Focus Lighting & Fixtures Limited (SME)

The promoter aims to persuade the investors by highlighting the following key points:

  1. Our performance should not be evaluated solely based on quarter-over-quarter (QoQ) measurements. By focusing solely on short-term performance fluctuations, the true potential and long-term growth trajectory of the company may be overlooked. It’s important to consider the broader picture and assess the company’s strategies and prospects.
  2. Similarly, our performance should not be evaluated solely based on year-over-year (YoY) measurements. Annual fluctuations can occur due to various external factors that may not reflect the underlying strength and potential of the business. Investors should consider the company’s long-term growth plans and overall market trends.
  3. If an investor is primarily focused on short-term performance and expects immediate returns based on QoQ analysis, this may not be the right stock to invest in. The company’s value lies in its long-term growth potential, and investors should align their expectations accordingly.
  4. We have a strong growth projection, with the potential to achieve a topline (revenue) of 400-500 crore in the financial year 2026-2027, compared to 162 crore in FY23. This demonstrates our commitment to expanding our market presence and capturing a larger share of the industry.
  5. We are making significant progress in becoming an approved source for the Railways, which would provide us with a substantial competitive advantage. This achievement would position us to secure over 80% of the Railways’ business, and we anticipate completing the approval process within a month.
  6. Our strategic focus is shifting towards expanding our manufacturing capabilities and reducing our reliance on trading activities over the next three years. This move aims to enhance our control over the supply chain, increase efficiency, and potentially improve profit margins.
  7. We are dedicated to investing a significant portion of our revenue, precisely 7-10%, in research and development (R&D). This investment underscores our commitment to innovation and the development of new and improved products. In the current year, we are targeting 10% of our revenue for R&D, with the possibility of increasing it up to 20% in the future.
  8. The promoter personally oversees product development, which demonstrates our hands-on approach and commitment to delivering high-quality solutions. Recently, the promoter spent a month in Europe, engaging with various companies to gain insights and explore opportunities for introducing innovative solutions to the Indian market. This proactive approach ensures that we stay at the forefront of technology and customer demands.

Investors who recognize the long-term potential of our company and align their investment strategy accordingly will be well-positioned to benefit from our growth trajectory and strategic initiatives.

(invested)

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The answer was pretty clear: There will be cash flow issues in the future too since payments are on a weak wicket due to exposure to Govt in infra lighting space.The major point was that being a 170 cr company,they can still take on orders as large as 100 cr at one go.A huge rock on a light boat rocks the ship & can sink it,just like a heavy order for a co. of Focus’ size can.So,the promoter said while OCF could remain in bad shape,they will be able to manage WC in a way that it doesn’t sink the company & thus gain higher scale in the process.

Disc.: Invested.

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This point is, still in the possibility zone, right ? 60 days is the normal payment cycle. In Infra, IF they take a 100 cr. project, of course it’s going to lead to cash flow problems. Right now infra share in overall revenue is 7.5-8%.

We can take the 12 odd cr. Surat project’s payment schedule as an example. Where 40% of the payment comes after a good chunk of work (Sl. No. 3) is done and another 45% after some important but light work like system integration etc…

I thought the possibilities on the Railway side was interesting.

Key takeaways on Railways : Current year business 1.18 cr. Expecting to get 15-17 cr. this year (FY24), but overall we see potential that in 2 years we can get 70-80 cr run rate. Approved sources margins are 30-40% more than development source margins. Cash Flow: ( Banks ready to discount the PO by ~90%, so cash flow is not a problem for Railway projects.). Development vendors have to do min. qty to qualify for approved vendor. We have developed 16 products and got approval for all of them.

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yes hence no guidance in the concall. I chose the number as an example given their revenue base & to drive home what the management said.

The company mentioned that the Indian Govt is seriously looking at creating a world class railway system including quality lighting.As such the opportuninty is a mega,multi-year one.Even at 70-80 cr in 2 years we might still just be scratching the surface.

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While we as investors have a way/expectations to look at performance, it would be worth to see promoter perspective and then validate two to see if there is synergy

There are broadly two sets of biz segments - established with good growth(retail B2b, exports etc ) and emerging with exponential growth (Railways and infra etc)

  • Focus has been predominantly a retail(B2B - showrooms etc) focused co - FY 23 at 60%+ revenue( this was majority part in FY 22). This is supported by credentials, financial hygiene and a well oiled engine to generate predictable growth - if promoter were to pursue only this track - most of challenges will go away and we get a 20-25% CAGR biz with decent margin, cashflows etc.
  • Railways - seem to have two parts and promoter is quite bullish in tnear term(supported by sector tailwinds)
    ---- Standard tender based bidding they did sub 2 cr in FY 23(at 20% so 10 cr tender win) - FY24 at similar win rates but at 80% they aim to do 20 cr type (at 80% need 25 cr tender win as approved vendor) - logical to assume Q2 onwards when developed vendor approval comes.
    ----- Exploratory - IoT based solutions - could be large but lets leave it out of calculations for now -
  • Infra - this is the vertical which is making all lumpiness and also presenting enormous potential, they have done delhi ariport and two projects like bade baba/surat fort in hand (together ticket size near 30 cr) - mgmt intent is clear that ticket size will only go up and they are prepared for cash flow impacts.

This is a high growth story where jockey wants to run show its way and not be judged for v short term in return for mid term potential (akin to PE space), will have spikes to an extent where mgmt itself cant predict near term.

Would be watching out for (note below are pure speculation basis FY 23 base and base growth 20% in existing biz/mgmt guidance)

  • Railway Dev approval, wins and rev run rate (Q2 onwards) = 20 cr FY 24
  • Retail and exports run rate and margins (Fy 23 base of approx 125 cr together) = 150 cr+ FY 24
  • Infra - Current order execution (Temple + heritage fort) + new wins quantum and WC = 30 cr+ ?

there is no doubt that stock has had one way move from 100 to 800 type and euphoria post Q3 call, and a 31% fib retracement puts it at near about 580-600 level - will also bring valuations closer to 750 cr/ 32X TTM basis or 23 X FY 24 basis (going by mgmt claim for 30% growth). Not cheap but not overvalued either for high growth.

D - invested and could be wrong in assumptions, mgmt may surprise on upside given optionality or struggle in cashflow /execution given nature of infra biz(though they know what they are getting into), heavy R&D disproportionate to size of biz is another risk

15 Likes

This is what I make of:

  • Focus is a projects company and not a consumer one, hence do not expect such characteristics - it is inventory heavy and hence WC heavy, cashflow will be delayed. (it made 51Cr in PAT during 2012 till now but total cash generated is 11Cr - 70Cr is stuck in inventories/Receivables currently). It is capex heavy too.

  • The MD has a long term approach and is brave enough to ask the analysts not to look at Q-o-Q movements, instead look at 3-5 years, reason being a projects company, without an order book, revenue is not predictable qtr to qtr. This is refreshing among managements who try to catch up to quarterly estimates and the analysts/market which chase it.

  • Due to the above nature, company wont likely merit a high multiple, atleast for now. May be a 20+, but not 30+ or 40+.

  • MD is a product and tech fanatic, very passionate. He knows his stuff too. Whenever there was a question about product/tech, he was quite gung ho and talked at length. The recent interview also showed it, he dreams big, executes well.

Focus has all the ingredients of a small company that can go places.

At the same time, I am disappointed the way the MD responded to my question on associate company Shethvinod (Focus Lighting & Fixtures Limited (SME) - #61 by johnsgeorge.cet), which is the manufacturing arm of Focus. And same with my other question of about raising funds.

  • Regarding Shethvinod this is what the MD said - Shethvinod was merged with the main company 3 years ago already, this question is not even relevant.

However, in my earlier email communication (dated Mar 24, 2023), this is what he had to say about Shethvinod - that it is a separate entity and is not merged with the main company!

Anyhow, I checked the 2022 AR again and could see this, they bought over all the tools/dies from Shethvinod and all manufacturing is now only in Ahmedabad. This is good and I assume there wont be any related party txn with Shethvinod from now onwards. If there is, it will be a red flag.

image

But why did he then say it was merged 3 years ago, why could he not simply say this in the email. And why did he reply to my email that it is not merged and sounded like there is no plans to do this at all?

Note that I had sent this questions to him before the call and he knew this was coming.

  • I also asked about the 31 Cr pref issue raised in 2022. My question was simple - There was heavy capex of around ~28Cr in recent years and in previous interviews/calls MD said this is sufficient capacity for next 3-4 years of growth. If that is the case, why raise this funding, diluting the shares?

He again became uneasy and didnt want to answer, as if this is not at all relevant. He shrugged it off saying that it was for future requirements like new line of products. But if each time such heavy capex is needed, we must have an idea to what extend. He could have given some more details around it and the reason why he didnt go for debt, instead chose to dilute the shares.

Should I just take these as whims of a small fast growing company, led by a passionate founder who just executes and does not care about looking good on governance? Contemplating on this. :slight_smile:
May be I must start moderate size and judge more in the coming quarters.

Disc: Not invested

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Spot on @Dev_S :ok_hand:

On R&D being disproportionate - what the MD refers to as R&D, which forms 7-10% is actually the tools, dies/casts and such similar assets for new products, which is simply product development, not exactly the R&D we refer to. Like a tech company puts the product team headcount as R&D in P&L, he attributes this to it. :slight_smile:
All manufacturing companies have such spend, but it is not called as R&D.

Which is why the discrepancy in AR - it only shows a namesake amount as R&D.

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On Shethvinod, from a technical perspective it is not merged - the company has acquired the assets (tools dyes etc). I agree there’s a need to see if this names comes in RPT for FY23 in the AR.

Retail segment is safe which is expected to grow ~ 20%.

But the exponential growth will happen in railway and infra and the promoter is very bullish.

My question is do we need to see any political risk going forward? Current government is focusing on improving railway and may be infra also. Can we expect the same if another party wins next year national elections?

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Been a while. Let me update on my email communication with the MD on my questions/concerns.

  1. Regarding Shethvinod (recap) - as per MD in conf call, Shethvinod was a fully owned subsidiary of Focus but it was merged into the main company 3 years ago and all assets were transferred to the main company.
    However the annual reports are not matching this. Referring to AR from 2019 to 2022, there is no mention of Shethvinod in fully owned subsidiaries. Nor any mention of merging Shethvinod. In all these AR’s Shethvinod is described as associate entity. Only AR 2022 mentions about purchase of assets from Shethvinod, still no mention of fully owned subsidiary or merger. Also, as per conf call the assets were bought over 3 years ago, but this was mentioned only in AR 2022 about such a purchase.
    image

    But MCA website shows that the company is still active. AR 2022 mentioned a resolution about assets purchase from Shethvinod.

    Focus MD response - Kindly note that the Shethvinod is not a subsidiary of Focus and neither we have merged it with Focus. As informed over the call, As on date we have only 2 WOS i.e. Plus Light Tech - which is in UAE and Focus Lighting & Fixtures PTE LTD - which is in Singapore and 1 majority subsidiary. As mentioned in our earlier email, Sheth Vinod has sold their entire Assets and Inventory to Focus Lighting & Fixtures Ltd by way of itemised sale and this transaction was consummated in the financial year 2022-23. Therefore there is no mention of Shethvinod as fully owned subsidiaries in our AR as well. As you have mentioned in your query, the relevant disclosures for transaction of itemised sale is covered in AR. This is the correct factual position.

    This is confusing to me, why do they say different things, why cant they simply explain this in the annual report rather than complicating the whole thing?

  1. Query - There are substantial amounts of loan given to associate entities like Arion, Shri Jay Exim, Opti innovation. Even though going by your previous response that this was given to help with their capital needs, why is Focus Lighting obligated to do this with an associate company? In what way these companies help or add value to Focus lighting in order to do this? Why is this in the best interest of Focus Lighting and its shareholders?

    Reply 1- Arion was all about trading of LED Lights thorough online portal & Opti was all about Specialised lighting solutions and therefore it is a a separate line of business and that is the reason why we had formed separate companies. Initially Focus had provided loans to these companies for working capital requirements. Arion operations are closed down as unviable and focus has recovered the loan amount along with interest. In Opti there is some value addition over and above regular business of Focus because it is solution providing activities not related to activities of Focus the Opti business will continue for sometime.

    In regards to Shri Jay Pharma there are no business transactions and we are looking at options including closure of this company.

    Reply 2: Kindly note we have not given any loan to Shri Jay Pharma at all. The name of Shri Jay Pharma is appearing in AR as it is a related party for Focus.

    However Shri Jay Pharma appeared in 2018 related party transactions, with 10L loan given. It was listed as an associated entity. If there is no business transactions, this loan given was absolutely against shareholders’ interest, whatever small amount that was.

    Regarding Arion and Opti, why cant they simply explain what kind of business relation exists, in the AR?

  1. Regarding preferential issues, the management is obviously standing firm that it was the right path, however it ended up in 20% dilution for the shareholders. They have maintained in the AR that whenever needed they will take in investors, which means they are not hesitant to dilute it further. It looks like they found it difficult to get bank because Focus is not asset heavy. This could be a genuine reason, hence not doubting the management’s intention, however I feel there isnt enough clarity of how much funds they need to raise from time to time. As I highlighted in the previous post, company already has done major capex for manufacturing capacity. The 31Cr fund raise is for future products development. But how much more is needed at what time frames? This is not explained satisfactorily.

  2. Audit committee has the MD also as a member.
    Focus Reply - Since the MD has the in-depth knowledge of day-to-day activities including financial matters which helps the Audit Committee members to understand the financial and other related transactions. However, the MD abstains himself from voting in all the approval required and only Independent Directors approves the same.

Even though the company looks good and growing, with good prospects, it still does not give confidence with all the above. These might not be big issues and I might be making a mountain out of a molehill, but it appears to me that the company uses lot of jugaads to scale up, go into new businesses with different partners and so on.

Disc: Not invested.

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Per corporate notifications Focus’s management is meeting with Elevation Capital (formerly SAIF Partners) on July 13, 2023. Elevation specializes in early funding of promising startups, but have invested in established companies, example: Indiamart.

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I found this company promising and considering whether to do a deep dive or not. The first question I have on the onset is about the competitive intensity in the business. Can anyone give some arguments on why this company distinguishes in this segment and why wont the big guns like Phillips and Syska blow them out? Thanks

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Kindly listen to their concall, they have explained this in detail there. You would get to know much more basic yet critical information about their business model if you go through it completely.

Q3 Concall - FY23

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I believe since the company is only listed on NSE and not on BSE, Screener.in does not show the data related to the shareholding pattern. Pasting here for quick reference:
https://www.nseindia.com/get-quotes/equity?symbol=FOCUS

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Concall transcript : -

Transcript of the Earnings Conference Call for the Quarter ended 30th June, 2023.

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I am simply too dumb to be able to understand this business, CG issues, its nuances, etc. Moving on to next. I might be wrong, please don’t use this as investment advice or anything of the sort - I am just sharing thoughts as I was looking at the company from an investment perspective.

Here are notes gathered based on readings from AR, ValuePickr & Youtube. Hope this helps existing/would-be investors.

  • Super expensive valuation As per one post on value_pickr management has said

potential (revenue) of 400-500 crore in the financial year 2026-2027 compared to 163 Cr in FY23

  • Business is currently valued in market at close to 1.2k Cr, that’s almost 3x the potential revenue in 3-4 years.

  • Management quality concerns - see super high salaries and related party transactions on valuepickr

– Competition - What is preventing other vendors to enter into their market? Is there a China threat (cheaper products/services than Focus Lighting & Fixtures)? Are they hoping for long term contracts based on their low priced services? If so, can other vendors (in listed/private space) beat them to it? If not, how sustainable is this? Are contracts long term in nature?

  • Pricing power - If they are tending to govt, there would be no pricing power as they will have to participate in L1 contract kinda things? For private - they also seem to be catering to some very large brands, which generally take services from multiple vendors and if any of the vendors diverge from the norm (pricing, delivery terms/timeline, etc.) they are usually very quick to terminate the contract and move on to next provider - Is that a threat here? If yes - mitigation strategies, if no, why?

  • Management quality - any past/ongoing litigation? Against the company or individual promoters / directors? Is business run by professionals or is it a family owned business? Why is promoter reducing their holding? Trendlyne says in Dec 2022 they held upwards of 70%, now it’s around 50% and meanwhile stock price has skyrocketed. Is management unloading onto retail investors? Has retail shareholding gone up or were these shares sold to other large / institutional shareholders? What about so many CG concerns? Related Party Transactions? Would I be willing to invest one third of my portfolio into this if this was available at acceptable valuations?

  • Interest free advances to subsidiary, why interest free? Either put in as capital investment to enable them to grow or charge interest if they do not want this to be permanent capital for subsidiary? Why is a subsidiary company being given free money. That money belongs to shareholders. Has management acknowledged it in satisfactory manner anywhere?

Some major concerns related to Related Party Transactions highlighted here: https://forum.valuepickr.com/t/focus-lighting-fixtures-limited-sme/21606/7

  • They give 5-8 yr warranties - but AR doesn’t mention anything along the lines of this being recorded as either Liabilities or Unearned Revenue or Deferred Rev., Their revenue recognition doesn’t mention anything in relation to this. Has anyone looked into this?

Management:

other players like K-Lite … They dont have die casts which is difficult to do in India due to pollution control etc.

  • So given pollution control concerns for other companies like K-Lite, is this sustainable for Focus 10-15 yrs down the line?

  • What are raw material costs for Focus? Could they end up taking a hit on raw materials end? Who are their primary suppliers? Are raw material costs hedged in any manner?

  • In one concall (see post dated Apr 16 by sahil_vi on ValuePickr), management:

Now we do not have to go get certain certification to an external agency we can self-certify it and this is approved worldwide which is a big advantage with us

  • Isn’t this contradictory? It’s like grading your own exams? Is this sustainable or simply awaiting discovery by some regulatory authority?

  • One user lovekesh_thakur mentioned Auditor’s fees has increased 3X (4 lacs to 11 lacs) from FY21 to FY22. Any address to this?

  • Some good pointers raised by johnsgeorge.net on Apr 26 2023 post - https://forum.valuepickr.com/t/focus-lighting-fixtures-limited-sme/21606/61

  • A post by rajpapdeja and its response mentions about Cash flow issues due to govt contracts. Reminds me “Here’s all the profits I have made to made - sitting in this junk” – Charlie Munger (Charlie was referring to plant/equipment owned by business in that case)

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Do anyone have information - when is Q3 concalls by management…

As per Screener it is scheduled on 17th February

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