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July 15, 1997


'Why I would bet on BPL'

If there is one counter I would be willing to put my fortune on, it would be the Bangalore-based BPL Limited.

BPL is not just a stock that is selling for a low p/e multiplier. In fact, the low discounting is not my unique selling proposition, though somewhere in my argument this does figure as an important tool with which I'd fight my case. BPL is actually one of the best proxies for this nation -- a country on the move, a country with some specific strengths that have been savagely discounted on the global playing field, a country with considerable technical skills that have been overlooked in the broad argument.

Look at why BPL is a romantic Indian story. When the foreign brands came into the country a few years ago, the Indian consumer was convinced that domestic brands would be driven into extinction. He was right -- but only partly. Look at where companies like Weston have gone. Disappeared. But as I said...only partly right. If you see the 1996-97 market share figures for the colour television industry, the multinationals sure have increased their market share from somewhere around six per cent of the Indian CTV market to nearly 13 per cent.

But interestingly, around the same time, BPL has also increased its market share -- from around 24 per cent in 1995-96 to around 29 per cent. As things stand in the current financial year, BPL continues to grow - at 15 per cent -- while the Indian market has flattened out with no growth. BPL remains the biggest company in the colour television industry in India and it is more than twice the size of all the multinational companies combined in the country.

Of course, you could say that this will not last and soon the multinationals will carve away BPL's market share. Let me tell you why that may not happen. There are going to be two ways the foreign brands might want to compete : set up a plant in India to manufacture CTVs or ship the assembled CTVs into the country and do just a marketing operation.

In the first instance, these companies will have to grow organically by building up their installed capacity in phases during which time, a growing BPL will graduate to an economies of scale which would make it difficult for the foreign brand to compete in the marketplace. Besides, once the foreign brand starts manufacturing operations in India, there would be increasing public resistance because the television set would no longer be foreign. In the second instance, where the foreign brand would prefer to bring the set into the country, the competition would be limited only in the larger sets where the company would be able to absorb the freight and not in the 14-inch and 20-inch market where the freight component would make the pricing unviable.

It would still have been a superficial argument in favour of BPL had it not been for two things BPL is doing that makes it a company to fear. One, it has a capacity of around a million CTV sets for the major part of 1996-97; this will rise to two million sets over a year and a half -- at a cost which is negligible since the basic infrastructure is already in place. This will lower BPL's overall cost of production on the expanded capacity.

The second factor is more interesting. Last year, BPL acquired Uptron, the ailing colour picture tube manufacturer. This makes BPL the only integrated CTV manufacturer -- an advantage that even the global brands will not have when they set up shop in India (unless they intend to reinvent the entire wheel). My estimate is that two things will transpire as a result: BPL will not need to import colour picture tubes and keep them in inventory for a long period, saving in interest costs.

More importantly, BPL will be able to utilise its lower cost of production (as a result of the integration) and use that to expand its market share. That's not good news for a number of Indian CTV manufacturers and the global brands. Even if BPL saves Rs 400 per CTV made, on sales of a million CTVs that would mean extra resources worth Rs 400 million to play with. If the CTV market strengthens this goes to the bottomline. If it remains weak, BPL eats the market share and makes slightly less.

There are a number of other reasons why BPL can stand to rule the Indian market. Its adspend is larger and more effective than the other Indian or global brands. In 1996-97, the company spent more than Rs 400 million to push only CTVs. Not surprisingly, according to a study conducted by Gallup, BPL finished in the top five of the most recognisable brands in the country -- and the highest in the consumer electronics segment. Companies like National and Sony finished considerably lower.

When I see this mountain of evidence on the one hand and the way the stock market has treated one of India's consumer durable jewels, I am amazed. Some months ago, BPL was traded down to Rs 15, a market capitalisation of a piffling Rs 400 million -- the kind of money that BPL spends in one year on advertisements only. The ruling argument at that time was that the group was overstretched on account of the telecom projects that it had undertaken.

BPL, in particular, had given guarantees on behalf of the mobile phone project in Bombay, Tamil Nadu, and Kerala and if the repayments were delayed, BPL would have to cough up the money. The fears are vastly misplaced: the respective telecom projects had been comfortably funded and, more importantly, the private equity placement of the Bombay project in the American markets has bought nearly Rs 3.5 billion into the group. Besides, if the BPL group were to sell its stake in the Bombay mobile phone project, it would stand to gain nearly Rs 10 billion. This is reflected nowhere in the pricing of the BPL stock today.

There are other factors that the market appears to have missed. BPL writes off all the adspending to the extent of 100 per cent in the first year. No amortisation. No need to even out the adspend impact. The result is a conservative balance sheet, so the bottomline that you see is the the bottomline the company has made. There is better proof: in 1996-97, BPL paid Rs 120 million as corporate tax, reflecting genuine earnings. I interpret both these entries bullishly. Best of all, the promoters hold 67 per cent of the equity so when the perception of the company changes, there will be little stock to find.

Now look at what might happen in 1997-98. Because of the money that has already come into the company as a result of the equity placement, BPL will be able to retire its high-cost working capital loans. Besides, if the company restructures, its entire working capital loan mix, it could save a few crores in the process. This alone could add to the BPL bottomline in 1997-98.

But that is an argument of the future. In this case I will fight my case with an argument of the present (or past). Last month, BPL reported a pre-interest, depreciation, tax and adspend profit in excess of Rs 1.3 billion. And the stock market has priced this 'A' list scrip at a market capitalisation of only around Rs 1.35 billion (considering a market price of Rs 50).

So when people tell me that couldn't I have chosen a better stock, I get terribly excited. Because the greater the distortion, the greater the opportunity. Which brings me to the first line of this column.

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