Why is Philips' Dutch parent seeking to hike its stake in its India operations.

By Brian Carvalho

If you're one of the old economy-new economy brigade, where would you pigeonhole consumer electronics major, Philips? Decidedly old economy, did you say? Of course, Philips isn't growing at the rate at which most new-e Johnnies-come-lately are-in fact, horrors of horrors, it's in the red-and that's reflected in its miserable valuation. Since April, 1998, its share price has not gone much beyond Rs 200, and these days is well under half that figure, with a market capitalisation of Rs 430-odd crore. What's more, consumer electronics as we know it- primarily audio products and television sets-doesn't quite fit into the ICE, TMT, and TIME (that's a new one) moulds.

But did someone whisper 'new economy'? Why? Well, take a look at the products in Philips' worldwide portfolio. Digital audio players that can play MP3 files; the Xenium, a GSM phone with Voice Command; the world's first free-powered (it doesn't need batteries) portable radio ... that list can go on to fill this page.

That list should be enough to make Philips a zillion times more new economy than many of today's convergence wannabes. And if ice is what turns you on, try this. Philips makes monitors, liquid crystal displays (LCDs), and develops speech-recognition software. That takes care of the 'I' (information, if you came in really late). The C (communications)? Mobile phones, where Philips is frantically trying to become a major player. And let's not forget that Philips is at the forefront of the Bluetooth Initiative, to develop wireless communication technologies. As for the 'E' (entertainment), other than digital and flat-screen televisions, Philips also makes set-top boxes for the internet and direct-to- home transmission. And, coming back to Bluetooth, Philips is also working on cable-free home entertainment applications such as wireless MP3 players, multi-purpose remote controls, and game consoles.

You might ask what relevance do these initiatives at Royal Philips Electronics' Eindhoven headquarters have to do with its beleaguered Indian operations. A lot. Even as you read this, the 31.5-billion euro Dutch major is wooing share- holders in its Indian operations via an open offer. If investors are to choose to sell their shares to Philips Netherlands, its stake in the Indian operations would climb from 51 per cent to 74 per cent. The open offer was made at Rs 105 (at the time of writing, the Philips India share quoted at Rs 94). Royal Philips is also seeking to up its stake in Philips India's lighting subsidiary to 76.5 per cent (Philips India holds the rest). ''It's a sign of more commitment by the Dutch parent, which will now be looking to stem the bleeding in consumer electronics,'' says F. Nataraj, Equity Analyst at Quantum Information Services.

Banking On The New

A visit to the India International Trade Fair at Delhi's Pragati Maidan (which began on November 13) would have provided some manifestations of that commitment. In line with Philips' gameplan of getting many of its newest launches into the country, Aaron Boey, Senior Vice-President (Brand Manage- ment), Asia-Pacific, and Rajeev Karwal, Senior Vice-President (Consumer Electronics), Philips India, showed off their wares. On display, amongst other gizmos, was the 'Rush' MP3 player, with RealJukebox, for creating and editing compressed MP3 files. Philips' patented technology, WOOX, which helps produce extremely low bass with minimal distortion, was also showcased, in the form of the WOOX Bass Radiator and the WOOX Dynamic Amplication Control. Then there was the AE 1000, the world's first non-battery powered portable radio (it has a built-in power generator). As was Philips' LightFrame monitors, which according to Karwal provides ''TV-quality video and photo on computer monitors.''

Impressive? Perhaps, but why does the Dutch parent need to increase its holding to show its commitment to India? After all, the funds that flow in for this purpose will go to shareholders, and it isn't as if fresh money is flowing in. SEBI's takeover code doesn't allow the Philips India top brass led by Managing Director K. Ramachandran to answer such questions (the offer to shareholders closes on December 13). Analysts point out two possible reasons for the Royal Philips offer. One, given that Philips' share price has been hammered down to Rs 90 levels, this is perhaps the best time for the parent to raise its holding. Two, it allows shareholders unhappy with the company's performance to exit.

Indeed, shareholders wouldn't exactly be excited by Philips India's recent performance. For the third quarter ended October 1, the company posted a loss of Rs 4.05 crore, which places its total losses this year at Rs 19.4 crore. Sales too are down marginally, at Rs 1,097 crore, as against Rs 1,258 crore in last year's corresponding nine-month period.

The biggest reason for the blood on the Philips' balance sheet is the poor showing of the consumer electronics business, where the company is taking a beating from several lower-priced players-especially in the colour television segment. ''Philips' problem is that it is unable to convince the market that its products deserve the price they command,'' says Nabi Gupta, former Exe- cutive Director of Videocon International (now Group President at Raymond).

Philips, for its part, is painfully aware of the underperformance of its consumer electronics business. Analysts point out that Ramachandran has two options to choose from. One, open up the purse-strings, go on a marketing blitzkrieg and offer aggressive discounts and schemes in a desperate bid to 'buy' marketshare. This would, of course, be a shorter-term fix, the objective being to wipe out the red ink on the balance sheet as soon as possible, thereby pacifying unhappy shareholders.

But it's clear that Philips has chosen to ignore this high-risk strategy. Instead, it prefers to take a longer-term view, preferring to live with losses if need be for a few more years. And that's where the ice flavour comes in. Philips believes the consumer electronics industry will change some years down the line. Today it is made up largely of audio and television products, but in future it will include other convergence products like set-top boxes, monitors, LCDs, lap-top speakers, speech-recognition software, mobile phones, wireless applications... the entire gamut.

And that's where an increase in commitment by the Dutch parent is likely to help. Adding such products to its Indian stable will also mean that Philips' status as a manufacturer in India could diminish. Making such products in the country will be unfeasible, and analysts do not rule out a stage at which Philips could well end up importing most of its product-range.

Of course, the question haunting the Dutch major is how long the Indian market will take to be ready for the products-other than televisions and audio products-it has in its stable. For the moment, though, the decision appears to have been taken. Philips will continue to lose money in consumer electronics business. But it will hang around, no matter how long the market takes to accept its higher-tech offerings.

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