Centum Electronics

[dkirand]

That was a long post

Continuing further on entry barriers -

a) From this Business Today article published recently (http://businesstoday.intoday.in/story/private-sector-manufacturing-of-defence-equipment/1/203170.html), we have some important insights:

Defence projects have a very high gestation period, says Centum’s Chairman and Managing Director Apparao Mallavarapu. He spent between Rs 20 crore and Rs 25 crore in 2006 to set up capabilities for defence. It was then primarily a supplier to ISRO for its space programmes with annual revenues of about Rs 100 crore. In 2013/14, 25 per cent of Centum’s revenues have come from defence and space projects. In the nine months ending December 2013, revenues were at Rs 313.4 crore. It was 10 per cent of Rs 257.4 crore revenues in 2011/12.

Look at increase in Defence + Aerospace revenues. They have increased from 25 crores (10% of sales) to 100 crores (25% of sales) this year (annualized 3 quarter figures for 4 quarters). We currently do not know if these are high margin areas, but there definitely seem to be huge entry barriers in terms of relationships.

b) Look at this company presentation (http://www.slideshare.net/ssumantha/centum-industrial-presentation). This is no ordinary manufacturer (see their evolution). They seem to have significant IP and technology understanding.

Anyway, there are a few questions:

a) Centum’s receivables from Rakon at the end of FY13 was 43 cr. In Q2FY14, it seems to have increased to 55 cr. It seems Centum received payments from Rakon, and the current receivables stand at only 23 cr, but need to confirm this.

b) In 2012-13, Centum wrote off 11 cr bad debts (more than 1 yr of consolidated profits) - and this was all of a sudden without any provisions in the preivous years, which tells us that this was totally unanticipated (the company in culprit was Datamatics, which didn’t pay up and Centum couldn’t recover dues even after they won a court case). What is the company doing to prevent such a shocker write-off? (11 cr was more than FY13/FY12 profits of Centum)

c) Biggest clarification required: How is the management hedging deteriorating financials of Rakon? What if Rakon declares bankruptcy and sells its technology to say a Chinese players? What would be status of the joint venture, given that 35% of sales and close to 40% of operating profits comes from Centum-Rakon joint venture?

d) What is the new facility about? What is the kind of expansion and for what products? When is it expected to go operational?

[Anant]

Hi Kiran,

I did some number crunching at my end too and the services numbers do not look so bad. Further the OPM in centum products (not the JV ones) is extremely high. When looking at the consolidated figures for profit I generally look after removing the minority interest. In the JV Rakon holds 49% so if I were to look at Centumâs Consolidated numbers after removing minority interest the mix will look better for services (although it does not impact the margins).Consolidated PBT before interest and growth and share in PBT after removing minority interest: FY14 figures are annualized.

	FY14 PBT	Share in PAT	FY 14 OPM	FY13 PBT	FY 13 OPM
Centum Products	1842	33%	31%	678	18.4%
Centum Rakon(51%) Products	1802	32%	24%	1231	23%
Centum Services	1902	35%	8.9%	-1410	---

Consolidated revenue and revenuegrowth: FY14 figures are annualized.

	FY14 Revenue	FY 13 Revenue	Growth
Centum Products	5910	3682	60%
Centum Rakon Products	14615	10595	37%
Centum Services	21282	14035	51%

Assumptions: All services are provided by Centum only.

Services business OPM changes in last few quarters. Instead of looking on YOY basis where there is little information that can be obtained (due to one time last year loss) I have done a qoq tracking of these numbers and see them improving significantly. In Q2FY12 the company booked a one-time loss in services division of 13.35 crores so those figures do not make much sense. The OPM in services business seems to be improving significantly.

	Sales	OPM
Q1FY12	3068	-3%
Q3FY13	3636	-3.7%
Q4FY13	4126	3.7%
Q1FY14	4340	2.6%
Q2FY14	5563	10.4%
Q3FY14	6057	12%

I thing the blind spots that we have now are mainly around growth and earnings sustainability besides Rakon. It will be also interesting to understand the competition incase you get a chance to meet the management.

[kunalpatel_5267]

I believe 5 PE valuation can be due to the following reasons

• at first glimpse most of the members may think - this is just an electronic manufacturing company which is prone to be thrown away anytime. Recent eg Blackberry, Nokia, Dell etc…
• Rakon’s stability is a big question
• Itoperatesin fastest moving industry hence inventory value may go down. One can feel company’s assets have “depreciating value”(unlike Real Estate companies’ land parcels. I am into Real Estate business )
• Management do not have clear targets /guidancein revenue, opm, etc
• If company is growing in IP, then where are the trademarks, patents ?
• Return on equity is low

Kunal

[vishal]

This company remind me Kavveri telcom

[manishinlucknow]

hi Kiran / Anant,

how would you rate the mgmt of Centum on quality n ethics parameters - average, good, very good.

Understand that since much of the profits is coming from Centum - Rakon JV, sustainability of Rakon is crucial , also the JV depends on the technology support from Rakon.

Can you express your opinion on below issues -

)- What will happen if Rakon goes bust. My view - in that case they will sell out to some buyer. Now even if a Chinese / Japanese buyer buys out Rakon, they will own 49 % stake in the JV. why would a company close / end its ties in a profitable venture. They will stand to loose their investment in the JV. In that case the receivables of Rakon will have to be paid by the new owner.

)- What if another reputed ( or may be better) MNC forms a JV in India with some other company. My view - hopefully there should be sufficient room to grow. Also Centum rakon while exporting products is anyway competing with other international suppliers.

I think the DPP for 30 % defence offset will help the entire defense sector in India and Centum will benefit too.

I think the opportunity is more on the sides of 4G / LTE - telecom. Most of the countries are still using primarily 3G and will sooner or later shift to 4g / LTE ( unless some new and better tech comes in ). Centum Rakon stands to benefit.

As per Rakon -Investment in 4G is now accelerating in major markets globally and it is anexciting market as this new infrastructure requires a number of Rakon’sproducts, for example; high specificationOven Controlled Oscillators (OCXOs) for timing applications - which only very

few companies can manufacture.

Rakon has strong global market share, designed into over 50% of the new 4G macro base stations. This is reflected in an improving EBITDA from Rakon’s India Joint Venture.

.

Sustainability of Rakon - The company plans to close its manufacturing in UK and France and do only R & D in these centres.

Excerpts from Rakon website -

As on sept 13 - bank borrowings of $37 million. Company targets to reduce it to $12m by 31 mar 2014 ??. They have already sold off the china unit for manufacture of SWD ( smart wireless devices).Divestment in Rakon Crystal Chengdu:Following the approval by shareholders at the Special Shareholders Meeting in September, the divestment of an 80% equity interest in Rakon Crystal (Chengdu) Co. Ltd (RCC) was completed during October with the settlement by ZheJiang East Crystal Electronic Co. Ltd. (ECEC) of the US$18.8 million purchase price.As you can see in the slide some 74% of Rakon’s revenue in

the 2013 year was from segments outside SWD where our operations are

performing well and the EBITDA contribution is positive.

Rakonâs strategic alliance with Huawei is progressing well in their telecom infrastructure division, whileat Cisco, Rakon was recently nominated âLeading Emerging Technology Supplierâ (out of 200 suppliers) after being invited to attend the Cisco supplier conference for the first time.

FROM RAKON AR FY 13 -In 2008 Rakonformed a 49% joint venture (JV) with Centum Electronics Ltd, based in Bangalore India, to create Centum Rakon. The aim of the JV is to manufacture high value telecommunications infrastructure products and commercialise the R&D programme generated from Rakonâs operations in France. The Centum Rakon JV operation is over 3600m2 and employs around 400 in manufacturing and R&D.

Since the Centum Rakon JV was formed in 2008 there has been impressive growth in the business, with the customer base broadening significantly in the last few years.

Growing importance of the domestic Indian market for OCXO products
There is good potential for growing the OCXO business in the Indian Space and Defence market segments. Currently OCXO products are being imported from other manufacturers. Centum Rakonâs products are already qualified by Indian Space and Defence organisations which will help drive increased market share from customers in these sectors.

[Anant]

@manishinlucknow

how would you rate the mgmt of Centum on quality n ethics parameters - average, good, very good.

What will happen if Rakon goes bust. My view - in that case they will sell out to some buyer. Now even if a Chinese / Japanese buyer buys out Rakon, they will own 49 % stake in the JV. why would a company close / end its ties in a profitable venture. They will stand to their investment in the JV. In that case the receivables of Rakon will have to be paid by the new owner.

What if another reputed ( or may be better) MNC forms a JV in India with some other company. My view - hopefully there should be sufficient room to grow. Also Centum rakon while exporting products is anyway competing with other international suppliers.

Manish:

Anant: Ethically I have found the management very good (no first hand information here). I have not seen them hide any information. I have been able to get in touch with one of their suppliers and they have never had any payment issue. The employees of this company rate their management (CEO Apparao) very highly and some of them have stayed for more than 10 years with Centum (a difficult feat in technology). I have interacted with the CS multiple times and he has provided answers and also called me back to address my concerns at the same time he has been very guarded about disclosing any price sensitive information. Their auditors too are well known for their adherence to audit guidelines.

**Manish: ** lose

Anant: I agree with your assessment. This is a concern but I do not see much negative impact. The JV has produced around 26 crores in profit for 9 months this FY. Most of these profits flow directly as cash flows in form of dividend to the stakeholders (last year the dividend was nearly 15 crores on a PAT of 21 crores). I think any new partner would be interested in keeping the JV going. The JV could be a major reason for the newer partner to buy Rakon.

**Manish: **

Anant: There are two kinds of moats that I think are in play here.

a) Rakon does have certain patents in this case which gives it a technological advantage. (Not sure about the exact details, you should verify yourself)

b) There seems to be a huge pricing advantage which I see the JV seems to be enjoying. When the JV began in 2008 Rakon was 7th largest manufacturer of XO today it is 2nd or 3rd. One of the other things that has happened is the crystals required for manufacturing were earlier imported and are now made in India. You can take a look at this video where there CEO Apparao talks about this:

https://www.youtube.com/watch?feature=player_embedded&v=_nj39gYI7DI Link: https://www.youtube.com/watch?feature=player_embedded&v=_nj39gYI7DI

I do not understand the moats or their strengths well enough now and am currently working on them.

[manishinlucknow]

hi Anant,

thanks a lot for your detailed response. i have better clarity now.

[kaushik2m8]

Though I have no idea and I never heard of this company but it’s related to defence sector. I checked the companies financial history from 2004 to 2013 and found not impressive. In long run (since 2004) it didn’t help increasing investors investment nor it has increased its EPS. One may say that Rafale deals will help it to get big order but as of now deal not signed and even if deal gets sign after new government formation there is no guarantee that they will get the order. L1 bidder will win the order and bid will be open to all. Though the share price has increased 4 times since past year one should be cautious to jump on it at this moment just based on some speculative news.

[kaushik2m8]

Dear Sir,

The above post was the first one in valuepickr. I am way behind you people regarding investment knowledge and trying to learn maximum from senior bloggers like donald sir, ayush sir, omprakash ji, HG sir and many others. Can anyone tell me whether this company has any moat like SKF has. Being associated with defence sector for last 10 years I have seen SKF/SNFA France is the only company which enjoy the real moat.

[vivek_mashrani]

Centum reported good set of 1Q numbers:

Net profit of Centum Electronics rose 30% to Rs 8.45 crore in the quarter ended June 2015 as against Rs 6.50 crore during the previous quarter ended June 2014; though their revenue fell slightly due to fall in raw material prices and hence they passed the same to customers…

Centum Electronics consolidated net profit rises 30.00% in the June 2015 quarter

[vikrum]

Hi, I am interested in Centum. What got me interested in the company is that DSP Micro Cap fund has over 2% in it. And the fund has been a performer over a long period. Also, HDFC Mutual fund has a position in Centum. I don’t understand numbers and technical bit, so I am not going to talk over it. However, it seems that the company is in a niche space. And there are strong entry barriers to get into this space. What concerns me is that it’s not tracked by many brokerages, so there is not much information about the company. It could be a positive if it’s not tracked by many. However, in last few months company’s stock price has fallen quite a bit. Does anyone know the reason behind stock performance when the market seem to be doing so well? I have initiated a small position but will get out if can’t get more information out. Thanks.

[djmoney]

Hello Friends, No activity here? This is the best time for Centum to grow and expand it’s business, I read they expanded B’lore facility in previous year

Centum Electronics Limited inaugurates new space facility at Yelahanka

In previous board meeting (May 2020) they proposes to increase its stake in Centum Adetel Group SA.

If anyone tracking the co please share with other members.

Discl: Invested recently

[Aniyan13]

HDFC AMC acquired 3% stake in the company at 410 per share.

[Rumble_in_the_Bronx]

[Souresh_Pal]

A link containing some research reports about centum which are hard to find
http://valoremadvisors.com/centum/

[kartiks]

Oct 20, 2022
Centum Electronics, Indra Sistemas Spain Tie Up to Manufacture Space Radar Systems for India
Centum partnered with Indra Sistemas Spain to manufacture space radar systems for the Indian government.
Long-range radars can detect, track and analyze objects and debris in space at a distance of thousand kilometers.

Oct 29, 2022
Centum Electronics Limited today announced a strategic partnership with Israel
headquartered Rafael Advanced Defense Systems Limited. As part of the MoU, both the
companies will collaborate in the field of Electronic Warfare systems for the Indian Navy and
Indian Coast Guards. The MoU envisages development and indigenous production of the
futuristic light weight Electronic Warfare systems in lower frequency bands and life cycle
support of the existing Electronic Warfare systems

c7f5e055-963b-4361-b231-162a42753018.pdf (bseindia.com)

[Lavanya_Tomar]

Anybody who has any idea about the promoter group of this company? If they can make space based radars, I hope they can make Air Interception Radars as well. If they do it it will be niche! , as Indian companies havent been in this space. Important thing will.be execution of orders wrt to the cost of capital.

[Souresh_Pal]

Following the company for 2 quarters but the losses are increasing each quarter without any means to interact with the management very difficult to analyse it from outside.

[Jitendra_Vyas]

@Souresh_Pal any action you took? I am looking to make fresh entry with all optimism around this company

[Souresh_Pal]

Not tracking it any more.