There was a time in 80’s when our home grown car
makers Hindustan Motors/Premier padmini were the kings of the Indian Roads due
to closed economy and licence Raj...they were the dreams of any young man who
wants to lead a life full of utter luxury. Today they are nowhere...even fallen
back beyond horizon. Then enters in the scene were, Maruti and Tata and they
make Indian cars competitive enough to be exported out globally, give . Today,
the scenario is such that all of world’s major car makers like Ford/Toyota/GM/Volkswagen
etc. want to set up manufacturing units in india due to much improved
infrastructure which can cater to their export market potential.
Switch over to mobile handset market and we find
ourselves on same footing with a different environment. Today like old car
makers, Indian mobile hand set makers are very few with no technology of their
own, cheap and crude processing power and design. The only change is that we
are not restricted to purchase only these...we can buy high tech, costly
imported hand sets from the houses of world’s best. Although some like Nokia,
LG has set up manufacturing facilities in india but these are more of assembly
units than real manufacturer which just assemble the imported parts of a mobile
handsets.
Our local warriors like Micromax, karbonn, spice,
Zen, intex also don’t manufacture anything in india...they just source
everything from china or elsewhere. Also there is an increasing fight all over
the world for Intellectual property rights for various
components/applications/design among all the leading handsets makers, recent
fight between Samsung and Apple is the one of. Indian companies are just copy
cats. So far big MNC’s were not treating them worthy of competition but as
these Indian makers are beginning to bite their share, the space is heating up
and anytime we’ll see fights over infringement of IPR by these companies.
India imports telecom equip/mobile handsets
valuing around 100000-150000 crores with little production in india. It is
estimated that at current pace it’ll outpace our oil/gas imports by big margin
in 2020. To have a figure, our oil/gas import this year was around 7-8 lakh
crore. With recent havoc in rupee depreciation due to high imports, india is
looking to lower its import bill. So this is one big sector which can’t be
ignored at all. India is trying for long to set up Semiconductor chip
manufacturing fab in india, but it never succeeded due to policy paralysis. At
present, semiconductor IC’s comprise for around 10-20% of cost of every
electrical item (for mobile handsets IC’s count for almost 30-40% of cost
of production). Also all of today’s electronic items have an IC which
control its entire operation.
Just when i was studying this sector...Govt has
announced setting up of two Semiconductor chip fabrication facilities in india.
These two will be set up by Jaypee group and HSMS india in technological
collaboration with foreign companies. It will entail an investment of around
50000 crores. But yet india can’t compete with cheap chips manufactured by
giant factories in china Taiwan and Singapore. Chip making is a very difficult
and capital intensive sector which also requires huge amounts of power and
water...the easy availability of which in india is always doubtful.
The compacting of chip sizes, driven by the
inexorable stretching of Moore’s Law, which postulated long ago that the number
of transistors on a microprocessor would double every two years, has had a
dramatic impact on the industry. The number of transistors on a device —
defined as transistor count in industry parlance — has increased from 2,300 on
the Intel 4004 in 1971 to 5 billion transistors on the 62-core Intel Xeon Phi
processor that was released last year. Individual chips, which used to be of 10
microns in 1972, are now down to 22 nanometres (a nanometre being 1,000 times
smaller than a micron). Silicon wafer, the building block of an IC chip is made
from humble Sand wherein sand is heated at 2000*C and other high power
processes to filter the impurities to make a high grade silicon wafer. Hence,
at present india can’t count on export income from semiconductor chips. But
local Indian demand is sufficient enough to provide a support to the sector if
Indian govt impose import restrictions on the same.
If i can recall our Reliance industries was also
having plans to set up IC chip and solar PV cells units with an investment of
around 30000 crores...i don’t know whether they are still serious about the
same. BHEL is also making a solar PV and silicon wafer making facility with an
investment of around 2000 crore.
However one thing where india is having an edge
over the others with respect to chip is....chip designing. Indian engineers are
designing high tech chips for major electronics companies of the world. India
is designing 15% of chips globally. Broadly speaking, the industry comprises of
VLSI design (transistors), embedded software development and hardware/ board
design, all of which make up a $15 billion chip design industry.
From Qualcomm to Intel, the world’s leading chip
design shops have established their captive design centres in India. A lot of
this is high-value work. Semi-conductor design firm Freescale’s India Design
Centre, for instance, has developed a world-class family of micro controllers
for automation systems and complex medical applications.
Electronic goods companies need to quickly launch
new products that too at low costs. Outsourcing the designing work to the
specialists mitigates major risks since design is the main building block.
Indian engineering institutions are creating a huge supply of ever efficient
engineers.
Hence so far i have filtered two companies who
are best placed to benefit from this shift. These are Bharat Electronics Ltd
and Tata Elxsi.
Bharat Electronics Ltd ( BEL) is a govt
PSU under the ministry of defence. BEL is serving Indian defence sector with
its innovative products since 1954. Its turnover has grown from some 20
lacs in 1956 to 6000 crores in 2012-13. The best part in this is that around
75% of the turnover (as per annual report) is achieved with products developed
at BEL through in house R&D, rest is from technological partnerships. It
manufactures Missiles(currently Akash Missile), Battle tanks, Army
communication system, Naval system, Night vision equipments, aviation systems,
electronic warfare systems etc. These are all high tech system requiring
significant technological strength. In civil sector, it is making civil
radars(used at airports), telecom broadcast systems ( Like tablets/Set top
boxes), homeland security systems, solar products etc. It is only one of the
few PSU’s making semiconductor chips.
India is looking to develop its local defence
sector in order to free itself from import dependence. Hence it is allowing for
Private and FDI investment in defence sector. It has made compulsory for any
Foreign company getting order from Indian Govt to get 30% of supplies/services
of its order from Indian companies which is a great opportunity for BEL. It is
increasingly looking after civil sector for huge growth in sector like homeland
security, civil radar and telecom and communication products. Once it has
produced a very low cost tablet for Indian govt for population counting.
I don’t know its plan for telecom sector but i am
sure sooner or later the company will leapfrog into the sector with great
vigour due to its inherent strengths.
The best part of the investment is the cash
holding of the company. Market value of the company at current price of rs.
1100 is 8800 crores. It is having a mammoth 5300 crores as cash which is 60% of
the market value. So we are getting 60%, 660/- in cash and so we are paying
only 340 Rs. for the stock for its earning capability. Hence chances are great
that company my announce a big special dividend. However its gross block has
grown from around 1431 crores in 2008 to 1902 crores in 2013 ( net block of
413 cr to 510 cr), which means company hasn’t invested much in setting up
new capacities. So i feel the more chances are for further expansion than
special dividend. I am yet to find out the reason of such a low growth in
capacity addition over time...the reason may be that it is importing major
components of its final product as mentioned in its annual report...2551 crores
of foreign exchange outflow against an inflow of just 166 crore. Net outflow is
almost 40% of total turnover which is huge by any standard...i can't find out
how much is for capital items.
This can raise a doubt on its R&D capabilites
because its operating margins are just around 8%. its operating income is 525
crores on a turnover of 6200 crores...it earns major part of its net profit
from interest on fixed deposit which is 560 crores for 2012-13. it looks more
like a trading or assembly company. for 2012-13 its operating cash flow turned
negative to -1351 cr, mainly because huge pending debtors of 3300 crore (our
Govt will not default however) which reduced its cash holding from 6800 cr
to 5300 cr. Nothing significant is visible on technology front at present.
But perhaps this is the reason for its lower valuation
and if there comes a good policy breakthrough or company plans some significant
investment for capacity addition because it invests 8.5% of its turnover,
around 500 crore in R&D, which is huge by indian standard and comparable to
world's best.
Due to these, it may appear somewhat risky...but
cash holding of 60% provides for safety margin and
it is best placed to reap the benefits of
defence sector localization.
I will further study its R&D break throughs to have a better understanding of its technological prowess. On a net basis..till then it is a buy from me.
Tata Elxsi- another gem from the house of
tatas. This company is a leader in chip design and product design providing
services in the field of product engineering, industrial design, animation and
VFX etc. It is serving leading consumer brands of the world. Its turnover is
630 crores for 2012-13 with Net profit before exceptional item is around 38
crore which is going to show better due to picking up of demand and closing of
loss making unit in los Angeles.
Its visual computing lab has produced VFX shots
for movie Bhaag Milkha Bhaag and many other Indian blockbusters apart from
Hollywood movies. it plays a part in launches of cars like Tata Motors’ Manza,
Tata Motors’ Aria, where the entire special effects were created purely from
the engineering data. So there was no actual car used for creating those
special effects.
I am holding this from 2009 picked at 130/- and
adding at every fall. Sh S Ramadorai, the current chairman sees Tata Elxsi as
next TCS in the making. He was managing director at TCS for 13 years and now
after retirement, he has been given the task of mentoring smaller gems like
Tata elxsi and CMC to giants like TCS.
Business for Tatas is always a serious thing.
Tata elxsi is a leader in Broadband, wireless and 4G telecom technologies.
It is giving constant dividend of 7/- for many
years inspite of ups and downs in its net profits, which is 4% yield at current
market price of 172/-
Regards
Great Analysis....
ReplyDeleteJatin