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Videocon Industries: An Indian Multi-Bagger?

April 22, 2008

There is something inherent about Videocon which makes me jump! [a la Jump Up!]

Blame it on my passion for strong research and development oriented companies or blame me for obsession with charts,Videocon has surpassed all such and more. It all started at the beginning of this month. Two piece of headlines within the gap of three days was enough to make me sit up and have another look at it. I had been reading about Venugopal Dhoot, his flute and his turnaround story of Videocon for quite some time. I felt its time for me, to get on the with the charts!

Business Model:

It is as close as it gets to being consumer electronics company. With strong interests in consumer durables, TV, Refrigerators, Washing Machines and basically everything you associate with electronics, forming the core of its business.

This company has got two major segments:

1. Oil and Gas :

  • 30% stake in Ravva fields in KG Basin off Andhra Coast, in partnership with Cairn India. It gets around $640 million in hard cash every year [going by the present $117/barrel rate and 50k barrel production per day].
  • Also owns oil and gas blocks in Jordan and Nigeria
  • In a tieup with oil majors in India and abroad like HP, BP, IOC,Oilex(Aus), GSPC, have bid and won several oil and gas blocks abroad in places like South America, West Africa and Australia
  • As late as April 2008, Videocon ,JSW and Indiabulls in what seems to be the biggest energy hunt overseas, are in the process of acquiring or has acquired coal mines in Africa.

2. Consumer Durables:

  1. Auxillary Electronic Components:
    • Videocon took over Thomson’s CRT division in a cashless transaction worth € 230 million in 2005, giving ownership on patents and research of 2000 patents including 16:9 aspect ratio screens and Ultra thin picture tube
    • Runs world’s largest single location glass shells plants in Bharuch. This is an important investment from the point of view of strategy as high quality glass shells are used in TVs, CRT monitors, heat exchangers and other high end applications. Invested around 1500 crore on what seems to be a high margin business. Has got a cost advantage and can prove to be a good money spinner for Videocon if it starts exporting to other companies
    • One of the largest producer of compressors for ACs and Refrigerators.
  2. Finished products and Manufacturing: The Economics of Consumer Demand
    • Dhoot has been successful in acquiring Daewoo Electronics for an estimated around of 730 million USD. This is strategic in numerous ways as it will plunge Videocon headlong into Europe and South Asian countries where Daewoo used to be a leader including countries like US, Poland and Vietnam. More importantly, Videocon has managed to get hold of patents of Daewoo also.Update, 23rd April: This deal has fallen apart. Extremely Sorry for the wrong info. But instead there is a real good news, it is moving in retail sector with a chain of stores called “Bolld”. Six stores are expected to open this year, calling for 400 crores of investment.
    • Looking to acquire Phillips CRT division.
    • Venturing into DTH business
    • It is reportedly bidding for Motorola’s mobile unit. Along with the convertible license for GSM band and rumored HFCL Infotel merger with Datacom [Videocon], its gearing for the ultimate mother of all battles in the telecom sector. [The bidding part made me sit up: ET]
    • Videocon is also reportedly looking to get into the high margin business of solar cells. This is a huge thing as a proper development can lead to opening of some very lucrative South Asian markets. [This was the second news]
    • Update: Videocon is busy courting Mr. Kim, CEO of LG Electronics to head Videocon Industries. Mr. Kim had been immensely successful in taking LG Electronics to the success in India. If this deal is done, then it will be great thing for Videocon as two heavyweight executives Dhoot and Kim will be taking Videocon to the next level

Management

I am going to keep it really short. It doesnt deserve much.

Full marks to Venugopal Dhoot. If he can turnaround the company from the throes of non existence, then he can deliver anything. At a time, when an Indian consumer oriented company was as rare as flab on Kareena’s figure, Venugopal turned out to be one sheer competitor for his peers. And he emerged as a highly aggressive player.

Technicals: Crux of the matter

Videocon has a very flattish curve and surely defies Elliott. Attached is Videocon Industries since the rise of 2006. It had a huge spike from 225 levels to shoot upto 478 levels. Another spike last November to 828 levels, severely pushing TRIX[10] to overbought levels. Today, Videocon is trading at around 100% retracement of the April 2006 levels.

Videocon: The Chart tells all

In shorter term, SMA[10] is expected to cross EMA[30] signalling the beginning of a TAZ[trader action zone] and a significant change in trend. Significantly TEMA has already lined up with EMA, and crossed SMA[10]. Since TEMA is a leading indicator, it should give a strong signal to start changing positions. Click to enlarge:Videocon Industries [Long Term]

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The volumes have started building up slowly and my recommendation will be to initiate a BUY position on this counter. However, due to significant buying happening in this scrip, it may quickly move to overbought regions and may test the support level near 340. The stock at present levels are ‘lipsmackingly attractive’ [as one of my friends mentioned it!]

The Bottomline:

It is a strong BUY signal from my side and in a time period of around 18 months this stock should return atleast 100% returns. The Elliott Wave pattern is all set for a newer 1-2-3 sequence. It is one of those stocks which are termed as “buy and forget”.

Risk Level:

Low in long term, moderate in short term

Signal:

BUY at current levels. Stop loss 335.

Disclaimer: I am long on this counter and hence have significant exposures to this counter. This should not be construed as an investment advice, and thus appropriate analysis and deductions should be done before taking any position

Many Thanks to my friend Adit S. who followed this scrip right from 2005 and collected all the data for the good of the investing community. Thanks Adit! You rock as always!

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