Videocon Industries

Videocon Industries is making a 2:9 rights offer at Rs 225 a share, raising Rs 1,156.3 crore. At the offer price, the company discounts its FY-09 earnings by 15 times (fiscal year ends September '09).

Shareholders can avoid the offer given the company's tight cash position, high debt, declining production at the Ravva oil & gas field and uncertainties prevailing in the telecom and power business.

Though the company's asking price for the offer is Rs 20 per share lower than the market price, we don't see it as a lucrative investment option at this juncture.

Videocon Industries' new ventures — power and telecom — are highly cash-intensive in nature. But, cash generated at the operating level from the consumer electronics and oil businesses was not enough to meet even the interest and finance charges last year.

The company's consolidated debt outstanding as of September 2009 was Rs 12,067 crore. Of this, Rs 1345.4 crore of debt will mature before September this year. The amount raised through the offer will go largely towards repaying debt (of Rs 898 crore). However, the proceeds deployed will not make a significant dent in the company's outstanding liability.

Contributions to earnings from either power or the telecom services business are unlikely to materialise in the near future, with these forays in their initial stages.

Additionally, the initial oil finds in the Brazil and Mozambique oil and gas fields, although encouraging, will take time to become earnings-accretive for the company.

Consumer Business

The consumer electronic and home appliances (television, television components, VCD/DVD players, refrigerators, washing machines, air-conditioners, water purifiers and microwave ovens) business contributes nearly 90 per cent (almost Rs 9,600 crore in FY-09) of Videocon's current revenues. Margins at the operating level of the consumer business have been at par with the industry at around 10-11 per cent.

With a brand well established, the company's consumer business is doing well; after a slowdown in 2008-09 (the segment's revenues were down 7 per cent, Y-O-Y, in FY-09), there has been a strong recovery. The consumer division's sales were up 41 per cent, Y-O-Y in the December quarter. However, the company's growth at the consolidated level has been constrained by its non-consumer business. While other consumer durable majors managed growth in the June and September quarters, Videocon's recovery was delayed till the latest December quarter.

Crude oil & natural gas

The company's oil and gas segment accounted for around 10 per cent of consolidated revenue in FY 2009. The business comprises participating interests in the Ravva oil and gas field in India (the company's only field under production currently) and in international fields across Brazil, Mozambique, Oman, East Timor, Australia, and Indonesia (all in the exploration phase).

The Ravva field (25 per cent participating interest) has seen declining revenues in FY-09 (44 per cent Y-O-Y) due to a combination of declining volumes and weak oil prices.

The uptick in oil prices in the December quarter has stemmed revenue decline to 3 per cent, but prospects for volume growth appear modest as output from here on may remain stable or even decline further. Discovery of oil reserves in the Wahoo and Wahoo-North wells in the Campos Basin in Brazil, in which the Videocon-Bharat PetroResources joint venture holds 25 per cent interest, bodes well for the company.

Initial tests indicate a high-potential reserve in the basin, which when it fructifies into production, could give a shot-in-the-arm to Videocon's oil and gas business. Encouraging initial discoveries have also been made in the Rovuma block in Mozambique, in which Videocon has 10 per cent interest.

However, given that oil and gas exploration and production is a long-gestation business subject to uncertainties, the conversion of potential to results and its eventual timing is something to watch out for.

Telecom and Power

Telecom and power, Videocon's latest ventures, are highly capital-intensive too. The company intends to build a 1,200 MW thermal power plant in Gujarat. But the project is in its initial stages with land acquisition not yet fully completed.

In the telecom business, the company has been allotted spectrum in 20 of the 21 local service areas in which it has license to operate.

Going by the experience of recent entrants in the telecom market, adding subscribers may not be tough. But it will take time for the company to see subscriber base translating into earnings good enough to help it break-even.

Low Cash

While the company's debt outstanding stood at around Rs 12,000 crore at end-September 2009, its cash outstanding was only around Rs 936 crore.

The debt-to-equity, post the offer, will stand at 1.3 (at 1.6 pre-offer) and net-debt-to-equity not much better (1.2).

While this may not appear too high, the company does operate on rather thin interest coverage ratios. Interest expenses in FY-09 increased by 40 per cent, bringing down interest coverage ratio to 1.8 times.

This is in part due to the high borrowings and no revenues so far on the power and telecom business front. The offer closes on April 12.

via BL