MIC Electronics: Buy

Investments with a one-two year perspective can be considered in the shares of MIC Electronics, considering the bright prospects for its LED (light emitting diode) display business and potential to sharply scale up earnings. At Rs 905, the stock trades at 30 times its estimated current year earnings. This appears justified considering the company’s improving margin profile (profits have more than trebled in the nine months ended December 2007 compared to the same period in the previous year) on the back of increasing contribution from the LED display business, in which there are not comparable listed peers.

MIC has two key business segments — media and infotech and communication. The media business provides LED video, graphics, text displays and lighting solutions for “out-of-home” advertising at stadiums, billboards and malls as well as for various applications in airports and railway stations.

The infotech and communications segment makes telecom network products, WLL terminals, handheld computers and offers software solutions associated with network management and computer telephony.

The infotech and communication business, which contributed over 65 per cent of revenues even a couple of years ago now contributes less than 40 per cent.

This is due to the high-margin LED business gaining considerable momentum in terms of order wins with both national and international clients. MIC manufactures LED displays in India, with LED and other raw materials imported from NICHIA Corporation, Japan. MIC’s revenues and net profits have grown by a CAGR of 53 per cent and 100 per cent respectively in the last five years.

LED business holds the key

A 2008 report of FICCI-PWC on out-of-home advertising estimates the market size to be Rs 1,250 crore for 2008 in India alone with a growth of 25 per cent last year. MIC Electronics, with its countrywide reach and established relationships with government and other clients, appears well-placed to tap into this market opportunity. The pace of mall and large format retail store rollouts is likely to remain quite strong in India over the next few years, with home-grown retailers, large realty companies and international retailing giants all readying pan-India forays.

This points to strong demand for LED billboards, which are deemed a better mode of display than incandescent bulb lighting, and suggests sizeable opportunities for this business. This apart, higher offtake from the Railways (the Railway budget has indicated expansion in LED displays in stations around the country) and airports, also present domestic opportunities for growth.

MIC and InfoSTEP (its subsidiary) have jointly developed a Global Digital Billboard Exchange Solution (GLOBIX) that enables clients to optimise the utilisation of their advertisement space. This solution has been launched in the stations of the Delhi Metro Rail and may be replicable in high potential markets such as the US, where adoption of such technology may be higher.

This apart, MIC has also inked a JV with Latin America Futbol Corporation — Sports LED Media — to focus on LED solutions for stadiums across the world. Initially, the JV would focus on Latin America and Europe, two large markets where football is a popular sport with several events through the year.

This presents potential for LED displays by way of perimeter advertising, billboards and other forms of visual displays. If the JV manages to tap even a part of the market, the company would benefit by way of revenue-share arrangements.

Telecom segment

Though the telecom equipment manufacturing business is a low-margin business, MIC has two potentially strong areas of operation. First is the inter-operator billing solutions that it provides, which may hold potential as the number of operators in the telecom segment expands.

Second, the proposed forays by leading telecom operators such as Bharti Airtel and Reliance Communications into the IPTV segment may expand the market for products in the broadband DLC for triple play (voice, data and video).
Risks

Competition in the domestic market from players such as Barco and in the international market from Barco, Daktronics, Stella Vista may lower order sizes and have the potential to put pressure on margins. WLL handsets, which MIC manufactures, may not have strong prospects in the wireless landscape.