Oppo calls on India's bond mkt, raises money by non-convertible debentures

At first, everyone was excited about a Chinese company spending heavily in India. But the source of funding reveals that Oppo is largely banking on money raised locally to fund its expenses

Unless you are living under a rock, you must have noticed the marketing blitzkrieg launched by popular Chinese handsets brand Oppo in India. The local subsidiary of the Dongguan-headquartered firm is spending billions of rupees on sponsoring the national cricket team to capture the attention of consumers. At first, everyone was excited about a Chinese company spending heavily in India. But a closer look into the source of funding reveals that Oppo is largely banking on money raised locally to fund its expenses. 

Oppo Mobiles India, the Indian arm of China’s Oppo Electronics Corporation, has raised at least Rs 7 billion through non-convertible debentures (NCD) from the market here. According to its submissions to the Bombay Stock Exchange (BSE), the firm issued 7,000 NCDs, each with a face value of Rs 1 million in September 2016 at a coupon rate of three per cent per year. Axis Trustee Services Limited is its debenture trustee for the three-year NCDs.

On the face of it, the move may amuse many, given Oppo’s shining fortunes in the local smartphone market and its steadily growing revenue in the past three years. Its share in the fast growing local handsets market has surged to over seven per cent in recent quarters — Oppo held 7.6 per cent of the quarterly 34-million units smartphone market in the April-June 2018 period and its share inched down marginally to 6.7 per cent in July September, according to market intelligence advisory firm International Data Corp (IDC). It shipped 2.6 million and 2.9 million units in the June and September quarters, respectively. In a rare feat, the firm’s revenue crossed the Rs 100 billion mark in 2017-18 to Rs 120 billion. During the six-month period between 1 April and 30 September in the current year, its sales rose 23 per cent year-on-year to Rs 94.2 billion from Rs 76.4 billion.

However, Oppo’s growing expenses have made its top line growth insufficient to meet ends. The firm posted a net loss of Rs 3.58 billion in 2017-18, while during the first six months of 2018-19, Oppo’s loss widened to Rs 7.79 billion. The firm’s profit and loss accounts for both the periods reveal that the largest head, after cost of materials consumed, is the “other expenses” that include  advertising and promotions. In April-September 2018, Oppo’s other expenses stood at Rs 15.5 billion, compared to Rs 16.2 billion in 2017-18.

 Other than putting pressure on Oppo’s margins, what the tight financial condition meant for buyers of its NCDs is clear from a note submitted by Oppo’s accounting firm Rajan Malik & Co. While issuing a regulatory certificate for the NCDs, it said that Oppo Mobiles “has not maintained 100 per cent asset cover sufficient to discharge the principal amount at all times for the aforesaid non-convertible, unsecured debentures.”

 Regulatory filings further reveal that Oppo has already consumed all the Rs 7 billion raised two years ago and no new NCDs have been issued based on its filings with the Registrar of Companies (RoC) under the Ministry of Corporate Affairs. However,  often these filings are not made immediately. For now, the firm plans to raise Rs 35 billion ($500 million) in the form of external commercial borrowings.

 A questionnaire sent to Oppo about its plans for fund raising among other details remained unanswered. The need for more funds cannot be ruled out. The company recently inaugurated a research and development centre in Hyderabad — its first outside China — and is planning to set up a new manufacturing facility here. The new plant, estimated to ramp up its local sourcing by adding 50 million a year capacity to Oppo’s existing 15 million units, may cost Rs 22 billion. 

According to sources, the firm’s higher advertisement and promotion costs are owing to deep discounting to its trade partners and widespread promotional activities involving on-shop promotions and display ads. Trade sources say in its bid to expand its retail footprint at a rapid pace, Oppo had raised the retailer margin to over 15 per cent in 2016. The standard margin range was five to 10 per cent at the time. “That was good business for us. But the way they spent money, it was unsustainable for any business,” says a senior executive of an electronic retail firm. The company, for example, spent Rs 10.8 billion on jersey rights for the national cricket team for 2018-2022 period . Market analysts, too, had raised red flags. 

 Interestingly, Oppo has brought down the retailer margin to less than 10 per cent, even though it had to cede ground to Xiaomi in the offline retail space. Xiaomi, which became the number one player in September 2017, has since expanded its presence in the offline retail aggressively with the addition of thousands of retail outlets and launching branded stores. A predominantly online player, Xiaomi now gets over 20 per cent its sales from brick-and-mortar outlets, without raising the retailer margin. For Oppo, analysts point towards the need to adapt to the fast changing realities of the market.

 Yi Wang, Oppo’s managing director since 2015 when the company’s rise to prominence began, stepped down in November but did not offer any reason for doing so. Sources say the departure of Wang is linked to the firm’s inability to reach the top spot in India’s smartphone market. Despite Oppo spending heavily, it slipped to the fifth spot in September 2018 as its shipment declined by 7.1 per cent year-on-year. According to IDC, “fewer promotional activities and non-availability of attractive channel and consumer schemes” led to the fall.

 A few months ago, the firm appointed Charles Wong as its new India president to drive growth and efficiently compete with Xiaomi. It said that Wong will be responsible for steering its expansion in India and achieve the company’s vision to be a leader in the market.