Picture This
Samtel Colour and Samtel Electronics are likely to be merged. What does it mean for shareholders?
The Delhi-based Samtel group, which has three listed companies Samtel Colour Limited (SCL), Samtel India and Samtel Electron Devices Limited (SED) is bracing itself up to secure a place for itself in the international markets.
The groups two picture tube manufacturing companies Samtel India and Samtel Colour were set up in an era of high duties on electronics imports and low volume manufacturing. Samtel Electron Devices , which manufactures black and white electron guns, was set up in 1994. But now the group is learning to be a high-volume, low-margin global player.
We set up sub-optimal capacities under a different paradigm, explains the companys managing director, Satish Kaura. He adds, But over the last three years, we have increased capacities and benchmarked our cost of conversion, cost of raw material and cost of manufacturing with world players. We have just finished adding a second line in Samtel Colour and have expanded our colour picture tube capacity to 2.5 million tubes per annum.
The new line at Samtel Colour has gone into production with a capacity of 1.6 million tubes and will produce 14-inch colour picture tubes. The old line produces 20-inch and 21-inch tubes. The full impact of this production will be felt in the year 1998-99. Most of the output from this line is targeted towards exports.
The company estimates that the market for 14-inch tubes is about 40 million tubes and it is expected to remain at that level. The demand is expected to be sustained because in most Western homes, this is the second or third television, which would perhaps sit in a childs room or in the kitchen.
Against the world figure of 40 million, Samtel expects to sell 800,000 tubes in the export market. Kaura is confident that this would not pose any problem. He says, This is such a small percentage of the world market that there should be no problem in selling this volume, claims Kaura. The company is targeting Europe and the US for exports and claims that the order book for 1998 is full.
According to him, the value addition in 14-inch tubes is so small that the West got out of production of these tubes. The manufacturing shifted to the Korea. But two to three years ago, Korea stopped producing these tubes and the plants moved to Malaysia. The costs have gone up there too and manufacturing is likely to shift to India and China.
The company has begun to export from the new line from the month of December 1997. Soon 50 to 60 per cent of the companys turnover is expected to come from exports.
In the Indian market, currently, the supply for picture tubes is more than demand. The annual demand now is about 3 million but the standing capacity is about 7 million. The demand is expected to be 3.9 million next year. Samtel has about 35 per cent market share with JCT having nearly the same percentage, Hotline holds 7 per cent and BPL has 4 per cent. The rest of the tubes are imported.
Samtel however is the only company in India which has the entire range. JCT has a capacity to manufacture 2 million 20 and 21-inch tubes. Hotlines capacity is 1.5 million picture tubes and BPL Uptron makes 1 million picture tubes.
The larger 29-inch picture tubes are all imported. Kaura says there are plans on cards to manufacture larger tubes once critical volumes build up in the segment. The companys customer list includes Videocon, BPL, Onida, Bestavision, Akai and Panasonic. Sony imports Trinitron tubes.
The basis for Kauras optimism about the export market is a study by McKinsey, the international consulting firm. According to this report, Samtels costs are comparable to that of one of the largest 14-inch tube manufacturers in the world Chungwa, which has a 5 million tube plant in Malaysia.
Samtel has an advantage in electron guns, the second highest cost because it makes its own guns. The companys in-house research and development has developed the gun.
There is also a cost advantage in metal parts and deflection yorks because they are also made by group companies. The South East Asian meltdown will wipe out the difference in glass prices but the advantage because of labour will also have eroded.
The company feels that it could bring costs down in future years. For instance, if glass is made at group company Samcor, it is likely to add to Samtels advantage. It also expects to bring down the cost of financing by dollar loans which will be hedged because of increased exports.
The company also feels that it could bring down the price of electron guns and the deflection yorks and hence actually gain a cost advantage of about $1.5 per tube.
The capital cost for putting up the line is also comparable to other international and demstic players. Samtel put up its 1.8 million line at $30 million per line. Samtels 1.8 million line will cost US $33 million per tonne against Philips line which costs $42 million. The companys Indian competitors, JCT put up a 1.2 million line at Rs 325 crore recently and LG Hotline at Rs 220 crore. Samtels 1.8 million line cost just Rs 185 crore.
The new line has been put entirely by the companys own engineers against the earlier line which was put up in collaboration with Mitsubishi in return for a royalty payment.
But, at the end of the expansion plan, Samtel Colour was left with a huge debt and a debt to equity ratio of nearly 2:1 at the end of March 1997. To improve these figures and also to be more transparent, it decided to merge Samtel Colour with its more cash rich supplier Samtel Electron Devices.
The merger, if approved by the High Court , will be effective from April 1997. Samtel Electron shareholders will get 17 shares of Samtel Colour for every 10 shares of SEDL.
The combined companys turnover is expected to be Rs 550 crore in 1998-99 (with an assumption that the rupee will be Rs 42 to a dollar) and an operating profit of Rs 104 crore. In 1999-2000, the turnover is estimated to be Rs 622 crore with an operating profit of Rs 138 crore (at Rs 44 to a dollar).
The return on net worth is calculated to be 23 per cent in 1999-2000. The turnover will be less then sum of the turnovers of the two companies because the transfer price between the two companies will now not appear in the sales figure.
The capital structure in the merged company will have Rs 40 crore of equity and Rs 191 crore of net worth at the end of 1998-99. The long term debt would be Rs 247 crore and hence the debt-equity ratio will be down to 1.29 and eventually to 0.76 by March 2000.
It should be interesting to watch how this company is able to increase its volumes and improves its returns while continuously working with decreasing profit margins. The stock of Samtel colour currently trades at Rs 10 and that of Samtel Electron Devices at about Rs 18.