Halonix (EV 300crs, debt 160crs) is owned by Private equity [66%]. Auto lighting [Halogen bulbs] and general lighting [CFL bulbs] contributed equally to FY12 sales. Halonix is a market leader in automotive halogen bulbs in India with over 50% market share in passenger vehicles and over 80% in motor cycles for OEM segment. The single most reason for the company downfall in last couple of years is their ADVENTURE in highly competitive CFL bulb field, which is continuously making operating losses and draining cash flows of the company by way of increased inventory and receivables. Download company presentation for additional details http://goo.gl/YPc47. On the face of it, it might appear to be worst business to own. Frequent changes of MDs, high leverage for a cyclical company [1.2x], losses to low single digit operating profits and a company which is sued by minority shareholders [Unifi capital, a Chennai based firm http://goo.gl/J16Pi]. Reported numbers hide the fact that Auto lamp business made EBITDA margins of more than 20% during FY09-12. Off late due to steep decline in exports and slowdown in local market sales and margins are in pressure [Though possibility of accounts cleaning on appointment of big four auditor cannot be ruled out and to a certain extent steep depreciation of INR which increased raw material cost [50% imported], but owing to market slowdown ASP is flat]. This is not a long term story but a special situation, in which the value unlocking will happen on occurrence of specific events and market price will be less correlated to general market movements. In other words, unless the specific events occurs stock price will most likely be range bound.
**Investment theme: **PE group Actis owns 66% stake [acquired in May 2006]. Life of a PE fund varies between 7-10 years with option to extend it by another 1-2 years. Actis Fund which closed in Aug 2005, is estimated to be due for redemption by end of 2015. Actis most probably HAVE TO EXIT in another 2-3 years. There are multiple trigger for re-rating a) after completion of hive-off of general lighting business a time period next 3- 6 months [announcement on 21 Jan see here http://goo.gl/lXFjb b) After turnaround of auto lighting business 1-2 years c) after exit of PE [2-3 years]. The extent of upside will vary in each event. It will be maximum after the exit of PE fund is announced. Valuation is quite subjective, one may take individual call. For me, at current price it looks CHEAP.
Current enterprise value is around 300 crs [debt is 160 crores]. During Aug-10, promoters agreed to buy general lighting business at EV of 140 crs [roughly equal to book value plus debts]. Assuming that the current transaction will be carried out at similar valuation, auto lighting business is trading at EV of 160 crs. As per newspaper report (29 Nov 2010) in economic times, Philips offered to buy its auto lamp business at around 300cr (I assumed at to be equity value, adding debt of 65 crores we get EV at 365crs. According to my calculation, market is factoring worst case scenario which is a very low probability event. [Using reverse engineering with the help of DCF you can arrive at your own nos].
_What can kill the idea _
o PE exist does not happen for next three years and the current promoters spend excessively in promoting CFL business and/or auto exports decline prove to be permanent [at peak exports contribute 58% of auto lamp sales].
o Promoters try to sell the Auto lighting business to their related entity leaving CFL business with the listed entity.
o Value is highly sensitive to EBITA margins. Last three years average was around 18%. My assumption is that 16-8% will continue to be sustainable margins. This is based on the assumptions that a) Decline in exports are a temporary phenomenon and acquisition of its European distributors will fix it b) Ram material hike is more because of FX depreciation and is cyclical and there are no structural problems with Halonix pricing power for Auto lighting. Expect downside if EBITA margin of Auto lighting remain stuck below 6% for extended period of time.
S**ee the attached note for detailed analysis. This is not in the form of a structured report, but should be useful for detail oriented investors. http://goo.gl/YmBjp. **
Disc: invested in stock
PS: Going by frequent spikes in the share price in the last one year at very low volumes [20-30% deliveries, it appears that some operator is indulging into frequent pumping and dumping operation for this stock. So be careful and donat take jump in volumes or price as any breakout