Centum Electronics

CentumElectronicsLimited (Centum) designs, manufactures and also exports electronic products. These include subsystems, modules, box builds, besides complex electronic components.Centumserves customers engaged in mission critical solutions with advanced tailor-made technologies. These range from StrategicElectronics(Space, Defense and Aerospace) to Industrial, Communications, and Medical.Centumhas been steadily increasing its product and service range, geographical reach and catering to increased industry segments in its goal to expand its offerings and become the sophisticated one stop shop OEMs are seeking. With extensive design & development expertise and leading-edge enabling technologiesCentumis now the industry leader in India inelectronicssolutions & components.


Triggers for the Business:

a1) DPP: Defense Procurement Policy )- The Defense Procurement Policy (DPP) of Government of India has created a huge opportunity for Indian industries. Due to this policy the international suppliers of defense products to India are actively looking to procure from high quality companies in the defense segment to meet their offset obligations. Also in some cases, the DPP calls for Buy & Make requirements, due to which many multinational companies are planning to manufacture the products in India either through licensing agreement or joint ventures. Also, the latest DPP provides for offset credits for the technologies transferred (TOT) to Indian companies, which will encourage the foreign companies to transfer know how, thereby creating more opportunities to Indian companies.

b2) EMC Cluster: The Governmentâs vision is to create a globally competitive Electronics System Design and Manufacturing (ESDM) industry to meet the countryâs needs and serve the international markets. To meet this vision, the Government has introduced a scheme for Electronics Manufacturing Cluster (EMC) to ensure world class infrastructure and facilities to be provided to attract investments. Accordingly, the Government has decided to offer financial support in the formation of EMCs. Further to attract investments, the Government has introduced Modified Special Incentive Package Scheme (MSIPS) for new and expansion of existing units. This scheme offers an incentive up to 25% of the value of investment in Plant and Machinery.

**c3) ****4G/LTE (Centum Rakon): **Rakon (NZ) is one of the leaders in designing and manufacturing high-end TCXOs (temperature controlled oscillators) and OCXOs (oven controlled oscillators) which are used extensively in base stations and mobile-signal-repeat stations. Rakonâs technology is being widely used for the upcoming 4G/LTE networks across the world. In 2008-09, Rakon formed a JV with Centum to manufacture these high-end OCXOs used in 4G/LTE networks. Previously, design and manufacturing used to happen in France. However, due to increased costs, Rakon moved the entire manufacturing of high end OCXOs to India (Bangalore), while keeping only design unit in France. Due to the pent-up and huge demand for faster broadband services, there is an explosion for 4G networks across mobile operators, resulting in huge capex spends across the world. An added trigger would be Reliance 4G being launched in a big way in India which can further carry the sentiment for Centum, along with an improvement in numbers due to OCXO demand for 4G networks across the world.

**d4) **Currently Centum is operating out of 4 different locations in Bangalore. Due to EMC incentives, they have acquired a 6 acre land to consolidate the operations and also for future growth (possible capacity expansion unknown).


**a1) **This industry (and hence the company) is subject to rapid technologicalobsolescence. Given this nature of business, it may not be prudent to have a very high capital allocation or think of it as a compounder. This needs to be evaluated as an undervalued bet for the short term.

T2) They have written off Rs.11.3 cr in FY13 as bad debts. This is more than 1 year of consolidated profits. It looks like this 11 cr is related to liabilities regarding merger in 2009 (but need to clarify)

**b3) **Rakon partnership: Rakonâs management (based on our research) is incompetent, state promises they never delivered on, promised a better future for 6 years and kept delivering poor results, destroyed shareholder wealth to a large extent, none of the senior management or the board was fired even when they wrote off millions of dollars and blamed everything and everybody but themselves over the past 5-6 yrs (and their stock price went from $6 in 2007 to 22 cents currently). Rakon’s financials don’t look too good. The fear we have is - if Rakon goes bankrupt or if Rakon decides to sell of the 4G/LTE business to some Chinese or Japanese player, the JV will be in huge trouble and we may not get an exit opportunity in Centum Electronics. As of FY13 AR, Centum needs to get close to 42 cr from the Centum Rakon business (sundry debtors). Anything negative on Rakon and they might have to write off a substantial amount and looks like a big risk._ (need to clarify with Centum management as to how they see this JV going forward, given Rakonâs deteriorating financials)_

**c4)**Working capital dynamics are very poor (I guess itâs the nature of the business). Given this state, the cash flow from operations obviously doesnât reveal a healthy picture and Centum needs to bridge the gap between supply-payment with short term loans. Need to evaluate if working capital dynamics would improve going forward and if not, would the market give it enough consideration to re-rate it to a 10 P/E given growth possibilities?


After, what looks like a disastrous FY13, the numbers in FY14 look much better and consistent. They seem to be delivering decent results over the past 2-3 quarters and look good to deliver a similar set of numbers over the next few quarters. Given this background, we thought that a 5 P/E business (inspite of the poor working capital dynamics) was pretty cheap.

Disclosure: Minor position initiated. Look forward to views from valuepickr boarders

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Hi Kiran,

It definitely looks interesting. Any view on the management team? What is their track record? Ultimately it’s management which makes the difference.



The margins are very thin for an electronics mfg company. The technological changes are very fast and frequent. Also with the global attraction for the Indian market, it looks very hard for the company to expand margins.

@Kiran What are the reasons for such a huge jump in sales and profitability over the past 3 quarters?

Some pointers towards business :

~Chairman was happy to announce that the company has signed multi year multi million dollar deal with three major defence contractors …

http://www.bseindia.com/xml-data/corpfiling/AttachHis/Centum_Electronics_Ltd_310813.pdf Link: http://www.bseindia.com/xml-data/corpfiling/AttachHis/Centum_Electronics_Ltd_310813.pdf

~The outlook revision reflects CRISIL’s belief that Centum group will sustain its improved scale of operations while maintaining its profitability over the medium term, supported by its healthy order book and continued improvement in operating efficiencies. Consequently, the group is also expected to generate increased cash accruals over the medium term resulting in a strengthened financial risk profile. Centum group, on a provisional basis, reported revenues of Rs.2.07 billion for the six months through September 2013, and has a healthy order book to be executed over the next 15 months. The order book is backed by an increase in orders from new customers and continued offtake from existing clients.

http://www.crisil.com/Ratings/RatingList/RatingDocs/Centum_Electronics_Limited_RR.html Link: http://www.crisil.com/Ratings/RatingList/RatingDocs/Centum_Electronics_Limited_RR.html

~In 2012, Centum Group, a Bangalore-based provider of aerospace and defence electronics, broke into the select group of contractors supplying to US-based defence solutions provider Thales. Centum became the first Indian company to ink a sweeping pact with Thales. It can now supply directly to any of the 70-plus sub-groups that make up Thales’s diversified business, from military communications in combat management systems for ships to integrated air defence systems for the US military.

http://businesstoday.intoday.in/story/private-sector-manufacturing-of-defence-equipment/1/203170.html Link: http://businesstoday.intoday.in/story/private-sector-manufacturing-of-defence-equipment/1/203170.html

~Company presentation :

http://www.slideshare.net/ssumantha/centum-industrial-presentation?utm_source=slideshow02&utm_medium=ssemail&utm_campaign=share_slideshow Link: http://www.slideshare.net/ssumantha/centum-industrial-presentation?utm_source=slideshow02&utm_medium=ssemail&utm_campaign=share_slideshow

On first look, it does not attract me. But going deeper, it does look interesting. I am more impressed with the sales to europe & us and the multi year contracts with the defense contractors.

If Modi becomes PM then the thrust to indigenous sourcing for defense could provide a good trigger.


If you have questions about this company, I know someone in the company who can help us reach the management. Let me know if there is greater interest.


This is good. I think you should get in touch with Kiran and other senior members in Bangalore. We have been trying to get in touch with the management but all our attempts have been stonewalled by their company secretary Ramu Alluri.

Disclosure: I have around 15% of my holding in Centum.

Thanks Sunil.

This Co. has the potential to go the distance. I have a starting position. Due to lack of clarity n conviction, planning to add gradually as the story unfolds. Interaction with the mgt. would be great & could go a long way in building the necessary confidence.

Intrinsically - I would be very very skeptical of glamour quotient/especially businesses built around the latest technology.


Let’s try and bring some clarity in the discussion process. By asking some questions and I will supply some answers from my side (without knowing anything/studying anything on Centum, pardon me) …just to get the BALL rolling …I may be totally wrong:)

1). Why is this opportunity EXCITING?

)- I would say for most folks it would be more about that its screaming CHEAP at 5x (and some excitement/glamour about latest Tech/4G/only outsourced to India at the moment)

2). Can we sort of establish this business should qualify for atleast a 10x-15x PE in the near-medium term?? only then we can say hey -its available at 50 C to the $

)- prima facie -I would say I cant see the possibility at this moment. The ROSY picture has to actually play out for a couple of years consistently before that.


)- again I would say even without knowing the specifics (pardon me) most folks who would have done some digging/spent time learning/thinking about this business would classify this as an Opportunistic bet only - can’t take a long term call - for SURE it may develop into a longer term play -as the company performs -walks the talk - maintains the same competitive edge - like say our Atul Auto, Indag Rubber, Avantif Feeds have done so far

4). Are there much better OPPORTUNISTIC bets around?

)- I would say Avanti Feeds is way above league (at CMP :)). You want to play the Mispriced- Bet game? the ODDS are stacked way way in your favour in Avanti than here. (I may be totally wrong)

5). What do we know about the MANAGEMENT TEAM? past track record?

)- for others to supply

Let’s do proper due diligence. But let’s place the business into a SLOT first. Welcome your views.

Please try and reach Management - for info - trying the company secretary route to reach Management is usually the least preferred/least successful route (in small under-the-radar companies)

Bangalore company - what prevents you B’lore folks from just walking in. Talk to someone Seniopr in Marketing. Ask to send an email to Senior Management - explaining your interest in understanding more about what seems to you a very promising company - But for that you should be able to bring out in 2 paras

Para 1 - what is it that impresses you most about the company?

Para 2 - what are the 2-3 key areas that you want to focus on to understand the business/industry better

90% of the time this works!Try it! This is how I did it for a ~1000 Cr company in 2008 - when I had just read PAT Dorsey …and worked on the company on PAT Dorsey analysis F/w for a month.

Got some info about Centum from a friend who works in the aerospace industry.

Centum gets sub-contracts for defense projects under the DPP scheme and has a good reputation for its work. It’s still not qualified to get the contracts directly frominternational suppliers of defense products to India.Hence it depends on sub-contracts from others which might impact its margins.

Some of its sub-contracts are impacted in the short term due to the recent cancellations of theAgustaWestland helicopter deal and the delay in Rafale planes. Not sure on the quantum of impact on the overall revenue of the company.

Would be nice to get more info on this from the management.

[This is my first post on ValuePickr and also first attempt at digging more details into this company so pardon the lack of specific numbers and details.

Really admire the ValuePickr team for doing a wonderful job ofresearchingcompanies in such detail.]


Ofcourse undervaluation is certainly at play and that is the reason I got interested in it to begin with. Further the company is in a sector (defence) with high entry barriers. The company itself has taken a decent amount of time to evolve upto here. The company has tie ups with three F500 defence manufactures. The company does seem to carry out genuine research which is evident from some of the research papers present publicly. The pedigree of the workforce is another very impressive thing working for this company. Further companies association with Isro and other aviation and high tech defence sector is resulting in IP in terms of technology and processes. Centum Rakon (Centum has 51% stake) has become the third largest producer of crystal osciallators in the world. Centum Rakon has also achieved cost efficieny when it started manufacturing crystals in India itself which were earlier being imported. Instead of looking at the company at just an outsourcing play I would see it as a company which is unique in what it is doing and also developing IP in the process.


)- This is the difficult part. The company does have operational issues currently. The sales to inventory ratio is high. The good part is that in my discussions with the company CS he told me that the company realises this. They are looking to improve this in this quarter and henceforth. Further on receivables from Rakon the company said that they are monitoring Rakon’s situation continuosly and have received significant amount of dues from the company. I do see operational efficiency and also the cash generation capacity of business improving from hereon. Next quarter results could be an indication towards that. PE rerating is difficult to predict but I think the next two quarters would be interesting. Also the dividend if any declared could provide a boost.


)- I agree this is an opportunistic bet for the next two quarters or until I understand business furthe. Why two quarters because I see company reporting much better operating figures and also in q1 fy 15 the dividends from the JV will flow into the company giving a boost to the company’s numbers(predictable since this is discussed in annual report). At the same time I have found myself lacking in understanding the business and would like to spend more time on it. I would also like to see if some senior VP members can meet the management and get more insight into the business.


)- I do not track Avanti. From the companies that I track this looks exciting for next two quarters.


)- The management quality is high in terms of their personal repute. As far as business credential are concerned they have done well in turning around the company and JV quite fast. The audit firm is also a reputed one.

I agree that there is a lot to understand here. Currently my understanding of company’s business is very little. Also I am unable to get a view of the company’s performance for the next 2-3 years. The defence deals that the company has entered into augurs well but I have not been able to understand the impact of anyone of them on the balance sheet. Further Rakon’s deteriorating financial condition and the company’s strategy in such eventuality is also there to to understand. Further the diversified products that the company manufacturers are also a cause of concern to me. Having said this I do see an opportunity here and the next two quarters seems quite positive.

Disclosures: I have 15% of my holding in this company. Ownership bias could be possible in my assessment. Also my average ownership price is 111 giving me a decent margin of safety.

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For those who would like to know more about Rakon with whom Centum has a Joint Venture can read some articles in New Zealand Herald over here:



frominternational India.Hence theAgustaWestland ofresearchingcompanies

Dear Vinay,

Super Inputs from you! Specific details do not matter as much as first getting the broad contours right - such as Management integrity/reputation in industry, typical risks in the business, specifics from current environment in industry/business, etc.

Its important to get a handle on RISKS inherent in a business like this.

Me and Ayush rate this sort of scuttlebutt efforts from - right industry folks/domain experts , much above the emphasis on nitty-grities of the business/or say desk-research which everyone can do. But you are doing is special and requires a different kind of effort and even skill. Please persist with this.

It will also encourage many of the lurkers at ValuePickr - that you don’t need pro-level analyst skills to add value here…or good English…or good presentation/communication skills…I hear so many excuses. There are enough analysts…more than we need actually :slight_smile: - we need more active hands from every industry around us - that can get us finer level details on the business and industry - that can enable Team ValuePickr to extract the most from a Management interaction in due course - hopefully.

Thanks again!

frominternational India.Hence margins.Some theAgustaWestland

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Hi Anant,

Great to see new guys (at ValuePickr) like you putting their hands up for detailed work. You might be an experienced hand at markets. I like your approach and the enthusiasm - the first necessary ingredient.

What I would like to see you add to your armoury:

a. First slot the business - which you have done already

b. Ask harder questions aimed at establishing Sustainability of Business.

c. FOCUS on the Sources of Growth/Quality and Sources of Profitability/Quality

d. Question real hard on the RISKS side

Each are best done as independent exercises in themselves…to maintain an underlying integrity and objectivity to the process…more like wearing the Fund Manager Hat first, next the Optimist Analyst hat, and then the Pessimist analyst hat.

So let me help by putting some out myself for 2 above -Sustainability and 3. Sources of growth/profitability

1). What is the REAL edge that Centum posseses in this business. Why can’t the multiple other avionics/defence/electronics/embedded manufacturers (first from India and then worldwide) not do what Centum does…or catch up…or even participate in the bidding process

)- Is it manufacturing knowhow/IP/or scale?

)- how niche really is this niche? or how wide?

)- what are the examples of best businesses in this industry globally? what are their margins?

)- why are Centums margins seemingly superior? why will such margins sustain for any period of time? in the face of evidence to the contrary globally

)- if there are a few shining example of superior margin profile in any high-tech manufacturing businesses? why are they there? and why is the margin profile pedestrian to abysmal for most?

)- if Centum has the Promise - (I would call it HOPE really) - how do you think a company of its current scale would reach to the next level? what would be the likely milestones on the way & why?

2). Segment Analysis - actually at a high level this is necessary while slotting the business - and subsequently very imp to focus on

Sales & EBIT contribution for major segments . I would assume these would be - please supply specifics yourselves

)- Defense


)- Railways/Aviation

)- Others

Where does the growth come from TODAY and with what Quality?

Where will the growth come from tomorrow and with what Quality?

What has been the pattern in earlier years? Why does that pattern exist? IS it because of a) niche expertise b) relationships c) t5echnology early mover d) contractual keeps fluctuating e) other?

This is key to getting a better GRIP on the business. And extracting more out of Management interactions


Hi Guys,

Very good work and discussions. This stock had come up on our screen after their Q2 & Q3 nos and looked promising…especially as the earlier year earnings were subdued due to some write off and provisions.

But given the industry nature, the things can change quickly and hence we need better insights and understanding to have major exposure.

It would be great if we can prepare a set of questionnaire and get some responses from the management.



Hi Donald,

Thanks for your kind words, they mean a lot to a newbie like me. I agree there are holes in the story and answering the questions that you have raised will plug a lot of them. I am working on it and will update the thread as and when I get more insights.

Thanks Anant, Om and Donald for elucidating very important information and asking some probing questions.

There are some obvious risks in the story (technological obsolescence, Rakon's probable bankruptcy, fluctuating earnings etc.) which is probably the reason why it's quoting at at 5 PE rather than a 10-12 PE. It's already been a 4-bagger this year, so there must be something going right in this business (apart from Bharat J Patel acquiring a good stake at the lows last year).

This attempt is to look through the numbers and see if there is any story unfolding (and hence a probably re-rating to 10PE or a jump in earnings). Obviously, I don't have answers to all questions posed by Donald. But hopefully, this number crunching may spur insights from others.

Just to clarify, Centum operates inSpace, Defense,Aerospace (Strategic Electronics), Industrial, Communication and Medical Electronics industries (no Railways :) yet). Unfortunately, ARs don't give a view of the breakup of either revenue or operating profits between these industries.

Centum breaks down (as stated in my initial post) its segments into Products and EMS (Electronic Manufacturing Services).

So, let's get more familiar with Centum's numbers.

Comparing Consolidated vs Standalone numbers -

Products (as a % of total sales) 49% 50% 39% 37% 44% 100%
Products (as a % of PBT) 78% 230%* 52% 61% 99% 100%
Products (Operating Margin %) 26% 22% 7% 7% 3% -1%
EMS (Operating Margin %) 9% -11% 3% 4% 0% -
*EMS PBT was negative

Products (as a % of total sales) 21% 20% 12% 13% 20% 100%
Products (as a % of PBT) 43% -69% -1% -3% 96% 100%
Products (Operating Margin %) 31% 15% 0% -1% 1% 2%
EMS (Operating Margin %) 9% -11% 4% 3% 0% -

The insights that can be drawn by comparison are -

a) The joint-venture (Centum-Rakon) has pushed up the share of product revenue for Centum overall.

b) Products have more substantially more margin than EMS. EMS operates almost at break-even at an operational level.

c) Product revenue (on a consolidated basis) is roughly at 50% for the past 2 years. Unless Rakon goes bankrupt, it looks like it would continue at similar levels in the future (or may increase due to new defense/aerospace deals), now that manufacturing has shifted completely from France to India.

d) Products, although contributes only 49% of sales, it contributes close to 80% of operating profits for Centum. Most of it seems to be driven by Centum Rakon (consolidated significantly higher than standalone).

Now, let's break stuff down at a geographic level,

India 18% 15% 27% 35%
Europe 53% 46% 30% 45%
USA 19% 31% 31% 19%
Rest of World 9% 8% 11% 1%
India 29% 21% 38% 49%
Europe 26% 23% 4% 22%
USA 30% 45% 42% 27%
Rest of World 14% 11% 15% 2%

The insights that can be drawn by Geographical numbers are -

a) Centum-Rakon's joint venture seems to have pushed Centum's revenues heavily towards Europe over the past two years.

b) Centum (on a standalone basis) seems to have made very good inroads into the US and RoW markets, and reducing depending on the Indian markets.

Now that we have established that Centum-Rakon forms a critical piece for us to value Centum's business, let's look at the actual figures of Centum-Rakon:

Centum Rakon (CR) 9MFY14 FY13 FY12 FY11 FY10
CR Sales (in cr) 106 cr 101 cr 0.75 cr 0.67 cr 0.48 cr
CR Sales (as a % of total sales) 34% 36% 29% 26% 30%

Insights are:

a) Centum Rakon's sales (table indicates Centum's 51% share of the joint venture) are increasing at a decent rate over the past 2 years (25% CAGR).

b) Centum Rakon contributes 35% of sales for Centum (and roughly 40% of overall Centum's PBT).