Phoenix lamps – rising up from the ashes?

AGM Notes

Had a very confidence instilling AGM and the new management was helpful in clarifying a lot of questions which the shareholders were dabbling with for some time.
Here are the key points that the management clarified:

1. Value Chain: The Company operates in a very competitive market where the price of its products is usually fixed by OEMs and then the customers of Phoenix lamps (the likes of Lumax etc), who are the suppliers to OEMs; accordingly decide the prices for Phoenix lamps.

2. Margin Profile: The Company makes a margin of 12% to 14% in this business on a consolidated level. On the question of 20%+ margins that company was showing in past years, the management was very candid in telling that those margins doesn’t reflect the true picture of the business and hence not to be trusted (read between the lines here. Some hints: They had another division and they have bleeding European subsidiaries so most of the margins shown were probably borrowed from these two). Management said, “Going forward, a margin of 14% on consolidated basis will be a good achievement.”

3. European Subsidiaries: The management has clarified that there should not be huge losses here. There might be few inventory losses here and there but shareholders should not fear any big bang losses from these subsidiaries but the management will take another couple of quarter to finish the complete assessments of books and will be cleaning up of excesses, if any.

4. Future Growth: The Company’s growth avenues going forward should be 2 fold. First, the company over a period of last few years has lost market shares to competition because of the lack of focus of previous management and also because of compromises on quality. As of the now the first focus of the management will be to put quality checks in place (for which they will also be doing investments of around 25 cr in Capex) and regain the lost market share. Suprajit’s strong presence in South may help Phoenix develop its brand in south also but as of now, it should not be taken as given and it is a long time consuming process. In the after-market, the price is derived by competitive pressures and there are substantial price pressures. Management will be looking to tap the after-market but they will not retort to any price war to take on the unbranded players and other competitors but having said that there are pricing pressures for the management. As far as global market scenario is concerned, the management will first focus on improving the quality and then will approach global markets. As per them, the global markets are a big opportunity going forward but the opportunity will be primarily in after-market and not OEMs as it will be very difficult to replace existing competition.

5. Investments: As mentioned earlier, the company will be doing a Capex spend of around 25 cr which is for quality controls and not for capacity addition. There current capacity utilization is of around 60 %

6. Managerial Remuneration: When I asked about the previous management drawing very high salaries despite loss making operations in Europe, the management responded by saying that they will be following same conservatism that they follow at Suprajit but the remuneration for the top management is governed by market also, but the management will do whatever is necessary to keep incentives right and in place.

7. Dividend Policy: Suprajit has a policy of giving dividends and has given dividends throughout its history but the dividends are an outcome of healthy operations and profitability and should be looked in overall perspective. Going by management’s commentary, it seems likely that the dividends will start flowing in only once the operations are improved and the company.

8. Competitive Scenario: The competitive scenario is getting tough from both organized and unorganized side. There are tremendous pricing pressures on them in after-market. One major competitor has started his manufacturing in India and hence has now become cost competitive also which also puts pressure on the management. In the OEM market, there is not much threat from chines but Koreans remain a relevant threat to OEM market too.

9. Currency Hedges: Earlier the European receivables were not hedged but going forward there will be partial hedging of the same. They already have started hedging and in recent future they would want to hedge around 50% of the currency

10. Other Issues: There is an issue with tax authorities of around 70 cr on which things are in wait and watch mode. These are significant contingent liabilities and should be discounted (in whatever proportion) in while calculating the

Most of the AGMs have a fun factor. This AGM was not very different in that regard. There were shareholder cum employees who started arguing with the management and demanded to give them… wait for it….no…no dividends……Well.. The next best thing, “Lamps”. Yes, they said that the earlier management used to give 2 lamps to some employees cum shareholders and the current management should also do the same as this is the “Tradition”