Micromax Informatics Ltd, the country’s largest homegrown mobile handset maker, has filed its draft red herring prospectus with SEBI for sale of 2.15 crore shares with SEBI. Three private equity investors together bought 5.75% stake (pre-public issue) from the four co-promoters for around Rs 210 crore earlier this month.
Sequoia Capital (2.68%), Sandstone Capital (2.68%) and Madison India Capital (0.39%) bought their shares from promoters Rajesh Agarwal, Rahul Sharma, Sumeet Kumar and Vikas Jain for an estimated price of Rs 181 per share (after accounting for subsequent bonus share allotment).
Another private equity investor TA Associates will be sitting on book profit of 3x on its total investment of Rs 200 crore, half of which was through share purchase from the co-promoters. TA Associates had invested Rs 100 crore in the company in December and, at the same time, bought shares from the promoters for a similar amount and currently holds 15% stake.
This means even as the PE investors have invested a total of around Rs 410 crore to buy shares in the company, just about a third has gone into Micromax with the promoters netting over Rs 300 crore. The remaining holding of the four co-promoters will be worth Rs 800 crore each.
Chasing the entrepreneurial dream does pay as the actual contribution of the four promoters at Micromax is just Rs 6 lakh per head. While three of the promoters are in their mid-30s, one is in his mid-40s.
THE FIRM & FINANCES
The company relies on a business model of designing user friendly features and sourcing low cost handsets from OEM suppliers based on those designs. It sold 70.5 lakh mobile handsets last fiscal ended March 31, 2010. Besides handsets, Micromax also sells mobile data cards for computers under its own brand to telecom service providers in India.
For the year ended March’10, the company had total income of Rs 1,601 crore with net profit of Rs 200 crore. While revenues jumped 4.5 times compared to numbers for year ended March’09, its net profit rocketed 5.7 times in the same period, reflecting high margins in the business. The key to its high margins lies in wafer thin overheads with cost of products sold comprising two thirds of total sales. The company had employee cost of just Rs 7 crore with selling and distribution expense of around Rs 75 crore.
Given last fiscal’s profits, on an expanded capital base post issue, the earnings per share will be around 9.3 translating into price earnings multiple of around 22.5 which could be said to be conservatively priced in a market which is raring to cross its previous peak. The company is looking at a valuation of 13.3 times its previous year’s EBITDA.
The question is whether this will prompt other local handset makers to also go public. One likely candidate could be Bharti Group’s Bharti Teletech which has for long been a landline and cordless phone maker under the Beetle brand and has just entered the mobile handset market.
JM Financial, Citigroup, Edelweiss Capital are the global co-ordinators and BRLM for the issue with Nomura acting as the BRLM for the public float of Micromax.
USE OF FUNDS
Micromax intends to use half of the proceeds of the issue to set up a new handset manufacturing plant that will cost around Rs 226 crore. It has identified Sriperumbudur in Tamil Nadu as a possible location for the proposed plant even as it is in the process of evaluating alternative locations.
The rest will go for marketing and advertising for Micromax brand (Rs 125 crore) for the next two financial years (April’11-March’13) and investment in acquisitions and other strategic initiatives (Rs 75 crore). A third of the money for strategic initiatives is likely to be deployed during the current year ending March’11 with the rest in the subsequent fiscal.
The company has disclosed that in particular, it is exploring opportunities to partner with or acquire companies that design mobile handsets or would complement or expand the value-added services that Micromax intends to provide. It is also exploring the opportunity to expand international operations through acquisitions or through an alliance.
It had expanded the business in international markets launching mobile handsets in Nepal in January this year and has followed it up with entry into Sri Lanka in June and Bangladesh in July this year. Micromax also intends to further expand its sales in Nigeria, Ghana and the United Arab Emirates.
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