1st October, 2021

On 29, Sept, 2021, Lava International, leading domestic mobile phone and tablet manufacturer, has finalized DRHP to raise Rs 500 crore of capital and offer for sale of 4.37 crores shares. Noida-based company plans to raise funds for its brand-building and promotional activities, working-capital and acquisition requirements.  

Lava International is the largest mobile phone manufacturer in India with production capacity of 42 million units per year. It markets its mobile phones and tablets under LAVA and XOLO brands. 

In terms of market share, Lava is the third largest feature phone company with a market share of 13.4% in the basic feature phone market and 0.4% in the smartphone market in India. The current Indian feature phone market size is 42% of the total mobiles sold and 13% in terms of value. From 2021 to 2026, the feature phone market is expected to shrink by -2% per year while the smartphone market is expected to grow by 16.7% per year. Since 80% of the mobile phone market falls below ₹12,000 range, Lava wants to position its smartphone range below that price bracket.

In FY 2020-21, the company achieved turnover of ₹5,523 crores with net profit of ₹172 crores. The company earned approx. 30% of its business from the domestic market while 70% of its business comes from international markets, primarily Thailand, Sri Lanka, Middle East, Bangladesh, Mexico, Indonesia and Nepal. The company’s strengths are R&D capabilities, vast distribution network down to tier 2 and tier 3 cities, and product models in both feature phone and smartphone categories. 

The company is now seeking money to expand its business. It wants to expand its distribution reach and build its brand in crucial foriegn markets in Asia, Africa and the Middle East. To cater to the potential growth in demand from these markets, the company wants to scale its manufacturing capacity in India and invest in improving its research and development capabilities. Plus, the company is open for doing strategic acquisitions to augment its manufacturing, technology, and marketing muscle.

Now, let’s talk about its business. 

Strategy Shift to Feature Phones

The company, started in 2009, initially focussed on the entry level smartphone market through its brand XOLO in 2012. The company adopted an import model from China to develop its mobile phone business in India. It captured an impressive market share of 8% by 2015. 

Since 2015, due to technology shift to 4G and the entry of Chinese brands – Xiaomi, Vivo, Realme, Oppo, and OnePlus, aggressively targeting the entry-level smartphone market, Lava has had to change its business strategy. The company shifted its focus from smartphones to feature phones. The range of feature phones starts from Rs 700 to Rs 2000, targeting the economy segment. 

Now, due to Govt. of India’s PLI scheme to offer an incentive of 4-6% on incremental sales of goods manufactured in India, Lava shifted its mobile phone manufacturing operations to India.

Improving Financials

Mobile phone manufacturing is a capital-intensive and low-margin business. The company’s sales growth ranges from 3-5% per annum over the last 2 years. The average profitability margins remain at 2.2%. The company barely generated free cash flows during the last three years. The company is relatively debt-free with a debt-equity ratio of 0.01.

Risk Factors

The mobile phone manufacturing business is a highly competitive industry.  This business, particularly in India, faces key business risks mainly the constant threat of cheaper imports, underdeveloped supplier network for hardware and software, technological shift to 5G, and IPR protection weakness.

In the features phone market, the company competes with Itel, Samsung, Nokia and Micromax.

Valuation

Currently, the unlisted LAVA INTERNATIONAL SHARE PRICE is trading at Rs 215 in the private market, after share split (1:4) and bonus issue (1:1) on 8 September, 2021. This price is up from Rs 100-120 a few months ago. At current price level, the company is valued at Rs 2,685 crores, which is just 0.5x its revenues. Dixon Technologies, its listed peer, is trading at P/S multiple of 4.44.

Buy & Hold Case?

There is a long-term investment case to buy and hold Lava shares if the IPO of Lava share price is fixed attractively. The company plans to utilise the PLI scheme benefits to increase its market share to 5% in the domestic smartphone market.