Consumer Electronics September 7, 2012 Sharp India Ltd. Company Overview CMP Rs. 31.0 Incorporated in 1985, Sharp India Ltd. (Sharp) is a subsidiary of Japan- BSE Code 523449 based Sharp Corporation, which holds an 80% stake in it. At present, the BSE ID SHARP company is engaged in manufacturing and sales of CRT and LCD High/Low 1Y (Rs.) 46.4/ 24.5 televisions in India. It has a technical collaboration with Sharp Corporation Average Volume (3M) 7,093 for manufacturing both types of televisions. Sharp has manufacturing Market Cap (Rs Cr) 80 facilities at Koregaon-Bhima,, near Pune in Maharashtra. Shareholding % Jun-12 Mar-12 Promoters 80.00 80.00 Company Fundamentals DIIs 0.01 0.01 Operating Performance FIIs - - Sharp posted a net loss of Rs. 50.5 crore on net revenue of Rs. 83.8 crore in Public & Others 19.99 19.99 FY12. Due to new business strategy, the operating results are not comparable with previous years’ figures. While rising interest rates and Stock Chart ( Relative to Sensex) soaring oil prices contributed towards the loss, the company cites the 225 adverse currency impact to be the primary reason. Sharp imports most of its raw materials and components, which makes it susceptible to currency 175 risk. 125 Rising demand for LCD & LED TVs in India to boost sales 75 Demand for LCD and LED TVs has been on the rise as consumer awareness 25 about latest technologies continues to rise. There is pent-up demand as 04-Sep-11 04-Jan-12 04-May-12 04-Sep-12 the penetration of new technologies has been slower in India compared to SHARP Sensex other markets across the globe. This creates significant opportunities for manufacturers. While the market is dominated by larger players, Sharp has made its presence felt in this segment and intends to capitalize on growing Stock Perfm.(%) 1M 6M 1Yr demand. It will gain from the technological knowhow obtained from its SHARP -12.1 -16.3 12.1 parent company in establishing its brand. Sensex 0.5 1.0 7.2 New Business Strategy In order to capitalize on the growing demand, Sharp has adopted a new Financials FY10 FY11 FY12 business strategy whereby it has decided to focus only on its core 108.0 112.3 84.2 Revenue manufacturing capability. It has already scaled down its trading businesses y-o-y 17.5% 4.0% -25.1% and has also passed on the after sales services to Sharp Business Systems EBITDA 4.5 3.0 2.7 (India) Limited. The company is aiming to improve its product mix by y-o-y 41.1% -32% -12.8% adding new models of LCD and LED TVs and is eyeing OEM (original PAT 1.6 0.8 -0.5 equipment manufacturer) opportunities both in India and abroad to y-o-y 627% -49% PL augment its production capacity. EPS (Dil.) 0.6 0.3 -0.2 EBITDA Margin 4.2% 2.7% 3.1% Key Strengths PAT Margin 1.5% 0.7% - - Rising demand in Indian LCD and LED market P/E(x) 50.0x 100.0x - - Technological collaboration with its parent company – Financial year ends at March 31st. All figures in Rs. crores except Sharp Corporation for per share data # FIIs- Foreign Institutional Investors # DIIs- Domestic Institutional Investors PL - Profit to Loss LP - Loss to Profit Initiative of the BSE Investors’ Protection Fund Sharp India Ltd. Company Business Promoted by Bharat Forge, the flagship of the Kalyani House of Industries, Sharp was initially incorporated as Kalyani Telecommunications and Electronics Private Ltd in 1985. In 1986, it came to be known as Kalyani Sharp and was engaged in manufacturing of TVs, VCRs, VCPs, and audio products which were sold under the brand name – Optonica. The company entered into a joint venture with Japanese consumer electronics manufacturer, Sharp Corporation, in 1989. In 1995, Sharp Corporation acquired a majority stake in the company and all products started selling with the brand name, Sharp. In India, Sharp has manufacturing facilities at Koregaon-Bhima, near Pune. The company is primarily engaged in manufacturing of CRT TVs, LCD TVs and spares. Earlier it was also engaged in trading of microwave ovens, refrigerators, colour televisions, LCD TVs, air conditioners and audio systems. However, as part of its new business strategy it has shifted its focus only on its core television manufacturing capabilities. All its products are sold through Sharp Business Systems (India) Limited - a 100% subsidiary of Sharp Corporation, which handles the after sales services. FY 2012 FY 2011 29,940 5,444 Finished goods Finished goods 402,918 Traded goods Traded goods Services Services 935,984 797,667 *Figures in ‘000 INR *Figures in ‘000 INR Till 2011, Sharp’s manufacturing revenue was primarily coming from CRT TVs. With the growing popularity of LCD TVs in India, the shift in revenue contribution is quite evident for Sharp from the below mentioned charts. FY 2012 FY 2011 6,067 11,889 87,141 411,279 CRT TVs CRT TVs LCD TVs LCD TVs Spares Spares 518,638 698,637 *Figures in ‘000 INR *Figures in ‘000 INR In India, Sharp has an emerging presence in the FPD segment and is pitted against brands like Hitachi, Mitashi, JVC, Akai, T-Series, etc. Initiative of the BSE Investors’ Protection Fund -2- Sharp India Ltd. Industry Overview The Indian television market is the third largest in the world, and with spending on consumer electronics devices projected to grow at an overall CAGR of 12% through 2015, the market offers good possibilities. The television market can be broadly divided into two segments – the conventional CRT TVs and flat panel display (FPD) TVs which comprise LCDs, LEDs, and the Plasma TVs. At present, the domestic market is witnessing a shift from conventional CRT TVs towards newer technologies like LCD and LED TVs and more high-end offerings like 3D and Smart TVs, in line with global trends. DisplaySearch (a leading display market research firm) expects that the LCD market would account for over 88.5% of the world TV market by the end of 2012 and will rise above 90% by 2013. In India, sales of CRT TVs in 2011 fell to 1,200 crore units compared to 1,800 crore units in the previous year (as per the company’s annual report - FY12). This is the lowest sales volume that the country has seen in this segment since 2006. However, despite declining sales, India still accounts for 40% of the global demand for CRT TVs (as per the TV Veopar Journal - April 2012 issue). It is perceived that there would be some demand growth from the semi- urban and rural areas where CRT TVs still enjoy popularity on account of their lower prices within the price band of INR 5,000-13,600. The size of the Indian FPD market was around 45 lakh units in 2011, registering a 50% growth over previous year. While India has been a late bloomer in this market segment, the trend of last one year indicates there is enough potential in this segment. In the CRT segment, LG is the fore-runner and close to 77.5% of the market is held by LG, Videocon, Samsung, and Onida together, while in the FPD segment, Samsung, LG, and Sony occupy around 61% market share. CRT TV Sales FPD TV Sales Units Sold in 2012 Units Sold in 2012 1,735,000 350,000 1,000,000 980,000 250,000 270,000 785,000 180,000 150,000 LG Videocon Samsung Onida Others Samsung LG Sony Others Source: TV Veopar Journal (April 2012 issue) The general market conditions continue to remain challenging on account of high inflation, oil prices, and weakening of the rupee. However, the Indian customers are increasingly opting for branded products and this allows the market players to secure competitive advantage through improving their brand recognition. Competitor Analysis We have compared Sharp’s performance against its peers in the consumer electronics sector. Company Year End CMP M Cap Revenue EBIT Margin EPS P/E Sharp * Mar-12 31 80 84 0.5% -0.19 - MIRC Electronics Mar-12 11.25 159 1,651 -0.1% -2.75 - BPL Mar-12 16.45 80 79 - 14.08 1.2x Source: BSE, Capitaline, Market cap and Revenue in Rs. Crore Initiative of the BSE Investors’ Protection Fund -3- Sharp India Ltd. Summary Financials Particulars (Rs crore) FY10 FY11 FY12 Net Sales 107.0 111.8 83.8 Other Op. Revenue 1.1 0.5 0.4 Total Revenue 108.0 112.3 84.6 Growth (%) 17.5% 4.0% -25.1% Cost of Goods Sold -73.3 -78.9 -63.8 Gross Profit 34.8 33.5 20.4 Employee Costs -10.8 -11.2 -6.3 Other Expenditure -19.4 -19.2 -11.5 EBITDA 4.5 3.0 2.7 Growth (%) 41.1% -32.4% -12.8% Depreciation -2.4 -1.7 -2.2 EBIT Profit 2.1 1.4 0.5 Finance cost -0.5 -0.6 -1.0 Other Income 0.0 0.0 0.0 Exceptional Items 0.0 0.0 0.0 PBT 1.6 0.8 -0.5 Growth (%) 627.3% -49.4% PL Income Tax 0.0 0.0 0.0 Profit after Tax 1.6 0.8 -0.5 Extra Ordinary Items 0.0 0.0 0.0 Net Profit 1.6 0.8 -0.5 Growth (%) 627.3% -49.4% PL Rep. Basic EPS 0.6 0.3 -0.2 Rep. Diluted EPS 0.6 0.3 -0.2 Equity Capital 25.9 25.9 25.9 Face value 10 10 10 Ratio Analysis FY10 FY11 FY12 Margins EBITDA Margin (%) 4.2% 2.7% 3.1% Net Profit Margin (%) 1.5% 0.7% - Valuation P/E (x) 50.0 100.0 - P/BV (x) 1.8 3.3 3.3 Profitability ROCE (%) 4.8% 5.7% 1.9% RONW (%) 3.6% 3.3% -2.1% Solvency Ratio Debt/ Equity Ratio (x) 0.0 0.4 0.3 Interest Cover (x) 4.1 2.4 0.5 Initiative of the BSE Investors’ Protection Fund -4- Sharp India Ltd.