9 September 2024

By Majid Ahamed

About the Company

The Company offers a range of products for the retail industry, office and home lighting, hospitality lighting, and lighting for infrastructure projects. It has a product range of cabinet lights, Dione Cove, EOS, Lightning systems, Pendant, Recessed, Semi-recessed, surface, track, and trimless.

The company operates primarily in Four segments:

• Retail Lighting 
• Home Lighting 
• Infrastructure Lighting 
• Railways

Investment Rationale:

• The company strategically looks to revolutionize the Trading of Lighting Products
• A proxy to be played with the growth in Infrastructure and Real Estate Boom in the Middle East (Saudi & UAE)
• The company looks attractive in terms of forward valuation and growth prospects

History of the Company:

Source: Investor Presentation

Business Segments:

Home Lighting

Home lighting is the segment where the company generates most of its revenue. This is a B2B segment where home lighting projects purchase lights in bulk through the company’s channel partners.

Retail Lighting

This segment provides lighting solutions for retail stores such as DMart, Reliance Retail, and others. The company started this part of the business in 2005, offering customized lighting solutions for major retail outlets.

Infrastructure & Railways Lighting

In this segment, the company supplies lighting components specifically to infrastructure companies and the railways, making it distinct from the other business areas.

Geographical Classification

The majority of the Income comes from India which contributes 60% of the total revenue in FY24, UAE Contributes 25% of the overall revenue and 15% from Singapore in FY24.

Management

• The company’s management is led by Mr. Amit Sheth (MD & CEO) who has nearly 20 years in the industry.
• Mrs. Deepali Amit Sheth, Executive Director of the company, has been is involved in the business right from the conceptualization stage to the execution stage like planning, operations, and overall business and market development.
• The promoter currently has a 55% stake in the business, which is reasonable for the size of the business
• The company board comprises experienced board members, including Chartered Accountants with strong fundraising experience and an additional director appointed having expertise in Law, which ensures the company’s corporate governance and internal controls are in place, with highly qualified professionals.

Deep-Dive on the Investment Rationale

The company strategically looks to revolutionize the Trading of Lighting Products

The company is one of the very few companies in the lighting industries in the market that has patented some of its lighting solutions and is looking to add more patents and strengthen its competitive advantage or moat in the industry.

While a majority of players in this industry are trade focussed with thin margins, Focus Lighting offers product differentiation resulting in an impressive 21% operating margin.

A proxy to be played with the growth in Infrastructure and Real Estate Boom in the Middle East (Saudi & UAE)

The company is now increasing it’s revenue from operations from the Middle East from 12% revenue share in FY22 to 25% in FY24, and is expected to further increase over time. Considering massive expansion especially in Saudi Arabia, with the government’s clear focus on developing the entertainment, sports and leisure sector which has driven the growth in Infra & construction this company would be a proxy theme to benefit from the massive expansion happening in the Kingdom.

The company have recently launched one experience centre in Saudi and has a channel partner with BMTC which is one of the leading companies in Lighting and Other Component Solutions in the GCC, leveraging their distribution and network they are looking to grow their overall in that region.

The company looks attractive in terms of forward valuation and growth prospects

As of September 10th, the company is trading at a TTM P/E ratio of 20. Given the sector’s strong tailwinds—such as rising demand for customized lighting and the infrastructure boom in both India and the Middle East—the company is expected to achieve earnings growth of 20-25% annually over the next 2-3 years. This growth outlook does not even factor in the company’s innovative new segment, which could drive further expansion if it successfully competes with larger players.

Risk/Threats

Higher Working Capital Days:  The company has higher working capital days which has increased from 80 days in FY22 to 152 days in FY24, and this was primarily due to an increase in higher debtor days which is a big issue going forward, this spike was primarily due to delays from the government contract this year. 

Revenue Concentration: Another risk the company faces is that of higher customer concentration where the top 10 clients in FY22 Contributed 35% of the overall revenue and this has increased significantly 53% in FY24, as losing any major client could badly impact the revenue for the company in the coming years.

Getting into B2C Lighting Trading Business: The company is currently operating in the B2B space but is now developing new technology, which is in the process of being patented, to enter the B2C market. However, the B2C market is highly competitive with thin margins. While the company aims to disrupt this space, this strategy seems unreasonable and unlikely to succeed, given the current market dynamics and the limited acceptance of their products. Aggressively pursuing this segment carries significant risk, and if not executed well, it could lead to a substantial decline in margins.

Poor CFO to PAT Conversion: The company has shown a very poor CFO (Cash Flow from Operations) to PAT (Profit After Tax) conversion, with CFO being just ₹4 Crores over the past 4 years, while PAT has been ₹65 Crores. In a B2B business, a CFO to PAT ratio of at least 60% would be considered reasonable. However, the company’s cash flow is low primarily because a significant portion of it is tied up in receivables. The company expects to recover these receivables by the end of H1 FY25, but the poor CFO to PAT conversion remains a red flag. This poses a risk, as the company may require external funding to maintain operations in the future.

Financial Analysis & Valuation

If we could see the ROE of the company, the company have steadily grown their ROE from 12.9% in FY22 to 30.4% in FY24, the primarily reason they were able to increase the ROE is primarily due to increase the Net Profit Margin in the business which has increased from 4% to 18%, this is expected to increase in the coming years with innovations and R&D o f their products getting realized in the coming 2 to 3 years.

Ratio Analysis

As we could see the company has been able to have a good increase in the Inventory Turnover which is 5 and this has been in the increasing trend, and Fixed Asset Turnover has been very healthy at 10 times and been in in the increasing trend, the Interest Coverage is also above 30 which is a very good sign and Debt/Assets is also low at just 0.1, hence from the ratio analysis is financial stable and strong and able to increase the inventory and fixed asset turns.

Valuation

As of September 11th, the company’s market capitalization stands at ₹787 Crores, with a trailing twelve months (TTM) P/E ratio of 20.3. Earlier this year, in January 2024, the company had a P/E ratio of 36, but a recent sell-off has caused a significant contraction. This drop is mainly due to challenges in securing government tenders. Additionally, the company’s Q1 FY25 results were underwhelming, with sales growth of just 7% year-on-year, which has raised concerns about potential slow sales growth in the next one to two quarters.

However, management remains optimistic about the next 2 to 3 years. They anticipate a rise in orders from airports and expect growth in Middle Eastern markets. Given these opportunities, the company appears attractively valued, especially with infrastructure spending on the rise. As demand for high-quality lighting solutions grows in the home and retail sectors, the company could serve as a key player in this space.