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Wednesday, May 02, 2007
Rising Rupee
The appreciating rupee is helping the government fight inflation. Prices of essential commodities are coming down gradually. But on the flip side, this surge in the value of the rupee has raised concerns over the profits of exporters, particularly textile, information technology and other labour-intensive industries. The rupee is currently overvalued by 11 per cent, up from 8.3 per cent a month ago, according to a JP Morgan index.
The Reserve Bank of India, which oversees the rupee-dollar exchange rate, is allowing the rupee to appreciate. It has the approval of the government because in a Cabinet note on prices, the finance ministry has said a combination of rupee appreciation along with tightening monetary policies would be the best solution for tackling inflation.
The rupee has been strengthening against the dollar over the last couple of months. It touched a nine-year high of 41.57/58 against the dollar a few days back. Although this seems to be a short-term view of the government, speculation is now rife that the rupee might be allowed to breach the 40 per dollar mark or even higher.
An appreciation of the currency helps increase the supply of goods and services domestically by making imports cheaper and exports expensive. This, in turn, helps to control inflation. A rising rupee has a dampening effect on exports since they become more expensive in dollar terms while imports become cheaper.
However, the negative impact on exports is immediate. India's Federation of Indian Export Organisations (FIEO) says the appreciation of the rupee has severely eroded the profitability of exporters. For IT exporters the rising rupee could mean a fall in operating margins and increased costs as they will receive less rupees for each dollar earned. According to Ambit Capital, each percentage rise in the rupee shaves off 30 to 40 basis points from an IT company's margins.
Those in textile business face stiff competition from our two neighbours Bangladesh and China. Bangladesh's exports to the US increased by six per cent while ours declined by 12 per cent, despite a much larger production capacity. Chinese exports rose by an even higher 23 per cent. With the rise in rupee India's textile will become more expensive than those manufactured by our counterparts. The Southern India Mills Association (SIMA) appealed to the Centre to immediately control the rupee appreciation against the US dollar to sustain the export growth of the Indian textile and clothing industry and have a level-playing field in the global market.
BPOs could be the worst hit as the margins earned by the foreign companies from outsourcing jobs to India are coming under pressure. The ITeS sector is less likely post higher growth rates as it has done in the past.
Even the India Inc. is divided whether the Reserve Bank should take steps to protect exporters from the appreciating rupee that will adversely affect their profits. While leading business chamber CII says the domestic industry would have to accept a strengthening rupee in the short term, FICCI, Assocham and exporters' body FIEO want RBI to intervene and check the sharp rise in the currency.
The argument of controlling inflation through a stronger exchange rate works in theory which states that imports increase the supply of goods, and cheaper imported goods help control the cost of the typical consumption basket. This works fine in a country like the US, where everything from coffee to footwear and clothing is imported. But look closely at India's import basket. The largest components comprising our import baskets are crude oil and electrical and non-electrical machinery, that is, capital goods. The latter does not have much impact on inflation but the former does. But these are de facto administered prices. Besides petrol prices can be tweaked without reference to the exchange rate, simply by reducing duties, or asking oil companies to hold prices and reimbursing them from the tax kitty. This fiscal response is independent of rupee-dollar relation.
The rise of the rupee against the dollar is without precedent, and seems to have been determined by volatile flows, not by macro-fundamentals. In the absence of hedging instruments like currency futures it seems pernicious to let the rupee rise abruptly, all in the name of inflation control. India has close to 12 million small and medium enterprises. They contribute around 6.7 per cent to the GDP and employ 30 million people, second to agriculture. They comprise 35 per cent of the total exports.
It is important to remember that in India exports create employment. One can expect that all those sectors that have been adversely affected due to this appreciation of rupee will withhold their expansion plans and capital investment. This would translate into less employment opportunities, badly impacting job seekers. So, at the end of the day the government might be able to tame inflation but will have unemployment and diminishing growth rate as its policy by-products. All these are bad signals for our economy, which is one of the fastest growing nations in the world now.
MIC Electronics IPO Analysis
Promoted by technocrat Dr M V Ramana Rao in 1988, MIC Electronics’ business is broadly divided into media, information technology (IT), and communications and electronics.
The media group is primarily responsible for the development, production and sales of video displays, text, graphic animation displays and display services including lease/rental of LED (light emitting diodes), and video walls. The IT group provides telecom software solutions for telecom network management, telecom switch access and computer telephony domains. The communications and electronics group has diversified products including the digital loop carrier (DLC) on optical fibre on synchronous digital hierarchy (SDH) ring, broadband DLC for triple play (voice/video/data) applications, code division multiple access (CDMA)/global system for mobile communication (GSM)-based wireless in local loop (WLL) terminals and phones, hand-held computers (HHC) with in-built GSM/CDMA modems.
MIC Electronics has lined up a public issue to raise Rs 65.79 crore at the lower band (Rs 129) and Rs 76.50 crore at the upper band (Rs 150). The net proceeds from the issue are intended to set up an additional facility to manufacture LED boards, invest in LED video display systems used for rental/leasing, upgrade products, beef up R&D of LED/LCD/plasma/3D stereoscopic displays, augment the sales network across the country and overseas, and acquire the remaining 45% stake in Infostep Inc, US, expand operations, explore overseas opportunities, and meet working capital requirements and public issue expenses.
Strengths
- The LED business has excellent growth potential. The management says the 30.8% earning before interest, depreciation, taxes and amortisation (EBIDTA) margin of the segment in FY ended June 2006 has improved to about 40% in the six months ended December 2006 on reduction in R & D cost. The current global LED display market size is around US$ 3.55 billion and is expected to reach US$ 3.9 billion by 2007. The LED market has shown a CAGR of 15.98% from FY 2004 to FY 2007. Internationally, LED display renting is one of the fastest growing segments in the live entertainment industry, with a size of around US$ 210 million and is expected to grow by 12.5% year on year.
- The order book of the three divisions stood at Rs 167.86 crore end January 2007, which is 2.5 times the revenue for six months ended December 2006. Of this, 33.92% of the orders are for LED video display systems, 3.57% for the IT division and the balance 62.49% bagged by the communications segment.
Weaknesses
- The operating cash flow has been negative to the extent of Rs 14.36 crore in the year ended June 2006.
- Nearly 90% of its entire LED requirement for outdoor LED display systems is sourced from one supplier: Nichia Corporation, Japan.
- There is competition in the LED display business from other internationally reputed companies with significant financial and other resources.
Valuation
Going ahead, MIC Electronics expects the media division to be the key growth driver. In a span of two years, company has been able to ramp up the revenue from this business, from Rs 88 lakh in FY 2004 to almost 32 crore in FY 2006.
EPS for FY 2006 on post-issue equity works out to Rs 7.7 and PE 16.8 – 19.5 at the price band of Rs 129– Rs 150. The annualised EPS for the half-year ended December 2006 on post-issue equity works out to Rs 10.8. At the price band of Rs 129–150, P/E works out to 11.9 to 13.9. There is no comparable listed company. However, its small size and involvement in a number of businesses will restrict its valuation.Tuesday, May 01, 2007
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