World's Fifth Largest Feature Phone Company Lava International Files For An IPO: Here's What You Need To Know

Mobile handset solution company, Lava International, has filed papers for an Initial Public Offering (IPO) with the Securities and Exchange Board of India (SEBI). The company will be raising Rs 500 crore through fresh issuances of equity, while promoters and some existing shareholders sell their stake through an offer for sale (OFS).

The company would be using the funds raised to provide working capital for its subsidiaries, funding acquisitions, and brand building

Lava International, along with other MILK (Micromax, Intex, Lava and Karbonn) companies, is one of the few Indian companies in the space. These companies have almost been decimated in the smartphone space with cheaper Chinese manufactured smartphones by stronger competitors. Despite having a majority market share in the smartphone space a few years back, today, these companies have shifted their focus to lower-end feature phones.

Lava is the third-largest feature phone company in India, with a market share of 13.4 per cent, in terms of sales volume in fiscal 2021. Lava is present in several countries like Thailand, Sri Lanka, the Middle-East, Bangladesh, Indonesia and Nepal. These emerging markets are more likely to have a large demand for feature phones, unlike wealthier markets. India contributes to only 30 per cent of its revenues with the remaining revenues coming from other countries.

It is also the fifth-largest feature phone company in the world, with a market share of 5.0 per cent in terms of sales volumes generated. In the Indian market, the company had a market share of 10.2 per cent in the $70 equivalent or less price segment (sales volumes).

The company is involved in designing, manufacturing, marketing, distribution and servicing of mobile handsets, tablets and other devices. It owns the “Lava” and “Xolo” brands. The company’s other services include offering mobile handsets solutions to original equipment manufacturers (OEMs). These services range from sourcing, design, manufacturing, quality testing, embedding software to distribution.

Recently, the company signed a partnership license agreement with Lenovo, which entitles it to distribute mobile handsets it manufactures under the Motorola brand in India. It also has a multi-year contract with HMD, the owner of the Nokia brand, for the designing, manufacturing, and distribution of mobile handsets under the Nokia brand in India and overseas.

The company has a mobile manufacturing facility in Noida with a capacity of 42 million feature-phone equivalent handsets per annum. The company expects to ride the digitization wave with its presence in the technology space. The company has also acquired a Panama based company that is one of the largest phone distributors in Latin America.

The company’s revenue from operations has grown from Rs 5,108 crore in fiscal 2019 to Rs 5,512 in fiscal 2021, a compounded annual growth rate of 3.8 per cent per annum. The company appears to be operating on thin margins, with EBIDTA margins of around 4 to 5 per cent.

On the Balance Sheet front, the company has reduced its long term debt from Rs 109 crore in 2020 to Rs 96 crore in 2021. It also paid back its entire short term debt of Rs 55 crore. The company has also reported negative cash flows from operations in 2019 and 2020, due to working capital requirements.

The company’s business model is not asset-heavy, which is quite evident from the fact that the business generates Rs 5,512 crore worth of revenues with Rs 119 crore worth of plant, property, and equipment.

Key Risks

High Competition

The company operates in a sector with multiple brands with low barriers to entry. Several Chinese brands and Indian brands, with the Chinese brands often pricing their products aggressively. Indian brands have extremely low market shares in the smartphones segment and majorly operate in the low margin features phone segment. At this point, large telecom companies have plans to launch their own phones bundled with cheap data, making the market quite competitive.

Dependence on China

Lava sources raw materials and phones from China, making it vulnerable to any geopolitical or natural crisis. For instance, the power shortage in China has caused factories to shut down, which could affect the mobile handset sector adversely. Political tension between China and India could also cause trade between the countries to come to a standstill.

Working Capital Requirements

The company has working capital requirements for maintaining sufficient raw material and inventories of finished mobile handsets, as well as components and spare parts of mobile headsets. In addition, Lava needs working capital for certain costs including but not limited to salary payments, rent, logistics expenses and other requirements. The company has already witnessed negative cash flows due to high working capital requirements.

Technology Risk

The company has to keep up with changing technologies. If it is unable to keep up with the latest trends or give users the best possible performance at the best prices, its operations could be affected adversely.