Phoenix lamps – rising up from the ashes ?
CMP – INR 115
Having learnt from both Warren
Buffet and Phil Fisher, I have developed my own unique style of stock analysis
– that involves about 40-50% of analysis on the ground (which a lot of analysts
miss out on) the rest in desk research- reading AR’s, analysing numbers etc. I
would like to call this the Holmesian way of analysing stocks - unlike
conventional analysis that relies heavily on secondary research, this creates a
double loop mechanism that feeds into the other engine and helps validate or
reject the thesis. This has often proven to be quite an advantage in micro caps
where often “what you see is not what you get in the numbers” and vice versa.
Said all of this, it is seldom
that I come across a stock that is a purists value investor’s delight which
offers a triple play of reversion to mean, de-merger/spin-off optionality and
pure and simple undervaluation. I must thank my friend, Gokul raj who introduce
me to this stock and also shared his note with me from which I have generously
borrowed.
Company background – phoenix
lamps – left for the dead, about to fly higher
The company is Phoenix lamps and
is a small/micro cap with a Market cap of INR 3,250 MM with no analyst
following (don’t I just love these) and of course low liquidity and
institutional interest.
The company, which was majority
owned by Actis was a classic study in “di-worsefication”. A near monopoly
business in automotive head lamps/tail lamps gone terribly awry through a
diversification into CFL’s which is cut throat, high intensity, B2C, branding
heavy business. A decade later and the mistake corrected through a slump sale
of the loss making CFL business, look at the ratios and you will be impressed.
High RoE, high ROCE, FCF positive business with high asset turns (11 x FA
turns) with a 20 % + EBITDA margin with ROCE of 30 % +. It’s got near FMCG
characteristics given the standard nature (My friend at bosch says the key to a
higher margin business in auto is a. high standardisation b. high value to
weight/volume c. OEM + after market possibilities and that’s why bosch is
always in things like ABS, wipers, air bags which are critical parts and fairly
standard. The only exception are high finesse items which involve a lot of high
end labour like machining and critical engine parts.
I looked at the company in the
past and the only reason why I let it slip was the lack of alignment between
shareholders and management – the existing shareholder actis wanted to sell,
the management guys were all professionals who had no clue about shareholder
value.
Recently the company got bought
over by suprajit engineering and this got me delving deeper again.
Triple play – great, proven capital allocator at the helm + improving
business prospects + re-rating possibilities
Let’s get the easy one out of the
way –actis has been stuck in the company for 9 years and started selling down
their shares (from 70 % to 60 % ) and this has resulted in the share price
going down from Rs. 180 to Rs. 100 over six months with no change in
fundamentals. That’s gone and a simple reversion to mean should take this at
least 50 % up.
The business is the largest and
one of the top 3 (Philips, osram) in the
automotive OEM. It’s the largest with 55 % market share in cars/PVs, 60 % + in
CVs and 80 % in two wheeler OEMs. Had lights are a small value but critical
item where there can be no downside – since that entails warranty claims and
OEM’s prefer to play safe with an indian manufacturer. Inspite of all the mega issues involving loss
of focus, it is to phoenix’s credit that it continues to be a leading player –
the threat of Chinese exists in aftermarket but not at OEM level (double
verified) because of quality/warranty issues.
Given the research I have done by
talking to a dealer/distributor, this can be a 15 % growth in the aftermarket
and a 7-8 % in OEMs, going forward.
Suprajit is well known to value
investors in the indian market. I have personally interacted with ajit rai and
I think he is an outsider CEO – buys cheap and is an exceptional operator with
a focus on bottomline and cash flows. He has been looking at acquisitions for
long and finally bought one which in his own words was a company that
manufactures :
Scalable, global standardized product
With a market leadership position in indian
market
With export possibilities
Complementary to his core business of two
wheeler cables
High margins and strong cash flows with minimal
debt
Given what he has done with
suprajit – have a look at ROIC of 30 % consistently and his own
salary/remuneration etc. and I am sure that he will do a good job of at least
maintaining status quo – which by itself should lead to a re-rating
Scuttle butt and research
Spoke to a couple of distributors
and a friend at Philips ;
Philips guys’ inputs – already exited
this market by selling their entire global lighting division. Used to be focussed
on auto market but has slowly exited – still sells high margin products in
after market but for all practical purposes has stopped supplying to OEMs
because of pricing pressures – they exited this business as they were
manufacturing in high cost locations and they want to concentrate on high
margin medical business
Distributors :
Phoenix brand is well known in
north but not so in south/west
Quality is still the best – very few
customers come back for returns
Supplies white labels to even
brands like bosch and has a good reputation for quality
Last 3-4 years have been playing
hot, playing cold – not enough attention in the market
Valuation :
I am attaching an excel sheet
from the screener template and you will find that both EBITDA, asset turns and
RoCE are increasing and last year’s dividend yield was a whopping 11 %- expect
this year’s to be at least 4- 5 %. (that’s a 5 % off on an already discounted
price for suprajit). It’s trading a 8 x
FY 15 and at about 1.8 x PB with an RoE of 30 % translating into a shareholder’s RoE of about
16-17 % - I look for fat pitches with a minority shareholders’ RoE of 10 % (viz., ROE divided by P/B) and that’s a fat
pitch IMHO.
Just mere re-rating to 12-15x
with an EPS growth of 15 % which is doable can lead to a 3-4 x over a few years
and of course if this gets merged into suprajit (which by all means it should),
it should be a fairy tale ending similar
to sun/Ranbaxy.
This has characteristics similar
to companies like Bosch (definitely a notch inferior) on EBITDA margins etc. –
not for nothing does Bosch think highly of this company.
I also expect modest synergies
from cross selling to suprajit’s clients.
The fly in the ointment is the
acquisitions they made in Europe which had a zero profit – they apparently
repackage the bulbs manufactured here and brand them and sell them in Europe –
which IMHO, is a so-so business unless suprajit can turn this around. I expect
zero contribution from this going forward and I would be pleased if there is no
good money to be thrown after bad.
LED’s are a risk but from my
talks with several industry experts given the :
Price differential
Harsh indian conditions of frequent hits which
lead to replacement of expensive bulbs
Wear and tear and rattling that result in LED
life getting shortened
LED’s are not a threat at elast
in the low end cars/CVs/ two wheelers for a long time to come. Even otherwise,
LED’s are only a supplement and cannot replace head lamps – most have only day
time running lights that are LED’s. Only Rs. 20 lakh plus cars have xenons and
LEDs’ and that will take some time to percolate down given the huge costs and
maintenance issues.
I see this as a high RoE business
in a slow growth industry (similar to Duracell purchase of warren buffet) which
can maximize FCFs and grow at a steady pace of 10-15 % easily without any
incremental capital and provide for a dividend yield of 3 – 4 % with a PE
re-rating upside.phoenix mills - numbers at a glance.xlsx (74.2 KB)phoenix lamps - value pickr.docx (18.7 KB)