Micromax recently filed its prospectus, and will be coming out with an IPO very soon. One of the first things that caught my eye about this IPO is that they’re thinking about giving a 10% discount to retail investors instead of the customary 5%. I thought I’d take a look at the Micromax IPO prospectus even though the dates or pricing is not yet out, as I was interested to see how this relatively new player has performed in the highly competitive telecom market.
Micromax is the biggest Indian domestic mobile handsets company and has been growing explosively in the fast growing telecom market since they started in January 2008, and their market share stood at 6.24% for the March 2010 quarter. Micromax has been more about affordable handsets which shows in their average selling price of Rs. 2,275.98 for the March 2010 quarter.
They have over 30 handset models selling in the Indian market, and that helps in not relying on just one product to drive revenues, as no single handset accounted for more than 20% of their revenues. Similarly, they are well diversified across states, and no single state accounted for more than 10% of their sales.Â They are currently not present in Android or Touch phone segments, but plan to produce phones for these segments in the future.
The growth in Indian telecom has been really explosive in the past few years, so it is natural to ask how long will it continue at the current pace, and what happens when a large number of people own mobile phones?
The replacement market has got to be the key going forward with people switching or upgrading their handsets, and I found some interesting numbers on this market from the Micromax IPO draft prospectus.
They quote research from Analysys Mason which states that the replacement market will drive the market rather than new additions. Even currently, the replacement market constitutes as high as 62.77% of the total handset market for 2010, and they expect this percentage to grow to 89.30% of total handset market by December 31st 2014. In absolute numbers – from 118 million handsets in 2010 to 359 million handsets in 2014.
They are also looking at adding some subscription based value added services, and here are a few of them mentioned in their prospectus.
Receive email on SMS: They are developing an application that would allow customers to receive emails on SMS, targeting mobile subscribers who do not have access to GPRS services or data connectivity.
Phonebook backup: They are developing a ‘phonebook backup’ application, where customers can store their contacts backup, and pull them up later when they need it.
Buddy Tracker: This is a Foursquare like application which has already been developed but not launched yet. This application will allow Micromax subscribers to track the location of friends and contacts also using Micromax using paid SMS service.
Facebook agreement: They have also entered into an agreement with Facebook to be able to use their brand features within the applications that Micromax develops.
The biggest risk to Micromax is that it is in a highly competitive market where there exist much larger players like Nokia, Samsung, LG, and Videocon. These players have much bigger resources at their disposal and pose a competitive threat to Micromax.
There are several VC firms invested in Micromax as well, and here are their details:
US Private Equity Firm Stakes in Micromax
|Private Equity Firm||Pre IPO Stake|
|Sequoia, Sandstone and Madison||5.77%|
Micromax IPO Financials
The first thing that struck me about the balance sheet is that there is hardly any debt on its books. The size of the balance sheet is Rs. 5.39 billion in 2010, and the total of the secured and unsecured loans was just Rs. 11.69 million. This is probably due to the fact that they don’t have any manufacturing facility thereby not incurring much capital costs.
Their revenues have significantly grown in the past few years and stand at Rs. 16,017.58 million for 2010 with a net profit after tax of Rs. 2,003.16 million.
The EPS for 2010 is Rs. 11.83 up from Rs. 1.41 in 2009, and Rs. 0.89 in 2008. The company had a negative cash flow in 2008, but it has been generating positive cash flows after that.
Objective of the Micromax IPO
Micromax currently doesn’t have a manufacturing facility, and it intends to change this. Currently they design their products internally and then contract with manufacturers to manufacture and supply them. They suppliers are primarily located in China and Taiwan.
They want to change this by setting up their own manufacturing facility, and the money raised by the IPO will be used for this. They are looking at big numbers too – the plan is to spend Rs. 2.26 billion on setting up factories that will have the capability to produce 2 million handsets per month.
I will update this post with more information about pricing, and dates as and when they are released, and for now I wanted to get a glimpse of what the company has done in the past, what is the money being raised for, future plans etc.