MIC Electronics Ltd.

Buy on dips around 30/35.

An Explosive Growth Story

Among the multitude of issues that we face today, the single biggest issue on the radar screen of developed economies is global warming and on the list of developing economies is energy stability. These issues are being tacked from both the supply side and the demand side, using a set of complex mechanisms that involve governments, corporations and individuals. On the supply side, we have incentives for renewable energy that has spurred massive investment in power generation using alternative sources of energy. We also have the Clean Development Mechanism for promoting such generation in developing economies by charging high-polluting companies in developed economies.

On the demand side, there is an increased thrust on energy audit, energy reduction and energy saving devices. While the supply-side initiatives have received a lot of press and attention over the last decade, the effort on the demand side has been making quiet progress.

My stock pick for this month is based on this increased focus on energy saving devices. And here, LED-based lighting is going to play a big role. Light Emitting Diodes can now be used to produce the most energy efficient lighting devices. While a typical metal halide street lamp produces 30 lumens/Watt and a CFL produces 60 lumens/Watt, LED street lights can now produce upwards of 90 lumens/Watt (Lumens is a unit of light energy produced and Watt is a unit of energy consumed). Also the life of an LED is far longer than a sodium vapor lamp or CFL (Avg life of 5y vs 2y).

So, where is the catch? Well, LED lighting is about 1.5 times as expensive as CFLs and twice as expensive as metal halide lamps. Which is why, I have discounted the short-sighted individual/consumer as a potential buyer for this product. The opportunity is in street lighting, lighting for advertising displays, railway lighting and industrial lighting. A municipality or a corporation can afford to pay extra today to save 50% electricity consumption (and for double the life) for all its street lighting.

Already cities like Toronto are moving to a full-scale replacement of regular street lights with LED-based lights. India is not far behind, with quite a few municipalities testing out the lights under pilot schemes. And the opportunity is massive...Any idea how many street lights a city like Delhi or Mumbai has?! As per my first-cut estimates, the LED industry stands to make anywhere between USD 5bn and USD 10bn from street lights in India alone!

A company which can take advantage of this new big thing needs to fulfill two requirements - one, it should have the necessary technology, R&D and manufacturing expertise to be at the forefront of this exciting development. And two, LED-based lighting should NOT be the core business of the company today! Why? Coz the LED lighting industry will take a couple of years to develop and a company betting all its chips on this today could see itself being wiped out before it can rake in all the big bucks.

MIC Electronics (MIC) is a Hyderabad-based LED video display manufacturer. It makes most of its current revenues from this business line. The LED video outdoor display market in India has been booming with increased outdoor advertising spend. MIC had a 300cr turnover, 85cr EBITDA and 65cr for FY08. For the nine months ended Mar 09, the corresponding numbers were 196cr turnover, 68cr EBITDA and 52cr PAT. With 24cr debt (as of Jun08) on balance sheet, the company looks attractive at its 291cr market cap (P/E of 4 and EV/EBITDA of 2.6). The company's management seems very competent - you can check this out on their website.

And all this with only its core business!

Now throw in the LED lighting angle to the above business and we have a very compelling story - a company with a strong, well-managed core LED video business, which is poised to take advantage of the anticipated boom in LED based lighting. MIC Electronics has, over the last 2 years, developed various LED-based lighting products - Street lights, Railway & Industrial lights and LED lights powered by solar panels.

This is one of the better technology product stories originating from Indian shores. And funnily enough, it does not seem expensive like most tech stocks on the NASDAQ. MIC Electronics is a very attractive stock at current market levels and is an explosive-growth story.