Apply for MIC Electronics IPO at cut off: Emkay

MIC Electronics, the Hyderabad-based ISO 9000:2000 certified company, engaged in the design and manufacture of True Colour LED video display systems, is open for subscription with an initial public offer (IPO) of 5,100,000 equity shares of Rs 10 for cash at a price to be decided through the 100% book-building process for listing on both Bombay Stock Exchange and National Stock Exchange.

Emkay PCR report on MIC Electronics IPO

Key Investment Arguments

Monopoly Position in LED Display media in India

MIC is the only company in India to have the “Design-to-Manufacture” capability for manufacture of LED video display systems in India. It provides customized solutions based on its customer needs, location, display purpose, etc. The products it manufacture find various applications including:

• Sport & Live Events;
• Advertising Applications covering Electronic Billboard/hoardings, News advertisement ticker displays;
• Indoor Applications including ones at Shopping Malls, Airports, Railways, Bus Stations, etc.; and
• Mobile Applications.

It also provides premier large format display solutions, including indoor LED display, outdoor LED display, and Mobile LED Display on a limited period rental basis. MIC has separate teams focussing on rental business, and target specific user groups for individual or bulk rentals.

Faster revenue and profitability growth

The company has shown a very strong revenue and profitability growth in past. Sales and PAT had shown a CAGR growth of 174% and 594% during FY04-06.In H1FY07 sales was Rs 665.7 mn and PAT was Rs 108.9 mn with improvement in net margin to 16.6% against 14.94% in FY06. MIC in Jan’07 bagged order Rs 1049 mn from BSNL for 401000 pieces of IFWT which is expected to be executed fully in H2FY07.

Its client list includes MTNL, DOT, BEL, BSNL, Technology frontier, Vetco International, C.S. Software etc. We expect that with new business model like theme park and innovation of new technology, MIC is likely to deliver strong set of numbers in years ahead.

Global Focus

To leverage its cost effective products and solutions and tap into the larger global market, MIC has established operations in various countries.

Media

Key Customer: Version trading, Evening Star Co, Hansen Technologies, BSNL, MTNL, Tata Tele, Cisco, Nortel, Sun, BEA, Hitachi Data System

Telecom Services

• MIC has a strong presence in the LED display market in India and is expanding its footprint outside India.
• Subsidiaries have been set up in the USA, Australia and Dubai for overseas expansion.
• Even a 1% share of the global market in niche products such as large LED displays can result in significant increase in revenues.

Industry Growing at faster rate

The Out of Home (OOH) market is estimated to be at Rs 9-10 bn. Outdoor media sites in India are predominantly owned or operated by small, local players and are directly marketed to advertisers and advertising agencies. However, this segment too is witnessing a change with technological innovations. Growing billboard advertising is fuelled by technologies such as light emitting diode (LED) video billboard.

Advances in nanotechnology, compounded semiconductor materials and enhanced manufacturing techniques has helped in generation of high brightness LEDs in nearly all colours of the visible spectrum as an effective medium for outdoor advertisement. This industry in India is at nascent stage and is getting high visibility presently. It is growing at a very rapid rate which can be glimpsed from the revenue of the company.

Strong emphasis on research and technological innovation

We believe that MIC’s growth is a result of our thrust on continuous research and innovation. Further, its systems, production and R&D processes have an ISO 9001:2000 certification. It has received recognition for its efforts in the form of a national award for R&D efforts in Electronic Industry from the Department of Scientific and Industrial Research (DSIR), Government of India, in 2002, it has developed inhouse the entire technology for LED Video Display systems after years of research, spearheaded by Dr Ramana Rao, the promoter.

Certain unique characteristics of LED displays are:

• Remote access
• True colour Display
• Day and Night Vision
• Display of live signals
• Weather resistant

Key Concerns

Significant competition

MIC LED display systems are recent technology innovation and cater to niche market. It competes against companies with origins in US, Europe, South Africa, and Hong Kong.

Execution risk

LED display system finds primary application in outdoor advertisement and communication. Usage of the LED display system for outdoor advertisement is dependent on receipt of the permission from various regulatory authority

LED market is yet in nascent stage

The Indian market is highly price sensitive and LED displays system with their high price tags may not find immediate acceptance. Outdoor vinyl holdings, which are available at a lower cost already popular. In the event that adequate awareness about the LED display systems is not generated, it would adversely affect the result of operation.

Valuation

At upper band Rs 150 MIC is available at 14x its FY07E earnings of Rs 10.9(annualized EPS). The company has already done sales and PAT of Rs 665.7 mn and 108.9 mn in H1FY07. We think that the valuation of the company looks justified considering that the company is leading player in the Indian LED industry and huge opportunity is still untouched. We also expect company to attract scarcity premium on account of its unique business model.

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