Videocon Industries, incorporated
in 1979, is well known for its consumer goods and has been a well-entrenched
player in the Indian market in this space.
It is engaged in the manufacture, marketing, and distribution of
consumer durables, color picture and cathode ray tube glasses in domestic and
international market where it has access to facilities in Italy, Poland, Oman,
China and Mexico. It is also the third largest picture tube manufacturer in the
world.
A few years back, it also made a
foray into the telecom space albeit with limited success. Its handsets may be doing well, but as a
mobile service provider, it hasn’t made any waves at least in the major metros
against stiff competition from established players such as Bharti Airtel and
Vodafone. It hasn’t been able to leverage its brand strength to make many
inroads in this area, unlike Idea which in a short time has given the
established players a tough time.
The Company has interest in four
major sectors:
- Consumer durables
- Display industry and its components
- Color picture tube glass
- Oil and gas.
On the consumer good side, the
company is firmly established, at least in India. A few years back, the company
acquired Thomson CPT Ltd, which has got manufacturing operations in four
countries for CPTs. Though the current
market trend in developed and developing markets is towards new generation
high-end technology like LCD/LED, there are enough countries in places like
Africa and even in the interior rural parts/non-metros of major countries like
India which continue to thrive on CPT-based TVs. Also, they acquired the
Indian operations of the Swedish goods major Electolux. It has an average
market share of 17 per cent across categories like color TVs, refrigerators and
washing machines.
However, what is not very well
known is that it has a significant oil & gas business where it holds stakes in
various oil fields across the world. This company has got 25% stake in the Rawa
Oil field, which is on the eastern Coast of Andhra Pradesh and produces close
to about 50,000 barrels per day. Besides this it has significant interest in
oil fields in Oman, Timor, Southern Australia and Western Australia. It has
also taken over the South American assets of a Canadian company called EnCana Corporation. The Brazilian
company has got about ten offshore blocks
in Brazil. However, its biggest and most profitable catch appears to be its 10%
stake each in 6 blocks of deep water Rovuma Block Area-1, offshore Mozambique where
state-owned Bharat Petroleum also has a similar 10% stake in these blocks thru
its wholly owned subsidiary Bharat Petro Resources Ltd. Videocon bought this stake
in 2007-08 for $75 million from Texas-based Anadarko Petroleum thru its
wholly-owned subsidiary Videocon Hydrocarbon Holdings. The other partners are
Japan’s Mitsui & Co (20 percent Thai group PTT Exploration and Production which
bought Irish company Cove Energy’s stake (8.5 percent) and the Mozambican
state-owned Empresa Nacional de Hidrocarbonetos (15 percent). Recently,
Andarko, announced a significant upgrade in estimated reserves in the basin
from 60 tcf to nearly 100 tcf. The new discovery in two gas wells off the coast
of Mozambique is being considered as one of the largest gas finds in the world
and would make the basin's reserves 20 times the size of India's KG-D6 (to put
the find in perspective) and make Mozambique a major exporter of liquefied
natural gas (LNG). This can sharply raise supplies and calm LNG prices at a
time US gas prices have crashed after supplies surged with shale gas. The good
news doesn’t end here. Just one-third area of Mozambique has been discovered so
far. Mozambique is now approaching to be as big as Qatar.
In a filing to SEBI on 20th
Aug., Videocon valued its 10 percent stake in the Mozambican block with large
natural gas reserves at US $2.26 billion. Videocon’s initial investment here
was just $75 million in 2008. The company based its calculation on Cove Energy
Plc.’s recent 8.5% stake sale in the block to Thai group PTT Exploration and
Production for $1.92 billion after a nearly 6 month aggressive bidding war with
Royal Dutch Shell Plc. Videocon also said that the valuation, excluded “the
large gas discoveries which took place during the period when the Cove Energy
sale process was on, which might or might not have been (taken) into account by
PTT, and on which we base our valuation,” which eventually won the bid. The
total valuation thus could be far more than US $2.26 billion when other things
are also taken into account.
The telecom story is by now well
known. Videocon had licenses for 22 circles which have now been cancelled and
are under litigation. However, since Videocon was not affected as deeply as
some of the others, the impact on it was not too much. It has also forayed into
another promising and sunrise sector of Digital TV. As per latest reports, it had
12% of the market share for digital TV. While active base/ARPU for this
business are not known, anecdotal evidence praises both the quality and the
distribution efficacy of the business (with firms like Edelweiss giving a
thumbs up to the DTH operations). Besides its other businesses are doing pretty
well, though over the last 2 years, consumer durables has taken somewhat of a
beating.
Dhoot has headed Videocon’s
transformation from a maker of consumer electronics products into a
multi-business group centred on hydrocarbon exploration. The diversification,
however, has come at a price: the group had borrowed Rs. 18,656 crore as on 31
December, an increase of 58.5% from a year earlier. Its current liabilities, or
obligations due within a year, rose 175% to Rs. 2,511.2 crore in 2011 from Rs. 912.05
crore in the previous year, while cash balances fell 61% to Rs. 504.5 crore in
2011, according to the company’s latest annual report.
The energy assets, tipped to be a
cash cow for the firm once the Mozambique block goes into production in fiscal
2016, could help in reducing debt.
Recently, Videocon board has
proposed to demerger its Oil & Gas business as a separate entity. In an
energy-deficient country like India, Oil & Gas sector especially the private
producers (Reliance, Essar etc) would always have a future for a long time to
come. When the above proposal is implemented, the shareholders of Videocon
would have exposure to 2 high-growth businesses – Consumer durables and Oil
& Gas. While the former will take as much time as the economy to bounce
back to its former position, the latter should pick up sooner than later
especially with the moves planned by the management.
To summarize, the upside triggers
for the stock seems.
1. Sale of DTH business-if rumor like this
one comes true (http://www.dealcurry.com/2012076-Videocon-To-Exit-DTH-Biz.htm).
2. Spinoff of oil and gas assets-no more
expensive capex. Also, it may reduce the complexity
discount/conglomerate discount attached to the stock.
3. Resolution of telecom 2G auction
issues and possible compensation.
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