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|December 1, 1997||
Business Commentary/Harshad Mehta
How BPL licked the competition, including MNCs
The corporate performance of BPL Limited for the first half of 1997-98 has revealed some interesting numbers and justified the very reasons that one had outlined when writing the company in as one of the most exciting purchases on the secondary market a few months ago.
Just savour the numbers for a minute: a pre-interest profit of Rs 650 million for the first half of 1997-98 at a time when Videocon and Onida have shrunk in sales, when the Whirlpool parent has told its Indian arm that it will no longer be in a position to plug the latter's losses, when Phillips India blew out huge losses causing it to shrink its advertisement budget and stop one of most popular TV programme Phillips Top 10, and when multinational presence in the country has increased.
BPL's post-tax profit increased from Rs 230 million in the first half of 1996-97 to Rs 420 million (83 per cent, the largest growth by any corporate in the country) in the first half of the current financial year. The equity has stayed unchanged at Rs 269.3 million.
Anybody's big question is how does BPL do it ?
My own reading is this:
* They produce excellent quality -- and keep changing their models every few months. This has an interesting impact where you least expect it: the dealer. Just when the dealer is convinced that what a great quality this BPL model with Nicam stereo is, BPL goes and launches the FQR 21 inch which is possibly the best set that you can get for reasonable money in India. The dealer gets only a three-week credit period from BPL so he doesn't like to see the models sitting on his shelf-space. The faster they move out, the better. And because the quality is right, the brand positioning is right, the models move. Just when the dealer is absolutely comfortable with the new model, BPL goes one step further : it introduces a newer model with better features. So the dealer stocks more.
And sells more. It is my conviction that BPL does not offer the best margins to dealers among the range of colour TV manufacturers in the country and yet these dealers end up making more money from the sale of BPL CTVs. So if the dealer push is right, the manufacturers does well. This is BPL's big plus.
* It has excellent brand synergy in consumer durables in India. A few days ago I was reading A&M, the country's premier marketing magazine. In its annual survey on marketing excellence, the company that topped the charts is BPL, beating Titan which has had a five-year stranglehold on the position. In doing so, BPL has risen from number five in 1996 to number one in 1997. Companies were judged across 13 parameters. The interesting point is that Titan beat BPL on five parameters, BPL beat Titan only on one.
Besides, BPL emerged with the highest points on only one out of 13 parameters -- and yet finished number one on the overall. This means that there is a greater breadth of excellence across various fields within the company instead of a flash of genius in only a couple. The point to note is that each of its Indian competitors -- Philips, Videocon and Onida -- lost ground on the rankings table. So just when the going got tough, the tough got going.
* But more on the brand synergy. Have you noticed that BPL doesn't sell BPL colour TVs or that it doesn't sell BPL washing machines? It simply sells BPL. It sells the brand, it sells the image, it sells perception. So when BPL advertises for mobile phone in Bombay, sales of colour TVs rise. When BPL advertises washing machines, refrigerators sell. My reading is that BPL's power of advertising voice as a group has finally reached that critical mass where it is able to outsell Indian and international competition because it is a highly visible brand. If you extend this logic, single product companies are likely to get edged out as multi-product single brands start capturing market share.
* Most interestingly, why I like BPL is because it is a future-oriented company. Having realised that increases in bottomline were not going to be achieved by any increase in the selling price of television sets, the company embarked on an ambitious exercise to cut inventory. By linking the shop floor more closely to the shelf space at the dealer's end, the company figured that if it replaced the goods sold faster than before, it could save interest costs. My back-of-the-envelope calculation is that if BPL can slash its inventory from Rs 1 billion to Rs 500 million, then it can save Rs 75 million on interest each year. That's a straight Rs 3 per share increase in pre-tax profits. And the indications are that the company has done precisely this in the first half of the current financial year.
There are other reasons why I admire this company. In July this year, the chairman of the company wrote a letter to the shareholders expressing concern over the dropping market capitalisation and how the company was committed to increasing shareholder value. As an extension, BPL reported quarterly results, following it up audited half-yearly results and the announcement of an interim dividend - the second time in the history of the company. The annual report for 1996097 also expresses the philosophy of investor welfare broadly: the document reeks of transparency.
On the technical front, the company launched the production of alkaline batteries in January 1997, sold the product for a few months abroad and finally launched it for domestic sales in August. A magazine called Better Photography picked Excell (BPL's brand name) for a test alongside Duracell, Energizer and Panasonic. Each of these cells was loaded into a camera and the button was pressed for successive flashes. BPL's 227 successive flashes was higher than that of each of its multinational competitors.
My argument is simple. If investors on the stock market are scared that multinational brands will kill Indian ones (BPL included), here is a great example of an Indian brand emerging as the best in the world in an industry which is dynamic and exciting. So why has this not been factored into the p/e multiple of the BPL stock ?
That is my point. How many are aware that Sanyo sells alkaline batteries in Japan, and when you turn the pack around and check the fine print, you will notice a 'Made in India' line below? Or that Fuji sells disposable cameras in a competitive Japanese market and when you look inside the battery compartment, you will find Bangalore-made batteries ?
This may have little to do with colour TVs which is BPL's bread and jam. But only if you skim the surface. Scratch deeper and you come across the attitude and intent behind a low-profile engineering conglomerate that is helping it emerge as a giant in a country going through a dramatic transformation.
I'll tell you how dramatic. In October, BPL sold more colour television sets than ever before in any single month in its history. Recession or no recession. It would have sold more. It couldn't. BPL had refined its inventory control so effectively that it had cleaned out its stock!
Now if the second half follows this buoyant trend, there is a post-tax profit of at least Rs 700 million -- or an EPS of at least Rs 27 to play with in 1997-98. The company pays tax at 20 per cent so all the money is genuine. Compare it with the market price of Rs 75. Irony.
The company is not only determined to fight the international competition
in the product but also wants to establish that it is no less conscious
towards the share holders and will prove its competence of managing the
share holders wealth too. The change is visible:
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