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.
ATTACHED IS A FILE WHICH EXPLAINs THE STRUCTURE OF THE COMPANY AND WHAT THEY DO. COULDN’T PASTE IMAGE HERE
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