The Hindu Business Line : All in a whirl

THE balance-sheets of Samsung and LG offer much information on how both made in-roads into the market shares of existing players in the television segment. In 2000, the sales growth of Samsung and LG were impressive. However, the profit growth was not — an indication that they were willing to grab market shares even if it led to lower margins.

Importantly, their borrowings increased in this period — 100 per cent in Samsung's case and by 50 per cent in LG's. Their net current assets also rose at a similar rate. In short, they have been buying market share during the slowdown; borrowings have been used to finance credit sales. In a slowdown, when the cash flows of companies are strained, it is good news for the competitors.

Among Indian companies, BPL had benefited thus. BPL's borrowings and net current assets rose by more than 50 per cent in the year ended March 2001. Interestingly, BPL did hold on to its market share in most of 2000. The slip-up in BPL's performance happened only this financial year. This suggests that BPL was not able to continue with its strategy in 2001. In the case of Videocon and MIRC Electronics (Onida), the rise in borrowings and net current assets was quite limited in the year ended March 2001. Evidently, both companies opted for a conservative strategy. That they were already leveraged is also an important factor.

So, why did such a strategy make sense for Samsung and LG but not for Indian companies. The answer lies in the cash conversion cycle. At the end of 2000, LG's net current assets were around 27 days' sales, while that of Samsung around 41 days. In contrast, net current assets exceeded 100 days' sales for Indian companies at the end of March 2001. Given the lower net current assets position as a proportion of sales, it made sense for Samsung and LG to increase their leverage if they thought they could ensure that their current assets would not deteriorate significantly.

Importantly, the debt-equity ratio of the Indian companies was already close to 1 before the beginning of 2000 while Samsung and LG had sufficient room to increase their financial leverage. That they chose to do so during a downturn in demand indicates deliberate strategy. Indian companies appear to have been caught off-guard by the demand recession. Their already leveraged financial health apparently did not give them enough room to manoeuvre in countering the competition.

Another important factor that helped the Korean companies is their asset utilisation rates. The sales of these companies are more than 10 times their net worth. In contrast, the sales of the Indian companies accounted for less than 4 times their net worth. The importance of better asset utilisation rates and better cash conversion cycles would have been felt in 2001. Companies that performed poorly on this score have had to cede market share.

What these indicators suggest is that a portion of the market share grabbed by the Korean companies in the television market may remain with them even if there is a turnaround on the demand front. This is because they have bought market share during the slowdown without any deterioration in their financial health. So, when demand picks up, they will be in a position to take advantage and face any increase in the intensity of competition because of the improvement in the cash flows of the Indian companies.

A conservative wash

In the case of the washing machines and refrigerators, Whirlpool of India too had adopted a conservative strategy. Borrowings were down and net current assets did not expand sharply. However, in contrast to Indian companies, Whirlpool fares better with net current assets at around 50 days.

Considering the difficulties that washing machines and refrigerators have had the last couple of years, this is a creditable achievement. On the other hand, the competition in this market is not as severe as in the television segment.

It remains to be seen if Whirlpool can hold on to its market shares when the going gets tough. At present, the strength of the brand suggests that it will be able to deal successfully with its peers.

From the investment perspective, investors can stay away from stocks such as BPL, Videocon and MIRC Electronics for now. The slowdown's impact on their financial performance is evident — profits declined significantly in the first half of the year ended 2001. What is not evident is the impact on their balance-sheets. This is relevant to ascertain their ability to grow with the market. In the case of Whirlpool of India, the stock continues to be a good investment candidate. However, it may be better to wait for price declines before accumulating the stock.

Send this article to Friends by E-Mail

Stories in this Section
Forbes Gokak: Accept the higher priced options on last date

Consumer durables: Through the wringer

`If you do not spend, you cannot sell'

Middle-class continues to drive expectations

Drop prices or forfeit growth

All in a whirl

Pioneer ITI Money Market Account: Invest

Tata Pure Equity Fund: Sell

Franklin India Balanced Fund: Hold

Alliance Buy India Fund: Sell

US-64: What investors should do