Luxottica short circuits Rayban Sun Optics shareholders

Luxottica, the parent company of Rayban Sun Optics India (the erstwhile Bausch & Lomb), seems to have short circuited the retail shareholders of Rayban Sun Optics India by making the following announcement (dated: 24-Dec-07) -

--
Rayban Sun Optics India Ltd has informed BSE that in line with the previous communication of Luxottica Group S.p.A. dated January 11, 2007 and following the release of the related Non Objection Certificate by the Company, the Board of Directors have received a communication from Luxottica Group S.p.A. vide their letter dated December 17, 2007 that the Luxottica Group has incorporated a wholly owned subsidiary in India by the name, Luxottica India Eyewear Pvt Ltd.

Luxottica Group S.p.A has further advised that with effect from January 2008, Luxottica India Eyewear Pvt Ltd plans to commence distribution of luxury and fashion brand eyewear, other than RayBan, on a wholesale cash and carry basis.
--

Ever since this announcement was made the stock has taken a big plunge. Take a look at the following chart:














Since the announcement was made, the stock has dropped by 52% as against a 25% decline in Sensex. Now a lot of stocks have dropped by as much as 50-60% (including the Ambani pack), but they were also amongst the ones which had run-up like there's no tomorrow. Infact, Rayban was a gross underperformer during a large part of the 'now-historical' bull run. So why is that the stock witnessed such a drop. The explanation lies in the notification released to the BSE and that included in the 'notes to accounts' section of the recently concluded quarter.


The statements:

- Luxottica Group has incorporated a wholly owned subsidiary in India by the name, Luxottica India Eyewear Pvt Ltd.

- Luxottica Group S.p.A has further advised that with effect from January 2008, Luxottica India Eyewear Pvt Ltd plans to commence distribution of luxury and fashion brand eyewear, other than RayBan, on a wholesale cash and carry basis.

- The Board of Directors of the Company in their meeting held on December 21, 2007 noted the letter of December 17, 2007 received from Luxottica Group SPA Italy informing the company on their plan to transfer the business of distribution and sale of various luxury frames and sunglasses, other than RayBan brand to Luxottica India Eyewear Pvt Ltd a wholly owned subsidiary company of Luxottica Group SPA Italy. Accordingly, Luxottica Group SPA Italy discontinued supply of non RayBan brands to company [ Rayban Sunoptics, i.e.] with effect from February 2008. (Source: Notes to Accounts of the Dec'07 results).


The effect:

Even though this business was less profitable as compared to the company's core business in India of selling branded eye wear stuff under the aegis of the Ray Ban brand, it accounted for more than 60% of its business. The company had in recent times launched internationally famous fashion products under the brand of Dolce and Gabana. A significant part of Rayban's topline growth in recent years can be attributed to such new launches.

All this will be gone, starting this year.

The listed company is therefore likely to witness a significant drop in sales & profits starting the Mar'08 quarter.

A sharp drop in the share price reflects this, or so i think.

At the current price - Buy/Sell?

Before we write-off the stock, here's a few data points to consider:

- Mcap at current price (Rs.61): Rs.150 crore

- Cash & Cash equivalents: Rs.88 crore (69.8 cr as per Dec'06 AR + 18 cr cash profit in CY07)

- Mcap_net of Cash: Rs.62 cr

- PAT_from the overall biz in '07: Rs.17 crore (treasury inc - 7 cr + trading - 3 cr [assuming a 5% margin in the trading business] + 7 crore in core business [assuming a 18-20% margin in the core business])

- P/E ratio_net of the trading biz and treasury: less than 10 times.

Not a bad investment if you think hard and do the back calculations. The stock provides significant margin of safety, but does it provide enough head room for growth ??? I am still exploring that !!

Comments / counter-points??