Bright spot

IPO REVIEW by Jitendra Kumar Gupta / Mumbai May 7, 2007

MIC Electronics should shine over growing business and lack of competition

MIC Electronics brings to the stock market a growing business with little competition. The company seeks to raising Rs 66-77 crore through its initial public offer at a price band of Rs 129-150 per share to strengthen its presence in the LED (light emitting diode) display business.

Being the first mover and the only player in LED-based video display in the country, MIC is well placed to capitalise on the growing opportunity in the niche segment.

Apart from setting up additional facilities for LED video systems, the company is keeping aside some funds for its US acquisition. Moreover, its order book of about Rs 170 crore promises to generate revenue in the near-term.

Media's mainstream
MIC Electronics is a niche technology player and operates in media, infotech and telecom segments. Currently, the company draws a little over two-thirds of its revenue from products and services used in the telecom space.

Though this business constitutes a sizable chuck, it earns lower margins since products in this space are largely commoditised.

Thus, the company is now increasing focus on the media business which currently constitutes nearly a third of the revenue pie and enjoys an operating margin of 30.8 per cent, significantly higher than that of telecom (13 per cent). MIC's media group develops, produces and markets video displays.

"We expect the media business to contribute almost 50 per cent of the total revenues in FY08 and about 65 per cent in FY09," says M V Ramna Rao, managing director, MIC Electronics.

Apart from better profitability, the media segment offers huge opportunity for growth. Thanks to the retail revolution in the country and changing technology, the advertising and media market is growing at a fast pace.

The fact that the ratio of advertising spend to GDP is still low at about 0.34 per cent for India compared to China (0.55 per cent), Singapore (1.38 per cent) and the world average of o.98 per cent, means there is tremendous potential to grow.

Rental income
Globally, renting screens is emerging as a big business considering the higher cost of outdoor displays.

To grab this opportunity, the company intends to invest Rs 15 crore in creating about 26 screens. The screens can attract a rental of about Rs 2 lakh per day.

According to estimates, even at Rs 20,000 per day per screen, if all the screens are deployed, the company can rake in Rs 18.72 crore in a single year.

Besides, there are customers who like to own screens depending on their needs. Here again, a import duty of 40 per cent tilts the business in favour of MIC. The import price works out to nearly Rs 85-90 lakh per screen, at least 30 per cent higher than the local price.

MIC is thus strengthening this business and intends to invest about Rs 14.9 crore out of the IPO proceeds. The company currently manufactures 500 module per month. The new investment will increase the capacity to 1200 module and will cater to both domestic and international buyers.

Apart from addressing the domestic market, the company is also seeking to leverage its product development capability and cost advantage to enter the overseas market. Already the company has presence in US, Australia and Dubai.

In the US, MIC had acquired 55 per cent in a company called Infostep Inc., which operates in IT services. Post-IPO, MIC will acquire the remaining 45 stake in Infostep. After the acquisition, MIC hopes to strengthen its current LED offerings in the US, which is the largest market in the world with 45 per cent share.

The issue is priced at about 10 times its estimated FY07 (June ending) earnings. Last year in FY06 the company recorded sales of Rs 101.8 crore up by 308 per cent, Whereas net profit grew by 682.5 per cent at Rs 15.47 crore.

Though there is no listed company with a similar business model in India, its telecom business can be compared with Tech Mahindra and Sasken which are currently trading at a price-earnings multiple of 30-40.

In the media business, comparable global companies like Daktronics and Barco are trading at a P/E of over 25-40 times. The issue looks attractive.