Q3FY25 : The Lighting Space.

Summary

In this video, the speaker delves into the Q3 updates of the lighting industry, focusing on two companies: Focus Lighting and EO Lighting. The lighting sector is split into two main categories: everyday LED lights and specialized studio/infrastructure lighting. The speaker discusses the challenges in both segments, including oversupply and price erosion in the first category and delayed projects in the second. Focus Lighting, which had strong growth in the past, now faces a decline, while EO Lighting, which serves both categories, has experienced subdued demand. Both companies have had to revise their growth expectations, signaling challenges for investors in the lighting space.

Takeaways

• 😀 The lighting industry has two main segments: everyday lighting (e.g., LED bulbs) and specialized lighting (e.g., studio and infrastructure lighting).
• 😀 The first segment faces high supply due to cheap Chinese imports, leading to price erosion and commoditization, making it a tough market for manufacturers.
• 😀 Volume growth is stagnating in the first category, and companies in this space are struggling with price cuts and a lack of brand differentiation.
• 😀 The second segment, which includes high-quality and durable lighting for large infrastructure projects (e.g., airports, stadiums), faces challenges due to project delays, especially in the wake of elections.
• 😀 Companies like Focus Lighting and EO Lighting cater to both categories but face different issues based on their business models.
• 😀 Focus Lighting was once a high-growth company but has recently posted a 27% decline in sales, shifting from a growth engine to stagnation due to delayed orders and unexecuted projects.
• 😀 EO Lighting has experienced similar struggles, with its ODM (Original Design Manufacturing) business being hit by subdued demand from major customers like Philips.
• 😀 EO Lighting's sales have grown minimally by 4%, but its profits have fallen sharply by 60% due to increased capex costs and a lower growth forecast.
• 😀 Both companies, Focus and EO Lighting, have had to lower their growth projections for the year, signaling a negative outlook for the lighting industry.
• 😀 The lighting sector, as a whole, is facing difficulties with demand, project delays, and cost pressures, making it a challenging space for investors.

Q & A

What are the two main companies discussed in the lighting industry segment?

The two main companies discussed are Focus Lighting and EO Lighting.

What are the two main divisions in the lighting industry according to the video?

The two main divisions are: 1) Companies manufacturing everyday lighting products like LED bulbs and tube lights, and 2) Companies focused on studio lights and lighting for large-scale infrastructure projects.

What is the issue with the first category of lighting, which includes everyday products like LED lights?

The main issue with this category is oversupply due to Chinese-manufactured lights being affordable and flooding the market. As a result, there is price erosion, and demand growth is limited.

How does the commoditized nature of the first category of lighting affect the market?

Since the lighting products in this category are highly commoditized, there is little brand differentiation. Consumers mainly care about the functionality, such as wattage, rather than brand names. This results in price cuts across the market, leading to lower profitability.

What is the problem with Chinese-made lighting products in the second category, such as studio and infrastructure lights?

While Chinese-made lighting products are affordable, they often lack the durability required for large-scale projects like studios, airports, or temples. As a result, higher-quality, but more expensive, European technology is preferred, despite its higher price point.

Why are infrastructure and studio lighting projects sometimes delayed?

Delays are often due to external factors like elections, which affect government projects, and issues in the execution of large-scale infrastructure projects, causing delays in order fulfillment and sales realization.

What happened to Focus Lighting’s growth and performance in recent times?

Focus Lighting, which once experienced high growth, particularly in 2022, has now seen a significant downturn. Their sales have declined by 27%, and the company posted a loss instead of a profit in Q3.

What has contributed to the decline in Focus Lighting’s performance?

The decline in Focus Lighting’s performance is largely due to delays in orders, including an airport project in Bombay and the company's efforts to work with Indian Railways, which have not materialized as expected. These delays have led to no significant growth and even a loss.

How does EO Lighting’s business model differ from Focus Lighting’s?

EO Lighting caters to both the first and second categories of lighting. It manufactures original design products for other brands (ODM), while Focus Lighting primarily serves the second category with high-end lighting solutions for infrastructure projects.

What are the key challenges EO Lighting is facing?

EO Lighting is facing subdued demand, particularly in the ODM business, which makes up 50% of their revenue. This slowdown has led to a 4% increase in sales but a 60% decline in profit. Additionally, they are undergoing significant capital expenditures to expand their operations, which is increasing their costs.

Why did EO Lighting revise its guidance downwards for the year?

EO Lighting revised its growth and margin guidance downwards due to the poor performance of its ODM business. The subdued demand from their customers led to a significant de-growth in that sector, which affected their ability to meet the initial forecasted growth targets.

What does the downward revision of guidance by EO Lighting imply for investors?

The downward revision of guidance is seen as a red flag for investors, indicating that the company may not meet the growth expectations it had set earlier in the year. This could lead to a higher valuation for the company relative to its reduced growth, which is a negative sign for investors.