Phoenix lamps – rising up from the ashes?


(Varadharajan Ragunathan) #22

Agreed @rohansh - at this point, I have no data point to support either which way. I am with you that there is a significant risk of being at the mercy of suprajit management.


(Varadharajan Ragunathan) #23

ok - thanks for your insight.


(prabhakar) #24

I think its a classic case of heads i win, tails i don’t lose much.


(Sahil Taneja) #25

Wow… what a price action and volumes today… Do we have any technical guy in this thread who can put some insight…


(Rajat Setiya) #26

Guys,

One quick query. Some of you have expressed concerns around unfavorable merger ratio, if at all that happens, and hence being at the mercy of new management. Just wanted to understand why do you think that management might do so? Are there any precedents of new management doing so with their shareholders in other companies or something else?

Thanks, pardon me if i’m missing something obvious.

Best
Rajat


(rohan shah) #27

@armchairinvest_It’s just a concern, the only action management has taken thus far is to offer INR 100/share to minority holders which was below expectations but it was well within its rights to do. Suprajit management is generally reputed to be fair & honest. They have indicated that they will at some point in the future merge the two companies and there will always be a question mark on the merger ratio until the event happens. In my view this may reflect in the PHL multiples remaining depressed - hope i’m proven wrong.


(Varadharajan Ragunathan) #28

Given the strong set of results by FIEM, lumax, I expect good results in phoenix lamps as the MHCV recovery and the lukewarm pick up in entry level cars (maruti) should help halogen lamps.

  1. I expect EBITDA improvement as suprajit replaces high cost management with their own.

  2. i expect europe’s losses to shrink further and eke out a good profit. EBTIDA for indian business improved if you knock out forex losses (as against super normal gains in FY 14). So, it’s close to 19% - which is amongst the best in the auto comp space.

  3. trifa is at 3 % ebitda on Rs. 150 Cr. topline. luxlite has sales of about RS. 90 Cr. with loss of 7.5 Cr. if these two can be turned around this year and made to deliver a Rs. 10-12Cr. ebitda this year, the stock should re-rate. Either this or a partial or a full divestment should help.

  4. pick up in auto market volumes in cars, LCVs where halogen lamps are used should help

  5. Most importantly, the after market segment in which phoenix so far had not been concentrating at all is a big lucrative opportunity with the partial exit of philips and no other credible name to challenge halonix. Done well, this can improve margins by 200-300 bps - something suprajit knows about

  6. The risks to this are the issues in european subsidiaries. If suprajit can fix this, the stock can be a good compounder and provide 2-3 x over a couple of years.

with ROIC of 22 % (ex-europe) and ROE of 20 % in an inefficiently managed set up and an OCF yield of 12%, I see little down side ( there is no dividend for this year given the suprajit take over).

Tails I don’t lose much, heads I win well.


(Puneet Khurana) #29

AGM Notes

Had a very confidence instilling AGM and the new management was helpful in clarifying a lot of questions which the shareholders were dabbling with for some time.
Here are the key points that the management clarified:

  1. Value Chain: The Company operates in a very competitive market where the price of its products is usually fixed by OEMs and then the customers of Phoenix lamps (the likes of Lumax etc), who are the suppliers to OEMs; accordingly decide the prices for Phoenix lamps.

  2. Margin Profile: The Company makes a margin of 12% to 14% in this business on a consolidated level. On the question of 20%+ margins that company was showing in past years, the management was very candid in telling that those margins doesn’t reflect the true picture of the business and hence not to be trusted (read between the lines here. Some hints: They had another division and they have bleeding European subsidiaries so most of the margins shown were probably borrowed from these two). Management said, “Going forward, a margin of 14% on consolidated basis will be a good achievement.”

  3. European Subsidiaries: The management has clarified that there should not be huge losses here. There might be few inventory losses here and there but shareholders should not fear any big bang losses from these subsidiaries but the management will take another couple of quarter to finish the complete assessments of books and will be cleaning up of excesses, if any.

  4. Future Growth: The Company’s growth avenues going forward should be 2 fold. First, the company over a period of last few years has lost market shares to competition because of the lack of focus of previous management and also because of compromises on quality. As of the now the first focus of the management will be to put quality checks in place (for which they will also be doing investments of around 25 cr in Capex) and regain the lost market share. Suprajit’s strong presence in South may help Phoenix develop its brand in south also but as of now, it should not be taken as given and it is a long time consuming process. In the after-market, the price is derived by competitive pressures and there are substantial price pressures. Management will be looking to tap the after-market but they will not retort to any price war to take on the unbranded players and other competitors but having said that there are pricing pressures for the management. As far as global market scenario is concerned, the management will first focus on improving the quality and then will approach global markets. As per them, the global markets are a big opportunity going forward but the opportunity will be primarily in after-market and not OEMs as it will be very difficult to replace existing competition.

  5. Investments: As mentioned earlier, the company will be doing a Capex spend of around 25 cr which is for quality controls and not for capacity addition. There current capacity utilization is of around 60 %

  6. Managerial Remuneration: When I asked about the previous management drawing very high salaries despite loss making operations in Europe, the management responded by saying that they will be following same conservatism that they follow at Suprajit but the remuneration for the top management is governed by market also, but the management will do whatever is necessary to keep incentives right and in place.

  7. Dividend Policy: Suprajit has a policy of giving dividends and has given dividends throughout its history but the dividends are an outcome of healthy operations and profitability and should be looked in overall perspective. Going by management’s commentary, it seems likely that the dividends will start flowing in only once the operations are improved and the company.

  8. Competitive Scenario: The competitive scenario is getting tough from both organized and unorganized side. There are tremendous pricing pressures on them in after-market. One major competitor has started his manufacturing in India and hence has now become cost competitive also which also puts pressure on the management. In the OEM market, there is not much threat from chines but Koreans remain a relevant threat to OEM market too.

  9. Currency Hedges: Earlier the European receivables were not hedged but going forward there will be partial hedging of the same. They already have started hedging and in recent future they would want to hedge around 50% of the currency

  10. Other Issues: There is an issue with tax authorities of around 70 cr on which things are in wait and watch mode. These are significant contingent liabilities and should be discounted (in whatever proportion) in while calculating the

Most of the AGMs have a fun factor. This AGM was not very different in that regard. There were shareholder cum employees who started arguing with the management and demanded to give them… wait for it….no…no dividends……Well… The next best thing, “Lamps”. Yes, they said that the earlier management used to give 2 lamps to some employees cum shareholders and the current management should also do the same as this is the “Tradition”


(rohan shah) #30

Many thanks for posting these notes! Point 10 seems to be truncated.


(Brijesh Mahawar) #31

Thanks for great notes.
Can you please name the competitor mentioned in point 8? Is it possible (if discussed in AGM) that management will completely hive off / sell the European subsidiaries if they continue to make losses?


(Rohit Balakrishnan) #32

They were non-comittal on the European subsidiaries. Their immediate focus is to upgrade the quality first by making necessary investments and then gain share in the domestic market.

On the competition front- Osram has opened an India plant.


(nikhil pai) #33

Hi Puneet,

Please add disclosures if any.

Thanks,
Nikhil


(Pravin Choudhari) #34

Bit late here, but in AGM did management mentioned anything about their plans about merger if any they have or if they want to keep both companies as separate entities for now?

Disc: Have taken tracking position last month @ 101 Rs.


(nishantaggarwal123) #35

Few observations:-

  1. Phoenix face tough time with brand recall in B2C segment - During my visit to a Maruti Suzuki dealer, I observed a big poster on halogen lamps promoted by Philips. While Phoenix supplies halogen bulbs to most Maruti vehicles it is not a familiar name among retail consumers. Philips, on the other hand is in fact a household name and is trying to capitalise the same by offering win-win situation for both Maruti (peddling the Philips product at an extra cost to the consumer) and itself (in terms of displacing an established OEM supplier like PLL).

  2. Working Capital Days (Cash conversion cycle) looks to be an issue. For Standalone basis, it is coming at ~120 days, for consolidated its coming at ~95 days. Is it due to sales mix of aftermarket/OEM??

  3. Bleeding European subsidiaries are a concern and bring down EBITDA (at standalone basis) from +20% to ~12.5% (at consolidated basis). Infact in FY14 CFO decreased from INR 770 Mn to -INR 100 Mn. Even with management guidance of ~14.5% EBITDA, may be Euro. subsidaries would not be so profitable in near term

  4. Looks more like wait and watch game where how new promoters can turn it around

  5. Few other queries, would help if anyone has answer on it:-
    a. production level/capacities for European subsidaries? what are the highest levels they can operate?
    b. Working Capital management?
    c. Capex cost of setting up manufcaturing unit, lets say 10 bulbs/yr?
    d. reason for spike in sales in FY14 even at Standalone level
    Phoenix Lamps - General Research.xlsx (62.2 KB)
    Disc. Not invested. Have also posted numbers excel herewithin…


(Puneet Khurana) #36

Sure, Sorry but I am not so regular on forum so bad habits :slight_smile: Will do from next time.
In this case, I owned Phoenix at the time of AGM and I don’t hold any now.


(pskrishnan) #37

@varadharajanr @armchairinvest_ @rohansh, very interesting discussions and perspectives on Phoenix Lamps. I agree with @varadharajanr that Phoenix Lamps is potentially a significant opportunity at current levels

I am interested in investing in Phoenix Lamps at current levels. I have a couple of concerns on Phoenix Lamps, and they are around the Rs 70 crore tax liability mentioned by @ PuneetKhurana. Is there any update on this tax issue?

The other concern I have is around how Phoenix is geared to handle the potential revenue loss that could arise on account of the shift in automotive lamps from halogen to LED’s. I don’t expect a significant impact on Phoenix’ Indian business in the near future on account of the shift from halogens to LED’s, but given that Europe contributes to a significant part of Phoenix’s revenues, and current generation vehicles in Europe are fitted with LED’s, I see the aftermarket business for halogen lamps for Phoenix going down in Europe in the next few years

Is there any information available on how Phoenix is going to handle the potential revenue loss that could arise on account of the shift in automotive lamps from halogen to LED’s in Europe aftermarket? Does Phoenix lamps has a plan to manufacture automotive LED lamps

It would also be interesting to get Phoenix management view on what is it that they perceive to be the key revenue drivers for future growth of the halogen lamps business of Phoenix across all segments (OE, aftermarket; India & international market)

Any update and feedback from members of this forum will be very much appreciated

Thanks


(hazariwalapu) #38

Rohansh,

regarding your concern about Rs100 per share to minority shareholders of Phonix, we should remember that while doing this deal Ajit Rai was working on behalf of Suprajit shareholders so this deal is very positive for Suprajit shareholders. Thats the way management should deal. Now he is working for both company so we can expect PHL shareholders friendly moves.

Regards,
Prashant


(rohan shah) #39

Agree, but the main attraction here is the operational turnaround he can bring about which should create significant value for everyone. He has indicated multiple times on calls that his acquisition price of 89/sh from Actis more than builds in all the negatives and write downs which have largely been effected, now we need to watch how the turnaround unfolds over the next year.


(rohan shah) #40

Their moves in the LED segment need to be monitored but thus far the party line has been that they are not concerned about disruption in that space. I personally believe that there is enough addressable market in the global and Indian aftermarket for them to grow for the next few years. I am getting conflicting feedback as to whether LED lights can and will be retrofitted onto existing cars, and some sources indicate that they are not permitted by several regulators because they are “too bright”. Beyond a point one cannot over analyse and needs to trust management to take the right call.
IMHO this requires a sizeable leap of faith in management’s ability to execute and turnaround and ascertain on behalf of minority holders as to whether technological disruption can be meaningful and swift or conversely, a gradually melting ice cube.


(hazariwalapu) #41

Dear Rohansh,

I am invested in to this company. As i took is as a very simple bet, as company’s operaomptions in this segment is and was strong. Company had only problem with promoters as they were not focused. Now promoters are changed and this new team is very strong on execution. so My bet is on Promoters.and i hope they will take good decisions going forward. we just need to watch the progress.

Prashant