Keynote Capitals recommends to buy Logix Microsystems Ltd.
Keynote Capitals initiated coverage of Logix Microsystems Ltd. Analysts set "Buy" recommendation and a 12-month target price of Rs110.
Synopsis
Niche player focused on the US automobile market
Logix Microsystems Ltd. (LML) is a niche automobile imagery product developer offering various specialised online products and web solutions mainly to the US automobile industry. It provides customised web solutions and online marketing platforms to automobile OEMs, web portals and automobile dealers in the US. The company services over 500 auto dealers with over 1,200 showrooms, auto portals like Yahoo Autos, AOL Autos and auto OEMs viz., General Motors, Ford Motor Co., Mitsubishi Motors, etc. The company has a small internet presence through web portal www.carazoo.com.
Sizeable US auto market, though growth slowing down
The US automobile market is the world’s largest, with sales of around 16mn vehicles p.a. However, the US auto industry has been under tremendous strain over the last 3 years. New vehicle sales, which averaged 16mn per annum till 2007, dipped to 12.5mn during the current year till September. It is estimated to have further declined to 11.5mn in October. A consistently declining consumer confidence is yet another worry. US Consumer Confidence Index is down from 87.3 in January 2008 to 38 in October.
Online automobile marketing gaining importance with auto dealers
The size of the dealership market is estimated at $693bn with over 20,700 dealers. It is the major link between auto OEMs and end consumers. Advertising spends which average 1.1% of auto dealer revenues, have however stagnated over the last 6 years. However, online ad spend by auto dealers has increased substantially, from 5% to 17% of the total ad spend over the last 6 years. Large user base, high flexibility in accessing sites, multimedia content, multi-usage formats and low cost make the internet an attractive platform for auto OEMs and dealers to market their products. The user see can multiple car models online, without having to visit car showrooms.
Strategies of strengthening US presence and diversification
LML has an established track record of 5 years in the US market, coupled with a robust client acquisition rate (no. of clients increased from 150 to over 500, in the last 4 years). The company plans to focus on adding big-ticket clients includin large auto dealers and auto OEMs. It recently added the world’s largest auto dealer AutoUSA (revenues of $22bn) as client. It plans to strengthen presence in the auto accessories market as well. In view of the fact that the company had a solely US-centric model, it plans to expand in Europe and India (currently a small presence). It also plans to launch a new product for real estate industry initially in India and in future, in the booming Middle East countries.
Consolidation may benefit Logix
Edmunds.com, a US-based provider of information on automobiles, discontinued licensing of enhanced imagery to third parties in 2006. We believe given the scenario of reducing auto sales and the impending shut down of a large number of auto dealerships in the US, further consolidation may take place in the automobile imagery product segment, going forward. Logix, with its cost advantage may benefit from a shakeout.
Risks and Concerns
Risks in our view are the possibility of shrinkage of the online automobile marketing segment due to depressed sentiments, entry of new players, sustainability of pricing power, execution risks regarding new products, marketing spends, exchange rate risks, increasing employee costs and taxation policies for IT/ITES software exports businesses.
Recommendation: Buy
LML has a unique business model, huge market, diversification plans and new products in the pipeline. The stock trades at 4x FY09E and 3.4x FY10E EPS. We initiate coverage with a Buy and a 12-month target price of Rs110, based on 8x FY09E earnings.
For the report, please visit Thomson One Analytics at https://www.thomsononeim.com. In the alternative, you may obtain the same by sending an email request to nitin@keynoteindia.net with your name and contact details.
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