Thanks to @GourabPaul and @saurabhved for their help in collaborating on this post
Virtuoso Optoelectronics
Background
Company started in 2015 as an EMS company that manufactures drivers and circuit boards for LED lights. Soon they forward integrated into making LED lights. Started IDU assembling unit in 2019 for Voltas and after this they started backward integrated in manufacturing of the components. They added ODU and water dispensers in 2023.
Virtuoso is promoted by Mr Sukrit Bharati. His education background is Masters in Science – Engineering Technology from BITS Pilani Diploma / Certification courses in Management subjects from Harvard Business School and NMIMS, Mumbai.
Products:
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LED – it produces various products like LED downlights, panels, lamps, and street lights. Current capacity is 40mn units with a capacity utilisation of 70%. It is undertaking an expansion to 60mn units. This business has 12% EBITDA margins. Panasonic is the anchor customer for Virtuoso. It has recently added Great White and Gold Medal as customers. Lighting is roughly 20% of the sales.
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IDU – it produces IDU for Voltas. IDU has a capacity of 8 lac units with 75-80% capacity utilisation. Here the margins are around 9% with 75% backward integration. Company has backward integrated into plastic injection molding, heat exchangers, sheet metal, copper tubing, cross flow fans, wire harness and remotes. Further the company plans to integrate BLDC motors and brass components. Currently Virtuoso accounts for around 20% of Voltas’ sales of IDUs.
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ODUs – It has a capacity of 4 lac units of ODU and plans to scale it unto 6 lac units this year. ODU has a lower margin of 6%. This is because it has a lower value addition as it is only 50% backward integrated. It is currently operating at 50% utilisation and expects to ramp up the sales this year. It accounts for roughly 10% of Voltas’ sales of ODUs.
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Water Dispenser and Toys – Virtuoso started selling water dispensers as the capacity is fungible with ODUs. It will manufacture them during lean season to better utilise ODU capacity. Currently sales are very small however it expects to reach 100cr sales in a couple years. Virtuoso is also qualified as a tier 2 supplier to Hasbro for manufacturing Toys. Both toys and water dispenser put together have 10cr sales.
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Commercial Refrigeration – Virtuoso is putting up a new plant to manufacture commercial refrigerators with a Capex of 80crs. It expects asset turns of 5-6 times with a margin of around 12% at peak utilisation. It is planning to onboard 2 anchor customers for this plant. It should commence production in 2nd half of this year with a capacity of 1.5 lac units. It aims to make this segment 30-35% of its sales.
Why it looks interesting:
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Aggressive growth plans – company intends to grow 35-40% for the next few years. It has already done Capex to take its turnover to 1100cr. Growth will come from market growth of products, increase in backward integration and addition of new products.
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Superior margins compared to peers – It has better margins than peers as a result of better capacity utilisation in plants and lower overhead costs despite having lower scale. Virtuoso takes land on long term lease to keep overhead costs low.
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Focus on working with quality customers – Virtuoso believes in working with quality anchor customers as it leads to predictable sales and growth. Voltas and Panasonic are its anchor customers. This has allowed it to scale the business quickly.
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Focus on backward integration – company has backward integrated into the various manufacturing process required for its products like plastic injection molding, heat exchangers, sheet metal, copper tubing, powder coating, cross flow fans, wire harness and remotes. This has helped it to increase its sales, improve margins and quality. It continues to use its R&D to further improve its backward integration into BLDC motors and brass components.
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PLI – Virtuoso will receive benefits for localisation of manufacturing in India. It is awarded PLI of 50 crs for backward integration of AC components. Further VOEPL is eligible for incentives under Electronics Policy of Maharashtra which it has applied for.
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White goods as a sector is under penetrated in India and this gives a long runway for growth. This year has been extremely hot leading to good sales of ACs and Refrigerators in India. Many manufacturers have had production issues as demand was higher than expectations and few of the parts are imported with significant lead times. This gives good visibility for growth in the near term.
Risks
- commodity prices – prices are revised quarterly for them. Thus sharp rise in commodity prices can lead to temporary reduction in margins
- under-utilised capacity or slow ramp up after finishing refrigeration capex can lead to losses for this unit
- Customer concentration risk
- ability to raise equity and debt to support business growth
Disclosure: invested and biased
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