BPL - Amazing Comeback Riding on Flipkart

Disclosure: I have been following this stock and the progress of their products on Flipkart (BPL sells exclusively on Flipkart) for 3 months now. Allocation 25% of my portfolio. My average buying price is Rs 38.

Current Market Price: Rs 38.1, Market Cap: Rs 186 Crore, Debt: Zero.

Bit of History

BPL, which was once the market leader in the consumer electronics segment, especially televisions and telecommunications equipment, was a household name in India in the 1990s. Starting from its core of medical electronics, it expanded into consumer electronics, telecommunications, soft energy and electronic components, with peak group revenue of Rs 4,300 crore in the late 1990s.

BPL had technology co-operation agreement with Sanyo Electronic Company since the early 1980s. Post economic liberalisation in 1991 BPL faced increased competition from South Korean companies LG & Samsung. BPL managed to stave off the competition till late 90s, but started it feel the heat in early 2000s. The company also diversified into several businesses like healthcare, energy and home security systems. These in combination to a dispute within the family led to BPL’s downfall. Read The Rise and Fall of BPL.

In a consolidation move, BPL entered into a 50:50 JV with Sanyo in 2004. From 2006 to 2007 Sanyo ran into financial troubles and incurred heavy losses. The JV failed and BPL got out of the consumer electronics business completely. Sanyo was eventually bought out by Panasonic.

Post this BPL concentrated solely on medical equipments and home automation products and solutions. BPL also had a small PCB (printed circuit boards) business, serving mainly as a supplier to LED and TV industry.

Hiving Off of Medical Technologies Vertical

BPL Medical Technologies was spun off into a separate company in 2013. In May 2013, Goldman Sachs purchased a 49% stake in the new company for ₹110 crore (equivalent to ₹131 crore or US$19 million in 2016). The report claims that the medical business is profitable but BPL suffers losses due to its legacy debt issues (acquired in 2000s when BPL also went through debt restructuring). So this deal was presumably to unlock value in the medical equipment business. Post this investment, BPL was left with a 20% stake in BPL Medical Technologies and technically it is now an associate company of BPL and not a subsidiary.

Agreement with Flipkart

BPL entered into an exclusive agreement with Flipkart for the sale of consumer appliances under the BPL brand. In July 2015 BPL launched LED TVs on Flipkart. The product range would gradually cover other home appliances products like Washing Machines, Air Conditioners, Refrigerators, Microwave Ovens, and LED / Solar Lamps. While BPL would take care of manufacturing, Flipkart would take care of logistics and customer service (through its subsidiary Jeeves). The exact details of how the revenue would be shared are not public.

Performance on Flipkart

Till June 2016 BPL sold 32 & 40 inch LED TVs, LED Emergency Lamps and small medical devices like pulse monitor and BP monitor.

Lets consider the performance of 32 & 40 inch LED TVs. The average rating on Flipkart is 4.3 and 4.4 respectively. Although the volume data is not public, BPL claims to sell between 8000-10,000 TV sets per month. However, even if you assume average selling price is 15k per unit, then quarterly sales should be Rs 48-60 Cr. But actual quarterly revenue is Rs 15 crore. So I am missing something here.

The products are fairly priced (lesser as compared to brands like Samsung and LG but more than low cost manufacturers like Micromax and Vu). These TV sets right now are apparently imported and assembled, according to this article

I take the number of ratings received on Flipkart as a proxy for sales. Assumption being => no. of Ratings directly proportional to sales. Here are the number of ratings for the 2 TV models. I am ignoring other products for now because their ratings are much lower.

          No. of Ratings 
-----------------------------
|               | 32" | 40" |
|---------------|-----|-----|
| 6th Jun 2016  | 201 | 83  | 
| 12th Aug 2016 | 499 | 221 |

So I think its fair to assume that BPL has more than 2.5 times their sales between June and August.

Sometime in late July/early August BPL launched washing machines on Flipkart. In August they also launched 24 inch televisions on Flipkart. The company had earlier claimed that they would expand their product portfolio before Diwali and it is staying true to this promise.

You can see the entire list of BPL products here: Flipkart

FY16 Results

BPL Posted Standalone Revenues of Rs 40 cr (up from Rs 24 cr in FY 15). Although the company suffered an operational loss of Rs 1.46 crores, it was helped by an other income of Rs 15 crore. The source of this other income is unknown. The company debited a sum of Rs 22.4 crore from deferred tax asset, and hence suffered a net loss of Rs 8.45 crores for the year. EPS: -1.73.

Q1 FY17 Results

Revenues Rs 15.8 cr, operation loss of Rs 0.1 cr, other income of Rs 54.6 cr and net profit of Rs 54.1 cr. The source of other income is unknown. EPS: Rs 11 (not annualised)

Positives

The company is debt free. The company is hopeful of a Rs 100 crore revenue this year and plan to increase it to Rs 600 crore in the next 3 years. Source this article. I think in terms of sales the company has progressed well in the past 1 year, and this year’s Diwali season would be crucial to the company.

Quarterly Revenue Trend

                     All Figures Are in Rs Crore
|                  | Jun'15 | Sep'15 | Dec'15 | Mar'16 | Jun'16 |
|------------------|--------|--------|--------|--------|--------|
| Sales            | 6.4    | 10.0   | 10.7   | 13.2   | 15.8   |
| OPEX             | 7.0    | 10.2   | 10.9   | 13.6   | 15.9   |
| Operating Profit | -0.6   | -0.25  | -0.15  | -0.4   | -0.10  |
| Other Income     | 14.0   | 0.21   | 0.2    | 2.0    | 54.6   |
| Tax Expense      | 0      | 0.16   | 25.4   | -2.9   | 0.04   |
| Net Profit       | 13.5   | -0.37  | -25.5  | 3.9    | 54.2   |

As you can see the revenue is slowly and steadily increasing but the operating profit is not. Whenever the company has reported profits it has been due to other income.

Some Concerns

Source of Other Revenue?

BPL sees Other Income quite often in its earnings report. While earlier it could be linked to divestment in energy and medical equipment businesses, the reason for an exceptional Rs 54 crore other income in Q1FY17 is unclear. I dug through the ARs and quarterly reports but the source of this revenue is not very clear. I have emailed their investor relations team and I am yet to receive a reply. It has an indirect subsidiary BPL Power Projects (AP) Private Limited, which apparently operates a thermal power plant. Also, BPL still has 20% stake in BPL Medical Technologies. BPL could be getting dividend revenue from both these sources company. This is my best guess.
####Pledged Shareholding
Promoter shareholding is Rs 63.24%, most of which is pledged. A total of 50.94% of company’s shares, which are with the promoters, are pledged. About 4.86% of BPL’s shares are held by 2 asset reconstruction companies.
Edit: The pledge on shares was released on April 12th 2016. Announcement 1 and Announcement 2.
####Contingent Liabilities
The company has Rs 65.35 crore worth of contingent liabilites. Of this Rs 20 crore are in the form of guarantees and balance in the form of unpaid & disputed taxes. Source: FY 15 AR
####Restrictions on Trading
In August 2014 shares of BPL were placed in the T group by NSE and BSE. In ‘T’ segment no speculative trading is allowed and delivery of shares and payment of consideration amount are mandatory. The bourses said the decision is part of a surveillance review to ensure market safety and safeguard the interest of investors. Source: Moneycontrol. Not sure if the restrictions have been lifted.
####Preference Shares
About 16.9 crore Non- Convertible, NonCumulative 0.001% Preference Shares of 100/- each, were allotted on 23rd September, 2005, pursuant to the Scheme of Arrangement approved by the Hon. High Court of Kerala, Ernakulam. Out of which, 1.41 crore shares are redeemable in four equal instalments at the end of the 11th,12th,13th and 14th year and the balance of 28,34,000 shares are redeemable in ten equal installments commencing from 31st March, 2008. The Company is yet to redeem these preference shares and the amount outstanding as on 31st March 2015, was 22.67crores. Company is making arrangements for the redemption of the above and the same will be redeemed in due course. Source FY15 AR

I don’t fully understand the implications of issuance of these preference shares.

I invite other members to provide your comments, feedback on this post and on BPL in general.

11 Likes

I would consider following factors before investing in the stock…

  1. Is there a positive cash flow in the company that is sustainable?

  2. What is the return on capital employed?

  3. Operating margins? Very important as it has to compete in a consumer market.

  4. What is the moat available?

  5. why would a customer buy a BPL TV when there are high quality TVs like LG, Samsung,Sony… and cheap ones from China…

  6. Would you hold this stock with a 5 year outlook?

2 Likes

Return on Capital employed ROCE - 1.33%
ROE - 0.93%
ROIC - minus 1
Screener dot in saying that there is no pledging of promoter shares. Promoter holding un-pledged 63.24%.

Graham No. 57.89
PE - 5.78
EPS - 6,6

Looks like a turn-around story but June 16 profit figure includes other income of 54.21 Cr. and the operating profit is only 0.05 Cr. If we exclude the other income, there is net loss.
Source - Screener dot in / accessed on 13/08/2016 09.57AM
Disclaimer - Not invested.

You are right. The pledge on shares was released. Announcement 1 and Announcement 2.

You are not considering the revenue breakup between flipkart and BPL. There must be some agreed fixed percentage for BPL in the revenue.

They can obviously sell a great number of TVs if their ratings remain above 4. I also prefer buying products based on their ratings. Good reviews can help them in driving their sales.
Cons : From a perspective of an owner of this business, there is a lot of revenue leakage. Importing the electronics, sharing revenue with flipkart and commodity based industry. It will be a capital intensive business.

Looking at those numbers and fact prima facie, It would be one helluva turnaround story bro.

Good Point

Agree to a certain extent. To generate operating profit the company has to start manufacturing and invest in R&D. But the partnership with Flipkart gives BPL 2 advantages:

  • A national reach due to Flipkart’s reach. Re-establishing a national supply would be time & capital intensive.
  • Helps it save on logistics, customer service costs and online marketing costs.

I did go through reviews, either it’s 5 or 2, 2 ones also mentioned that they got fooled by Flipkart ratings. Does online portals practise jump and pump ratings for the products where they have vested interests like high margin or stake. Same I notice on Myntra for hrx products.

2 Likes

I went through a few of the reviews for TVs. They complain about the TV not playing certain audio formats, USB drive getting heated. Because many people own laptops, not PCs, they prefer to watch movies and TV shows on their TV. BPL TVs not being able to play formats like x264, x265 (although I admit that I don’t know how well the smart TVs from other Companies play these formats) will influence the buying decision of a considerable number of people.

1 Like

True that the partnership with flip kart has many advantages but also note that flipkart itself is a cash flow negative business. So success of bpl depends upon success of flipkart which itself is a huge question mark (as of now).
If flipkart lands in more trouble they’ll squeeze the likes of bpl even more. Also we don’t know if bpl has exclusive arrangements with flipkart, else who’s to say le eco will probably get a similar or better deal and eat bpl’s lunch.

Overall the risks seem significantly high at this stage but agree that if they can pull off the rewards will be phenomenal too

No positive cash flow from operations yet. But there is this consistent ‘other income’, don’t know if that is sustainable. Awaiting details on this.

According to Screener its 1.33%

Negative margins right now, but I would like to point out that the company is just getting started and their scale right now is very small. They need to achieve economies of scale to start generating positive cash flow. They will have to invest heavily in R&D & manufacturing to get back to their 1990s peak levels. Remember their peak revenue levels were ~ Rs 4300 crore. The current quarterly revenue of Rs 15 crore pales in comparison.

In consumer electronics, in the medium & lower end, technology has become a commodity. So in this space the moat has to be distribution reach & operating efficiencies. BPL is not in the league of Sony, Samsung & LG and it does not even compete with them. It competes with Micromax & Vu s of the world. The unique partnership with Flipkart gives it a wide reach, lower operational & servicing costs and faster consumer feedback.

Price. Consumers who consider buying Sony or Samsung are going for higher end TVs. BPL competes on the lower end and competes with Micromax & Vu.

Yes. This looks more like a longer term bet. Not for people who have a 1-2 year horizon.

Thanks for pointing this out. Need to keep a tab on the subjectivity of the reviews.

Am I being correct to understand that this business is solely based on revenue from flipkart? Does it have any plans to go into any other verticals or into brick & mortar business again? Kindly take note of the fact of what value investors think about investing in companies like flipkart because this looks like a proxy play into flipkart. Being that prospects of this company are relative to the prospects of flipkart itself.

Fabregas Sir,

For the sake of constructive discussion I would like to put forward 2 more points of view.

  1. You have mentioned about the stock story which is very impressive. However without the set of stable numbers such as operating margins , cash flow and ROCE. How can one find a valuation to the stock?

  2. Already in the past we have witnessed huge companies such as BPL itself, Onida , Videocon etc who were into the TV Business go into oblivion. Also it is a sector with lot of technology obselence. Coming trends are hard to predict OLED, 4K, 3D, VR to name a few.

Considering these risks, isn’t it better to invest in similarly priced low risk companies or even hold in cash till the cash flows get better/ future outlook gets clearer??

**

Why BPL and why not Lloyd Electric?

**

ROE, ROCE, ROIC are all 12 for Lloyd. The are into TV business also.
PE - 9.38 and PEG ratio - 0.45, Graham No 271 and CMP 236 (12/8/16)
Debt level is a bit high - D/e - 1.14 (screener dot in)

Companies diversified solutions portfolio includes;
Lloyd branded Consumer Electronics & Home Appliances
HVAC&R Heat Exchange Coils
Engine Cooling Systems
Commercial Refrigeration Systems
Original Equipment for Window and Split AC sytetems
Air Handling Units
Industrial Fans and Coolers (From website)

See their products - http://www.mylloyd.com/products.php?cid=2

Too many related party transactions.
The company sold off the business - Bharat Energy ventures ltd to related party Electronic research ltd for about 115 cr and included it in Non current assets in FY 15 AR ??.
As per Mar 16 Balance sheet, same included now in Trade receivables ?
To me it looks like a corporate governance issue ?
When the company has admitted that it is suffering from financial constraint , why sell the business to a company who can’t pay ? or maybe the business isn’t worth much and is an accounting trick to keep book value high.

in the past company had made non current investments of 109 cr( generally such investments are made in JV, subsidiary, associates) . out of this diminution in investment is 88.5 cr ???

2 Likes

20% upmove yesterday ?? Any reason for this positive breakout ??

No new information released by the company. I have sent them 3 mails, on their investor relations email id, asking about the exceptional ‘other income’ in Q1FY17 results but I haven’t received any reply so far. What should one do if the management doesn’t reply to investor queries?

@fabregas, i feel the other income most likely would have come from the related party “Electronic research” as part payment for the transfer of business.
However, we will know once we see the BS of Sept qtr.

@manishinlucknow Can you elaborate? I don’t understand the term transfer of business. Do you mean to say that “Electronic Research” operates as a middle man between BPL and Flipkart?