale. In 2007 the operating cycle was 152.12 days and has reduced to 141.65 in 2008.
Cash to Cash Cycle:
This cycle shows the number of days the company has to finance its own stocks. It measures the number of days between the initial cash outflow (when company pays suppliers) to the time it receives cash from customers. In 2007 it was 72.96 and has increased to 78.54 in 2008. This is not a good sign. The CCC should always be less.
Payment period to operating cycle:
This indicates the company’s vulnerability to the supplier’s terms of payments. A high value indicates that the company is more vulnerable. In 2007 it was 0.52 and in 2008 it reduced to 0.45. This indicates that the risk of supplier changing the terms of payment reduced over the period.
Profitability Ratios:
PROFITABILITY RATIOS Gross Profit Margin 37% Operating Profit Margin 8% Net Profit Margin 6% ROE Dupont: Net Profit Margin Asset Turnover Ratio Financial leverage 2.36 ROE Return on Assets Return on Investment Times interest earned ratio 10% 6% 74% 2.67 10% 4% 5% 2.02 2.40 16% 6% 6% 45% 11% 9% 16% 9% 65%
Gross Profit Margin:
It indicates the proportion of profits over the sales. Profit a business makes on its cost of sales. It was 37% in 2007 and increased to 45% in 2008. This is not a clear indicator of profitability since the sales have reduced.
Operating Profit Margin:
The operating profit margin indicates how much profit a company makes after paying for variable costs of production such as wages, raw materials, etc. It shows the efficiency of a company controlling the costs and expenses associated with its business operations. It was 8% for the year ended sept 2007 and increased to 11% for the year 2008. Also known as Return on Sales.
Net profit margin:
This indicates how much profit a company makes after interest, depreciation and taxes. It was 6% in 2007 and increased to 9% in 2008.
Asset turnover ratio:
This is a measure of how much a company’s assets are being sweated. For Videocon Industries, it decreased from 74% to 65%. This is due to reduction in sales by 2% and increase in the assets. Going forward this ratio should increase.
ROE ( Return on Equity):
This ratio indicates the proportion of income that results out of the equity. Equity includes shareholders’ funds and reserves& surplus. This value was 10% in 2007 and increased to 16% in 2008.
Dupont Analysis:
• • • ROE can be broken into 3 parts Net profit margin Asset turnover Financial leverage
Thus ROE = Net profit margin * Asset turnover * Financial leverage = 0.06 * 0.74 * 2.36 = 0.1
Return on Assets:
It is a measure of a company’s profitability expressed as a percentage of total assets. In 2007 it was 4% and grew to 6% in 2008. This is due to increase in PAT.
Return on Investment (ROI)
ROI is a measure of the performance of any investment, indicating the benefit vs the cost of the investment. It has increased from 5% to 6%.
Times interest earned ratio:
This is a measure of a company’s ability to honour its debt payments. It has increased from 2.02 to 2.4%. Generally it is a warning sign if the times interest earned ratio falls lower than 2.5. SOLVENCY RATIOS SOLVENCY RATIOS Debt to equity ratio 1.00 1.65 Defensive interval period 763.52 760.25 Equity
multiplier
2.36
2.67
Debt equity ratio:
This ratio indicates how much the company is levered. Solvency is the ability of the company to pay the long term obligations. The debt equity ratio has increased from 1.0 to 1.65 during the period.
Defensive Interval Period:
This indicates how long a company can operate on liquid assets without revenues. For Videocon this ratio was 763 days in 2007 and reduced to 760 days in 2008.
Equity multiplier:
The equity multiplier ratio is the factor by which the assets grew from the use of debt. This has increased from 2.36 to 2.67. Quality of Earnings: The concept of earnings quality has roots in the judgmental nature of accounting, which can be seen in the fact the different parties may interpret the economics underlying a transaction differently, and different firms may have different business characteristics. Other ways accounting choices can lower a firm's earnings quality include[1] ? Recording revenue too soon or of questionable quality,
? ? ? ? ? ?
Recording fictitious revenue, Boosting income with one-time gains, Shifting current expense to a different period, Failing to record or improperly reducing liabilities, Shifting current revenue to a later period, and Shifting future expenses to the current period as a special charge
1) A recent circular (New Circular) dated 8 June 2007 issued by the Reserve Bank of India (RBI) states that only those preference shares that are fully and mandatorily convertible into equity shares within a specified time will be considered a part of the investee company’s share capital. Also only such preference shares will be issued to foreign investors under the automatic approval route (that is, without requiring permission from the ministry of commerce).
Foreign investments in non-convertible, optionally convertible or partially convertible preference shares are now considered to be debt finance, that is, akin to a loan, and are required to conform to the stringent guidelines relating to external commercial borrowings (ECBs). Videocon industries has successfully incorporated this norm. Their share capital reflects equity shares and only those preference shares which are fully convertible into equity.
Quality of earnings
Repeatable and controllable earnings:200 4-05 Adjusted 381 PBT(Unconsolidated) .35 6.8 As a percentage of sales 9% Other income as a percentage of total income Income from exchange rate fluctuation as a percentage of total income 6.89 % 0.33 % 200 5-06 748. 23 9.87 % 9.87 % 0.23 % 200 6-07 916 .55 10. 52% 10.5 2% 1.01 % 20 07-08 12 65.96 12. 53% 12 .53% 0. 00%
Earnings adjusted for exceptional and non-recurring, non-operational items are showing a growth trend as a percentage of sales. Uncontrollable earnings due to fluctuation in exchange rate are excluded. This shows that the earnings are maintainable and sustainable in the core business of consumer durables and home appliances and crude and natural gas. Bankable earnings:2 2 2 2 00400500600705 06 07 08 Cash flow from 1 1 operations 1814.08 351.72 133.68 1193.44 Cash flow from operations is not showing a favorable trend although it was positive in 2005-06 and 2006-07. Cash flow was negative in 2007-08 primarily because of exchange rate fluctuations, huge debtors, inventories and loans and advances. 200 2 2 200
4-05 Doubtful debts as a percentage of sales 0.46 %
00506
006-07 7-08 0 0. .51% 47%
0.45 %
Doubtful debts are not changing as a percentage of sales. This shows that the quality of earnings is consistent. Off balance-sheet risk:The company has a whopping (5,057.10) crore Rs. of contingent liabilities and
negligible amount of operating leases. Hence contingent liabilities are a potential risk to company’s healthy earnings.
External risk:2 00405 Net Forex earnings / -expenditure 3 068.31 1 3 330.97 8 297.5 1 00506 741.8 6 2 2 2 006-07 007-08 558.29 789.31
Loans in Indian rupees Loans in foreign currency
This shows that company’s earnings are exposed to exchange rate risk. Company provides for fluctuations in currency as and when required. Company has outstanding sales tax deferment loan from which it will benefit from future foregoing interest obligations. Company has Outstanding 41820 FCCBs of US $1000each due on 7th March, 2011 at 116.738% of its principal amount. The bonds are convertible at the option of the bondholders at any time on and after 20th March 2006 upto the close of business on 28th February, 2011 at a fixed exchange rate of Rs.44.145 per 1 US$ and at initial conversion price of Rs.545.24 per share being at premium of 15% over the reference share price. It also has Outstanding 66,651 Foreign Currency Convertible Bonds of US$ 1000 each (Bonds) due at least 130% of the accreted principal amount. The bonds are convertible at the option of the bondholders at any time or after 2nd September 2006 until 18th July 2011
except for certain closed periods, at a fixed exchange rate of Rs.46.318 per 1 US$ and at initial conversion price of Rs.511.18 per share being at premium of 22% over reference share price. The company has to reduce the share price over which the bonds can be converted otherwise they will not be converted and as a result the company will have a huge debt obligation which will ruin its earnings quality. The input to raw materials to crude oil business is dependent on commodity prices.
Acquisitions:Videocon has done 11 acquisitions in 2007-08. All of the subsidiaries have led to a negative effect on P & L. Hence the management needs to focus more on their profitability. Valuations:The valuation of the company to find out the intrinsic value of the share has been calculated by three methods:• Market comparable(PECV) • • • Net Asset Value Discounted cash flow Market price method Videocon Value per Share
Method
Weigh t
Product
Net Assets Method PECV Method Market Price Method Discounted cash flow Total
144.89 792.02298 36 209.59 325.80382 61
1 2 2 3 8
144.89 792.0229836 419.17 977.4114782 2,333.50
Fair Value per share
291.69
The fair value of share comes out to be 303.78 which shows that it is a buy recommendation as the share is trading at 255 Rs. Discounted Cash flow:• Three stage growth model using percentage of sales method for independently consumer durables and oil based on past four years average and for telecom based on market players in telecom(Bharti Airtel) • • Telecom sales projections are done conservatively based on ARPU taking inflation into consideration. Consumer durables and home appliances division:-Growth rate for next 4 years is taken as 15% as the company is foraying into DTH which will lead to increase in growth in sales. 15% is a very conservative figure when market is expected to grow at 22% CAGR. Thereafter for next 6 years till 2019 the growth is reduced from 10% to 4% and then a steady growth of 2% is taken for ever in maturity as per current growth in US. Crude oil division is estimated at 5% as natural gas market is expected to grow at 7.5% and oil business at 2.5%. Cost of capital comes out to be 9.07% using market premium of 11% and beta of .8 and risk free rate of 7.4%. PECV:Maintainable PBT adjusted for exceptional and non-recurring, nonoperational items is calculated and adjusted for investments, contingent liabilities and deposits. PE multiple of 4.37(intrinsic value) is taken as expectation. • NAV:Net asset value is taken for valuing the share price.
• •
•
•
Future expansions:• Videocon is eyeing 1 crore DTH subscribers, 15 lakhs in 2009 and continuing with the same addition every year. • • The company has already got 2G licenses in GSM telecom in 21 circles and has applies for 3G licenses via its subsidiary Datacomm. The company has huge capex plans for telecom(6000 cr. In next two years)and oil business.
DUE DILIGENCE
Legal due diligence As per the terms of the 42,00,000 Non Convertible Debentures of Rs.100/- each, aggregating to Rs.420.00 million shown under “Secured Loans”, the date of redemption is 20th November, 2006. These debentures were held as such pending the implementation of the arrangement for the equity contributions into a group company by its JV partner, pending regulatory compliances. There are series of disputes between the said group company and its JV partner, currently in the arbitration. The company has been legally advised that there will not be any liability either on account of the redemption or as the case may be, for the coupon payments pertaining to these debentures. In view of this, although the principal amount of debentures has been shown under the head “Secured Loans’, no provision for interest payable on the same and towards the redemption amount has been made in the books of accounts In respect of joint ventures in the nature of Production Sharing Contracts (PSC) entered into by the Company for oil and gas exploration and production activities, the Company’s share in the assets and liabilities
as well as income and expenditure of Joint Venture Operations are accounted for according to the Participating Interest of the Company as per the PSC and the Joint Operating Agreements on a line-by-line basis in the Company’s
Financial Due diligence
The financial statements are prepared under historical cost convention, except for certain Fixed Assets which are revalued, using the accrual system of accounting in accordance with the accounting Principles Generally Accepted in India (Indian GAAP) and the requirements of the Companies Act, 1956, including the mandatory Accounting Standards issued by the Institute of Chartered Accountants of India, as referred to in Section 211 (3C) of the Companies Act, 1956. The Company provides depreciation on fixed assets held in India on written down value method in the manner and at the rates specified in the Schedule XIV to the Companies Act, 1956 except a) on Fixed Assets of Consumer Electronics Divisions other than Glass Shell Division and; b) on office buildings acquired after 01.04.2000, on which depreciation is provided on straight line method at the rates specified in the said Schedule.
Tax due diligence: MODVAT/ CENVAT / Value Added Tax Benefit is accounted for by reducing the purchase cost of the materials/fixed assets. Sale of Crude Oil and Natural Gas are exclusive of Sales Tax. Other sales/turnover includes sales value of goods, services, excise duty, duty drawback and other recoveries such as insurance, transportation and packing charges but excludes sale tax and recovery of financial and discounting charges. Income tax comprises of Current Tax, Deferred Tax and Fringe Benefit Tax. Provision for Current Tax and Fringe Benefit Tax is calculated on the basis of the provisions of local laws of respective entity. Deferred tax assets and liabilities are recognised for the future tax consequences of timing differences, subject to the consideration of prudence. Deferred tax assets and liabilities are measured using the tax
rates enacted or substantively enacted by the balance sheet date. The carrying amount of deferred tax asset/liability are reviewed at each Balance Sheet date. Systems due diligence All the new manufacturing facilities of the Company are equipped with hi-tech energy monitoring and conservation systems to monitor usage, minimize wastage and increase overall efficiency at every stage of power consumption. Environmental due diligence The health and medical services are accessible to all employees through well-equipped occupational health centers at all manufacturing facilities. Safety and security of the personnel, assets and environmental protection are also on top of the agenda of the Company at its manufacturing facilities. Human Resource due diligence The Company continues to improve daily living and to create a workplace where every person can reach his or her full potential. The work environment gives employees the freedom to make the most of them. Learning and relevance are key principles at the Company. The Company believes in talent acquisition and retention, to augment its plan of making its presence more prominent to global markets. The Company has developed a HRD Plan with the parameters to achieve Excellent Results. The steps have been taken to create a sense of belongingness in the minds of the employees, which in turn gives maximum contribution per employee while gearing them to face the challenges in the competitive business environment and achieve the desired goals. The Company is poised to take on the challenges with its work force of around 8,500 employees/workers in the business environment and march towards achieving its mission with success.
doc_858706578.doc