MIC Electronics IPO Review

Name of the Company: MIC Electronics Limited
Sector/Industry: LED Display System, Software and Telecom
Issue Size: 51, 00,000. The issue would constitute 25.34% of the fully diluted post issue paid up equity capital
Issue Price: Rs 129 - 150
Issue Opens: Monday, April 30, 2007
Issue Closes: Tuesday, May 08, 2007
Promoter(s): Dr M.V. Ramana Rao
Company Website: http://www.micelectronics.com/
Book Running Lead Manager: Edelweiss Capital Limited.
Registrar: Intime Spectrum Registry Limited
IPO Rating: The Company is not proposing for IPO Rating.
Draft Red Herring Prospectus: www.sebi.gov.in/dp/micdraft.pdf


About the Company: The Company began its operations in the year 1988, in Andhra Pradesh India. The business is broadly divided into three parts:

Media: LED Video Display, LED Products & Services.

InfoTech: Embedded/ Telecom Software, Business Intelligence, Corporate Governance and IT services.

Communications & Electronics: Digital Loop Carriers, HandHeld Devices, CDM/GSM Products.

Overview of the Industry in which MIC Operates:

Media: The Indian advertising spends, as a percentage of GDP is 0.34% as against the world average of 0.98%. The Indian Industry will catch up this figure over a period of time and the huge gap will be bridged. Hence Media industry is poised for huge growth via increased ad spends as well as 9 - 10% GDP growth.

MIC mainly operates in Out-of-Home (OOH) Media Industry. OOH Media broadly describes a variety of advertising vehicles, which reach consumers where they shop and travel. These include:

Billboards / Hoardings
Street Furniture, Bus queue shelters, phone kiosks and newsstands; and
Transit/Airport/Malls, Buses (sides and fully-wrapped), trains, station platforms, commuter rail cards, airports, malls, trucks, taxi tops.

With CommonWealth games in Delhi, modernization of airports in Delhi and Mumbai, greenfield airports in Bangalore and Hyderabad and large no of integrated townships and multiplexes coming up, it is not difficult to visualize the growth prospects of this sector. Another big trigger for OOH industry could be modernization of Indian railway stations under PPP (Public Private Partnership) model.

InfoTech and Communications: Do I need to mention about the growth prospects of this industry? Everyone knows about it.


Objectives of the Issue:

Setting up additional facility for manufacture of LED Video Modules at Cherlapally, Hyderabad and Roorkee.
Investment in LED video display systems to be used for rental/leasing business.
Investment on Design & Development of 3D Stereoscopic Displays.
Investment on Market Development – Domestic & Overseas.
For acquisition of InfoSTEP Inc, USA.
Augment working capital requirements.
Meet the expenses of the issue.
Achieve benefits of listing.


The objectives of the issue looks healthy because most of the money raised would be spent in capacity expansion as well as geographical spread and this will positively impact the topline as well as bottomline.


Strengths:

As on October 2006, the order book for three divisions stood at Rs 47 crores and 85% of it belongs to LED business.

MIC is operating in a niche segment and enjoys monopoly in its LED division. Most of the money raised through this issue would be invested in LED business which in turn would increase their profit margins since LED business has higher profit margins compared to InfoTech and Communications.

It has few marquee clients like Reliance, BSNL and MTNL.

Weakness:

There are significant concerns regarding the way in which the promoters have acquired shares in the company. On June 15, 2006, 99035 shares were allotted to Mr M.V.Ramana Rao at the price of Rs 10.81 and again on July 18, 2006, 2725 were allotted to him at the price of Rs 10. On top of this, on September 28, 2006 bonus was declared in the ratio of 2:1. Thus the effective cost of acquisition per share for the promoter is Rs 6.66 and all this happened just one year back. I find this completely outrageous because there were earlier precedents when huge quantities of shares were allotted to other shareholder at a premium of Rs 205. This clearly shows that the promoters have put their individual interest ahead of company’s interest.


MIC is significantly dependent on Nichia Corporation for LEDs which is primary raw material for outdoor LED display systems. Over dependence on a single vendor might land MIC in trouble.

MIC is too small to be involved in three high profile sectors and it gives an impression that the management is trying to do too many things at a time rather than concentrating on core competency.

It has not been exposed to any significant competition and so entry of any sound domestic or international player might give MIC tough time.

Financial Summary:

For FY 2006 ending in June MIC achieved revenues of 101.39 crores and PAT of 15.59 crores.

Valuation:

Since we don’t have PAT figures for the whole year we need to do certain extrapolation with the numbers we have. The EPS for FY 2006, ending in June is 7.74. Assuming a growth of 30% we can assume that the EPS for FY 2007, ending in June would be 10. Hence the valuation turns out to be in the band of 12.9 to 15 which according to me is reasonably priced but we also need to look at inconsistent track record as well as the weaknesses mentioned.


Currently equity markets are going through uncertain times. There is no conviction in the market. As far as Indian markets are concerned people have already started discussion about ‘May mayhem’ syndrome. Market crash is on the cards but no one knows the time. Investors comfortable with risk can look forward towards investing in this issue for listing gains if the sentiments are good on the listing date. Risk averse investors can ignore this issue and wait for better opportunities.


Keep visiting this blog for the follow up action as well as details about upcoming issues.

Happy Investing……………