DrVijayMalik Company Analyses Vol 2

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com
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Copyright © Dr Vijay Malik. All Rights Reserved.
www.drvijaymalik.com
Company Analyses (Vol. 2)

Live Examples of Company Analysis using “Peaceful Investing”
Approach
By
Dr Vijay Malik
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Copyright © Dr Vijay Malik.
All rights reserved.
This e-book is a part of premium/paid services of www.drvijaymalik.com
No part of this e-book may be reproduced, distributed, or transmitted in any form or by any means,
including photocopying, recording, or other electronic or mechanical methods, without the prior
written permission of the Dr Vijay Malik.
Printed in the Republic of India
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Important: About the book

This book contains the analysis of different companies done by us on our website (www.drvijaymalik.com)
in response to the queries asked by multiple readers/investors.
These analysis articles contain our viewpoint about different companies arrived at by studying them using
our stock investing approach “Peaceful Investing”.
The opinions expressed in the articles are formed using the data available at the date of the analysis from
public sources. As the data of the company changes in future, our opinion also keeps on changing to factor
in the new developments.
Therefore, the opinions expressed in the articles remain valid only on their respective publishing dates and
would undergo changes in future as the companies keep evolving while moving ahead in their business life.
These analysis articles are written as a one off opinion snapshots at the date of the article. We do not
plan to have a continuous coverage of these companies by updating the articles or the book after
future quarterly or annual results. Therefore, we would not update the articles or the book based on
the future results declared by the companies.
Therefore, we recommend that the book and the articles should be taken as an illustration of the practical
application of our stock analysis approach “Peaceful Investing” and NOT as a research report on the
companies mentioned here.
The articles and the book should be used by the readers to improve their understanding of our stock analysis
approach “Peaceful Investing” and NOT as an investment recommendation to buy or sell stocks of these
companies.
All the best for your investing journey!
Regards,
Dr Vijay Malik
Regd. with SEBI as an Investment Adviser
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Table of Contents
Important: About The Book .......................................................................................................................... 2

1) Granules India Limited ......................................................................................................................... 6
2) Srikalahasthi Pipes Limited ................................................................................................................ 22
3) Indo Count Industries Limited ............................................................................................................ 33
4) Ruchira Papers Limited....................................................................................................................... 52
5) Tvs Srichakra Limited......................................................................................................................... 63
6) Poddar Pigments Limited .................................................................................................................... 72
7) Mbl Infrastructure Limited.................................................................................................................. 87
8) Ultramarine & Pigments Limited ........................................................................................................ 98
9) Emmbi Industries Limited ................................................................................................................ 110
10) Jenburkt Pharmaceuticals Limited .................................................................................................... 123
11) IST Limited....................................................................................................................................... 132
12) Vikram Thermo (India) Limited ....................................................................................................... 149
13) Chaman Lal Setia Exports Limited................................................................................................... 157
How To Use Screener.In "Export To Excel" Tool .................................................................................... 167
Premium Services ..................................................................................................................................... 188
Disclaimer & Disclosures ......................................................................................................................... 200
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1) Granules India Limited
Granules India Limited is a Hyderabad-based Indian integrated pharmaceutical manufacturer, which

focuses on making active pharmaceutical ingredients (API), pharmaceutical formulation intermediates
(PFI) and finished dosages (FD) as primary business activities
Company website: Click Here
Financial data on Screener: Click Here
It is preferable that while analysing any company, the investor should take a view about the entire entity
including its subsidiaries if any so that she is aware of the complete financial and performance picture of
the company. Therefore, while analysing the performance of last 10 years for Granules India Limited, we
have analysed the consolidated financial performance of the company.
Let us analyse the past financial performance of Granules India Limited.
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Granules India Limited has been growing its sales at a good pace of 20-25% year on year for last 10 years
(FY2007-16). The growth rate has been very good until FY2015, however, since then the growth rate has
moderated. This is due to Granules India Limited reaching its near full capacity utilization in its core
business of API manufacturing and high utilization levels of PFI as acknowledged by the management in
the conference call with analysts while discussing September 2016 results:
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Therefore, it has become essential that the company invest in further capacity addition to paving the way
for future growth.
As a result, Granules India Limited has been investing in greenfield plant additions as well as JVs to
continue on the growth path: (Source FY2016 annual report)
It remains to be seen whether the company is able to execute its planned capacity additions on time and
within costs.
It is important to notice that the operating profit margins (OPM) of Granules India Limited, was following
a cyclical pattern until FY2014 as visible from the OPM movement from 15% in FY2007 to 11% in
FY2009, improving to 13% in FY2010 and again going down to 11% in FY2013. However, from FY2014
onwards, the OPM has been witnessing steady improvement and has steadily improved up to 19% in
FY2016.
The cyclical nature of the profit margins of Granules India Limited have been explained by the credit rating
agency ICRA in its rating rationale in December 2013:
“The above strengths are however partially offset by GIL‟s relatively weak profitability
metrics, reflective of its presence in some of the mature and commoditized product segments
restricting pricing power.”
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It is essential to know that the primary products called as “Core Business” by Granules India Limited
constitute some of the most used drugs in the world. These drugs have already witnessed very high
penetration in healthcare services and the probability of a further sharp increase in their market size does
not look highly probable.
These products: Paracetamol (reduced fever), Ibuprofen (painkiller), Metformin (lowers blood glucose for
diabetics), Guaifenesin (cough syrup) and Methocarbamol (muscle relaxant), witness very mature markets
with many big suppliers competing for the market. This results in poor pricing power in the hands of
suppliers to pass on the raw material cost increases to buyers. This leads to fluctuation in the operating
profitability margins with changes in the raw material prices.
These core products still constitute a large portion (86%) of overall sales for Granules India Limited.
(Source: India Rating: Oct 2016 credit rating report for Granules India Limited)
The large portion of mature drugs ensures that the company would find it difficult to earn super margins on
large constituents of its sales. India Ratings also acknowledges the same in its credit rating report of October
2016
“Scope for profitable growth of scale in the base business is limited due to commoditised
nature and mature stage of the products.”
However, recently, Granules India Limited has witnessed improvement in operating profitability margins,
which as per the management is a result of a reduction in raw material costs as well as the change in the
product mix of sales. Granules India Limited is planning to move up in the value chain by focusing more
on the PFI business rather than the precursors and intermediaries like APIs: (Granules India Limited
FY2016 annual report page: 39)
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The above section of the annual report also mentions that the profitability improvement is also on account
of reduction in some of the raw material prices. However, the improvement in profitability margins due to
a reduction in raw material prices does not seem sustainable as the company will have to pass on this benefit
to its customers, as mentioned in the India Ratings credit rationale for Granules India Limited for Oct. 2016:
“The operating EBITDA margins improved 340bp YoY to 19.5% in FY16. The improvement
in margins has benefitted from the falling trend in input prices, which typically are passed on
with a delay of two to three months.”
The net profit margins of Granules India Limited have followed the similar cyclical pattern like OPM and
have witnessed improvement in recent years. It is advised that the investor should keep a close watch on
the profitability margins of Granules India Limited.
Operating efficiency parameters of Granules India Limited reflect that the net fixed assets turnover (NFAT)
has been increasing from FY2008 to FY2013 when it improved from 1.70 to 2.97. However, since FY2013,
the NFAT has been declining continuously and stands at 2.23 in FY2016. This essentially indicates that the
investments done by Granules India Limited since FY2014 onwards in various ventures, plants etc. are yet
to bear full fruit and be utilized to optimal capacity.
An investor would notice that the net fixed assets of Granules India Limited have increased sharply from
₹263 cr. in FY2013 to ₹668 cr. in FY2016. The capacity expansion is still going on as the company has a
capital work in progress (CWIP) of ₹77 cr at the end of FY2016.
An investor should keep a continuous watch on the asset utilization levels as the continuous capex many
times masks the suboptimal use of existing assets by companies. The managements always find a plausible
explanation of lower NFAT citing reasons of new capex not leading to full utilization. However, it many
times hides the poor utilization of previously done capital expenditures.
Working capital efficiency parameters of Granules India Limited reflect that since FY2014, the working
capital efficiency has been deteriorating.
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The inventory turnover ratio (ITR) has declined from 7.1 in FY2014 to 5.4 in FY2016. Similarly,
receivables days of Granules India Limited have deteriorated from 30 days in FY2014 to 37 days in
FY2016.
An investor would notice that Granules India Limited has raised its capex significantly since FY2014. It
has acquired Actus Pharma Limited in FY2014 and has also been investing in JVs (Omnichem) and
acquisition overseas (Virginia, USA). These acquisitions and capex decisions seem to be weighing the
operational efficiency parameters down.
An investor should keep a close watch on the operating efficiency parameters going ahead to ascertain
whether the investments by Granules India Limited are working out in the favour of the company or not. It
is advised that the investor should do her own analysis in arriving at conclusions in such cases and not rely
on management statements as managements are known to defend their decision irrespective of the final
outcome.
Moreover, while analysing the receivables position of Granules India Limited, when the investor compares
the standalone and consolidated receivables position at March 31, 2016, then she notices that the
subsidiaries of Granules India Limited are collecting the receivables from their end customers but are not
paying/remitting to Granules India Limited on time.
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A comparison of above two images shows that about ₹46 cr is stuck with subsidiaries/JVs as the
consolidated trade receivables are about ₹153 cr. and standalone trade receivables are about ₹199 cr.
An investor should keep a close watch on developing receivables position to monitor the trend. An investor
should focus on monitoring whether the company continues to park funds in its subsidiaries, which becomes
evident from the relative rise in standalone receivables while consistent consolidated receivables.
Self-Sustainable Growth Rate (SSGR):
The investor would notice that Granules India Limited has an SSGR almost in single digits (5%-8%) over
the years, which is much lower than the sales growth rate of 20%-25% being achieved by the company.
As a result, Granules India Limited has to rely on additional sources of funds, both equity as well as debt,
to fund its growth requirements.
The analysis of debt levels of Granules India Limited over last 10 years (FY2007-16) indicates that the debt
of Granules India Limited has increased from ₹134 cr. in FY2007 to ₹474 cr. in FY2016. Over and above
the debt increase, the company has been diluting equity by way of issuing warrants to promoters at
preferential terms (more on warrants issuance later in the article).
This assessment assumes significance in conclusion that Granules India Limited is growing faster than its
means. It has already undertaken debt (and equity dilution) funded capital expenditures, which as discussed
above are weighing down its operating efficiency parameters. It remains to be seen whether the company
tries to focus more on improving the state of its existing operations to increase the utilization efficiency of
capex already done or it goes for further capex.
However, as mentioned by the management of Granules India Limited in the conference call with analysts
in Oct 2016, the company plans to increase its capital expenditure in coming years.
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An investor should keep in mind that as highlighted by SSGR being lower than the growth rate, each
incremental growth part is going to burden the company with higher funds requirements over and above
what it can generate internally, and as a result will burden the company with more debt and probably equity
dilution.
The assessment of SSGR gets substantiated when the investor analyses the free cash flow (FCF) position
of Granules India Limited.
An investor would notice that Granules India Limited has generated ₹613 cr. from cash flow from
operations (CFO) over last 10 years (FY2007-16) whereas it has spent ₹787 cr as capital expenditure over
the same period resulting in a negative FCF of ₹174 cr. Moreover, the increasing debt of Granules India
Limited has ensured that it has to service a significant amount of interest each year.
If an investor assumes 11% interest rate applicable to the debt of Granules India Limited over last 10 years,
then she would notice that the company paid about ₹253 cr. in interest payments to its lenders.
There is hardly any doubt that Granules India Limited has to rely on debt and equity dilution to fund the
excess of capex over CFO (negative FCF) and the interest payments. The negative FCF of ₹174 cr. and
interest payments of ₹253 cr. required the company to arrange for about ₹420 cr. from additional sources
over last 10 years (FY2007-16)
Granules India Limited has tried to meet this gap of ₹420 cr. by raising incremental debt of ₹340 cr. (₹474
cr. - ₹134 cr) and additionally relied on equity dilution to bridge the gap.
SSGR and FCF are two of the main pillars of assessing the margin of safety in the business model of any
company.
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The above analysis indicates that the past performance of Granules India Limited does not indicate any
sustained competitive business advantage in its business model. The rising debt continued equity dilution,
deteriorating operating efficiency would put pressure on the credit rating assessment by any rating agency.
It seems that the company has been doing credit rating shopping in the market by switching different rating
agencies in quick succession.
Granules India Limited was initially rated by CARE (there is a publicly available rating rationale of the
company prepared by CARE in June 2010). Thereafter, it switched from CARE to ICRA and as a result,
CARE suspended its credit rating. Further, the company switched from ICRA to India Ratings and as a
result, ICRA also suspended its rating.
Such frequent shift in rating agencies can be due to any of the two considerations: (1) to save on costs by
negotiate lower pricing by shifting the rating agency and (2) negotiate a better credit rating from another
rating agency in case existing rating agency is not willing to give desired credit rating to the company.
An investor should contemplate/explore further about the reasons for such frequent switching the rating
agencies by Granules India Limited.
The above analysis of FCF indicates that Granules India Limited is consuming more cash than its business
model is able to generate, which is resulting in continuously increasing debt levels. It seems questionable
that the company has been paying dividends every year despite being in a cash flow deficit situation.
Granules India Limited paid a total dividend (excluding tax DDT) of about ₹52 cr. over last 10 years
(FY2007-16). Ideally, the company should have conserved resources and used the funds to repay debt,
avoid equity dilution and fund the capex plans.
Payment of dividends in companies, which have negative free cash flow (FCF) indicates that the dividends
are effectively funded by debt. As the decision to pay dividend depends upon the promoters/majority
shareholders, most of the times, such dividend payouts are to benefit promoters even though the dividends
are received by all the shareholders.
An investor would appreciate that payment of dividends out of debt proceeds effectively puts the company
in an unnecessary leveraged position. It’s like benefiting the equity shareholders at the cost of the company.
While reading the annual report for FY2016, an investor comes across a few other parameters related to
management, which deserve the attention of investors:
1) High Promoter’s Salaries:
An investor would notice that the promoter of the company, Mr Krishna Prasad Chigurupati (CMD) took
home a remuneration of about ₹10 cr in FY2016 and his wife Ms Uma Devi Chigurupati (Executive
Director), received a remuneration of about ₹8 cr in FY2016.
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These salaries look very high from industry benchmark perspective despite being in statutory limits. This
is after considering that the net profit after tax of Granules India Limited in FY2016 was about ₹118 cr.
Salary of Krishna Prasad is about 8.5% of PAT and the salary of Uma Devi is about 6.8% of the PAT in
FY2016.
We have noticed that on an average the promoter’s salaries are reasonable within the range of 2-5% of PAT,
which includes fixed component as well as approximate 2% commission on the profits of the company.
Considering it, the salaries drawn by promoters seem very high.
Moreover, an investor would notice that the executive director, Ms Uma Devi Chigurupati does not seem
to be dedicating her full-time attention to her role in Granules India Limited. The annual report for FY2016
for the company mentions that she is also overseeing the operations of another business, which is a vineyard
in Karnataka.
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If the vineyard operations require much of her time, then the high salary being paid out to her from Granules
India Limited might not be entirely justified.
An investor should analyse it further to arrive at a final conclusion as high remuneration to family members
might be one of the ways in which the promoters might be benefiting at the expense of the company similar
to the above-mentioned observation of payment of dividends out of debt proceeds.
2) Warrants:
We believe that the preferential issuance of warrants to promoters by companies is not a good sign as it
allows promoters to:
 speculate on the own company’s share price by taking a position like a call option and
 allows the promoters to increase their stake in the company through backdoor channels, without
facing the increased cost of share acquisition. Usually, the cost of purchase of shares from the
market is higher as the share price increases once the market gets to know that the promoter is
purchasing shares.
An investor may read our views on warrants in detail in the following article: Steps to Assess Management
Quality before Buying Stocks (B)
FY2016 annual report of Granules India Limited mentions that the company issued warrants to promoters
on two occasions in FY2016:
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a) 40,95,230 warrants allotted on August 28, 2015, at ₹84.91, which were exercised by the promoters in
full on October 31, 2015, when the closing market price of Granules India Limited was ₹147.90 on October
30, 2015, on BSE.
This led to the promoters benefiting by ₹25.7 cr. [40,95,230 * (147.90 – 84.91)]. This is assuming that the
promoters would have been able to buy 40,95,230 shares at the market price, without factoring in the usual
share price increase that results on the news of promoters buying shares in the company. Additionally, the
daily trading of the shares of the company involves buying and selling of about 2.5 to 3.5 lakh shares, which
is low considering the number of shares being gained by the promoters.
b) 1,86,56,000 warrants allotted on September 07, 2015 at ₹95.30, out of which 72,55,000 warrants were
exercised by the promoters on March 30, 2016, when the closing market price of Granules India Limited
was ₹119.70 on BSE.
This led to the promoters benefiting further by ₹17.7 cr. [40,95,230 * (147.90 – 84.91)]. This is assuming
that the promoters would have been able to buy 72,55,000 shares at the market price.
The conversion of about 1.12 cr. warrants by promoters in FY2016 helped them to increase their
shareholding from 48.59% to 51.15%
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We believe that such use of warrants by promoters to increase the stake in the company has two aspects:
 The promoters are able to avoid the incremental cost of acquisition of shares if they would have
bought the shares from the market as the market would have taken the share price higher. The share
prices increase is even steeper when the market gets to know that the acquisition of shares by
promoters would lead them to cross very significant milestones of 50% shareholding.
 The promoters get to buy an asset at a discount as in the above case promoters could benefit by
₹43.4 cr. when the conversion price of warrants is compared to the closing market prices of the
shares.
c) As per the exchange filing done by the company on December 28, 2016, the promoters have further
exercised 39,17,454 warrants on December 28, 2016, when the closing market price of Granules India
Limited was ₹105 on BSE. Promoters currently have about 75,00,000 warrants that remain to be exercised
at a fixed price of ₹95.30 irrespective of the prevailing market price.
We believe that warrant issuance to promoters is effectively a way to transferring the economic value from
non-promoter shareholders to promoters.
Many times, the logic is given that warrants help the companies raise funds from promoters in difficult
times when companies find it difficult to raise funds from other sources. However, in case of Granules India
Limited, the promoters are funding their warrants purchase by raising loans by pledging their shareholding
in the company, which was communicated by the promoters to analysts in the conference call in Oct. 2016
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If an investor analyses the sequence of events/activities, then it indicates that promoters are using the
economic value of shares of Granules India Limited to raise funds to buy more shares in the company at a
discount to market price.
In case the promoters are not able to service the loans taken by them by pledging of shares, then the selling
of shares by those lenders would lead to a huge decline in share price of Granules India Limited, which
would hurt the wealth of all the shareholders whether promoters or non-promoters.
Moreover, such loans taken by promoters incentivise them further to get high salaries from the company as
well as get dividend payouts despite negative free cash flows (dividend funded by debt), so that they are
able to service these loans.
Effectively, one way or the other, it is the company and the shareholders who end up bearing the cost and
repercussions of such loans irrespective of these loans being in the name of promoters. However, the benefit
of these loans is primarily enjoyed by promoters as it leads to their increased shareholding in the company.
Therefore, we believe that allotment of warrants by companies to promoters and then the exercising of the
warrants by promoters by paying from the funds raised by pledging shareholding in the company itself is
not a good practice. Investors should be fully aware of the dynamics that result in such situations.
3) Non-Current Investments for Trade:
Granules India Limited has done investments in Jeedimetla Effluent Treatment Limited and Patancheru
Envitotech Limited, which it has classified under the trading category.
Investors would expect the company to focus on investing in its own operations and monetize any of the
investments, which are for trading in nature so that the funds can be used to meet the capex requirements,
which are currently being met through debt and equity dilution.
An investor should assess further whether these entities are related to promoters but strictly not in the
statutory definition of related parties as per Companies Act.
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Granules India Limited is currently (February 9, 2017) available at a P/E ratio of about 19, which does not
offer any margin of safety in the purchase price as described by Benjamin Graham in his book The
Intelligent Investor.
Overall, Granules India Limited seems to be a company growing at a decent pace of 20%-25%, which
historically has witnessed cyclical profitability margins. However, recently, the profitability margins have
been witnessing steady improvement on account of change in product mix by the company as well as lower
raw material prices. It remains to be seen whether the management is able to sustain these improved
profitability margins in the future.
Granules India Limited has been doing significant capex since last 2-3 years, which has led to a deterioration
in its operating efficiency parameters as it has not been able to utilize these investments efficiently.
Assessment of self-sustainable growth rate (SSGR) and free cash flow (FCF) indicate that the company has
been growing out of its means. As a result, it has to resort to debt funding and equity dilution to fund its
capex and interest servicing requirements. Moreover, the company has plans for doing more capex in
coming years. Therefore, an investor should keep a close watch on the project execution of the company as
well as the debt levels on a continuous basis.
High promoter salaries, payment of dividends out of debt proceeds, allotment of warrants and funding of
warrant exercise by promoter by pledging their shareholding in the company leave a lot to be desired in the
governance characteristics of the company.
As a result, we believe that any investor who wishes to make an investment in Granules India Limited
should keep all these things in mind and monitor the company performance on a continuous basis along
with promoter’s decisions.
These are our views about Granules India Limited. However, readers should do their own analysis before
taking any investment related decision about Granules India Limited.
P.S:
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buy/sell transactions since July 30, 2017 as well as to get updates about any future buy/sell
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Latest Buy/Sell Transactions Updates (Premium Service)
 The financial table in the above analysis has been prepared by using my customized stock analysis
excel template which is now compatible with screener.in. This customized excel template is now
available for download as a premium feature. For further details and download: Click Here
 You may learn more about our stock analysis approach in the e-book: “Peaceful Investing – A
Simple Guide to Hassle-free Stock Investing”
 You may read more company analyses based on our stock investing approach in the Company
Analysis series, which is spread across multiple volumes: Click Here
20 | P a g e
 We have used the financial data provided by screener.in and the annual reports of the companies
mentioned above while conducting analysis for this article.
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2) Srikalahasthi Pipes Limited
Srikalahasthi Pipes Limited (erstwhile Lanco Industries Limited), currently, a part of Electrosteel group is
involved in the manufacturing of Ductile Iron (DI) pipes, pig iron and portland slag cement.
Let us analyze the financial performance of Srikalahasthi Pipes Limited over last 10 years.
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Srikalahasthi Pipes Limited had been growing its sales at a moderate pace of 10-15% over last 10 years
(FY2007-16) and as mentioned by the company, it is nearing complete utilization of existing capacity and
therefore, to generate future growth, Srikalahasthi Pipes Limited has invested in additional capacity. The
additional capacity has been completed by September 2016 and the company expects to use it to generate
future growth.
A look at the profitability trend of Srikalahasthi Pipes Limited would indicate that the both the operating
profitability margin (OPM) and net profitability margins (NPM) have been highly fluctuating over the
years. OPM has been varying from 17% in FY2008 to 6% in FY2013 and then rising to 23% in FY2016.
Similarly, NPM has been witnessing wide fluctuations from 3% to 14% and the company has even reported
losses for FY2012 and FY2013.
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On the face of it, the fluctuating margins indicate that the company is exposed to margins pressure with
changes in the raw material prices and the company finds it difficult to pass on the increase in raw material
prices to end customers.
The fact of inability to pass on changes in the raw material costs to intact profitability gets exposed, when
an investor reads the annual reports of two years when Srikalahasthi Pipes Limited has reported net losses
i.e. FY2012 and FY2013.
In the FY2012 annual report, the directors of Srikalahasthi Pipes Limited have communicated to
shareholders the key reasons for the losses reported by the company:
1. increase in the cost of iron ore, one the key raw material for the company, due to the scrapping of
the long-term supply contract with NMDC as a result of the order of Hon. Supreme Court of India,
which direct sale of iron ore only through e-auction. The cost of iron ore to the company increased
by about 25% as a result of this order
2. increase in power costs due to the load restrictions put in by the Andhra Pradesh and
3. increase in costs of imported raw material esp. the coking coal from Australia as a result of the
depreciation of the rupee against US dollar. An investor would notice that Srikalahasthi Pipes
Limited gets about 40-50% of total raw material from imports.
The evidence of losses due to rising input costs as a result of above reasons indicate that Srikalahasthi Pipes
Limited is not able to pass on cost increases to buyers. Thereby, Srikalahasthi Pipes Limited remains
susceptible to fluctuating profitability margins.
Over recent years, Srikalahasthi Pipes Limited has been able to increase its profitability margins. The
company management has stressed repeatedly in the communications to shareholders that it is working
aggressively on reducing the operating costs, which has led to successful improvement in profitability
margins. As mentioned in the FY2016 annual report of the company:
“Besides the significant increase in the volumes of Ductile Iron Pipes, in its constant endeavour
to remain low-cost manufacturer, your Company has undertaken various cost reduction
measures during the year under review such as reduction of coke consumption in MBF, HSD
oil in Ductile Iron Pipe Plant. The continued favourable trend in the prices of major raw
materials viz. iron ore, coal facilitated the Company in maintaining the lower cost of
production.”
If an investor correlates the improvement of the margins of Srikalahasthi Pipes Limited with the movement
in iron ore prices, then the investor would get further clarity about the reasons for the improvement in the
profitability of the company.
Let’s see the movement in the price of iron ore in India for last 5 years:
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The above chart indicates that the iron ore prices in India have declined from in excess of ₹85 per ton during
Sept 2013 to about ₹25 per ton in Nov 2015. This sharp decline of about 70% in the iron ore prices coincides
with the improvement in the operating profitability margin of Srikalahasthi Pipes Limited from 6% in
FY2013 to 23% in FY2016.
It remains to be seen whether the company would be able to maintain its profitability margins when the raw
material prices increase in future. An investor should keep a close watch on the profitability margins of the
company to monitor whether Srikalahasthi Pipes Limited is still exposed to vagaries of commodity cycles.
Srikalahasthi Pipes Limited has been witnessing fluctuating tax payout ratio. However, an analysis of the
annual report indicates that the company has been using MAT credits to set off its income tax liabilities.
Looking at the net fixed asset turnover (NFAT) of Srikalahasthi Pipes Limited over the years, an investor
would notice that its net fixed assets turnover (NFAT) has remained stable over the years. NFAT has been
within a narrow range of 2.25 to 2.50 over the last decade, indicating that there is not a lot of improvement
in the asset utilization levels. It might be a result of no significant changes in the technology used to produce
DI pipes leading to stable NFAT over the years.
Receivables days of Srikalahasthi Pipes Limited has witnessed improvement and then deterioration
resulting in almost stable receivables days of about 65 days over the last decade (FY2007-16). The
receivables days once improved to 49 days in FY2014, however, it has since then deteriorated to 63 days
in FY2016.
Srikalahasthi Pipes Limited has stressed that it has managed receivables risk by supply to contractors who
in turn bid for government contracts and supply/use the pipes of Srikalahasthi Pipes Limited in government
projects.
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At the face of it, such an arrangement looks like an ideal solution found by the company to mitigate the
delay in realization of payments, which is usually associated with government contracts. However, we
believe that on the ground, such an arrangement does not insulate any company from the underlying risk as
the intermediary party would also be able to honour its payment obligations to Srikalahasthi Pipes Limited
only when it gets the money from government departments/agencies for the work done on the project.
If in any situation, the intermediary party (the buyer of Srikalahasthi Pipes Limited) is not able to get the
payment released from the government in time, then it is near certain that the payments would be delayed
by the intermediary party to its vendors including Srikalahasthi Pipes Limited. It might be one of the reasons
for the recent increase in receivables days being faced by Srikalahasthi Pipes Limited.
Moreover, such arrangements of getting intermediary parties in between the key material supplier like
Srikalahasthi Pipes Limited and the end beneficiary (government departments/agencies), also leaves a lot
of gaps for potential accounting manipulations with many entities (which might get classified as related or
unrelated parties), coming into the picture as intermediaries and helping the material supplier to show
cleaner books of accounts by way of management of receivables and profitability margins.
Therefore, it is essential that the investor should monitor the movement of receivables days of Srikalahasthi
Pipes Limited closely going ahead along with the appearance of any write-off of the receivables/bad debts
to understand any development of potential stressful situation for the company.
When an investor assesses the inventory turnover of the company, then the investor notices that the
inventory turnover of Srikalahasthi Pipes Limited has improved over the years from 4 in FY2007 to 9 in
FY2016. Such an improvement in the inventory turnover is a significant achievement for the company as
it leads to relatively lower working capital costs for the company as the relatively lower amount of funds
remain blocked in the form of inventory.
Over last 10 years (FY2007-16), Srikalahasthi Pipes Limited has witnessed almost unchanged receivables
days and significant improvement in the inventory turnover, which has ensured that the funds are not
blocked in the working capital of the company, which is evident from the analysis of cumulative profits
and cash-flow data of Srikalahasthi Pipes Limited for 10 years (FY2007-16). The investor would notice
that Srikalahasthi Pipes Limited has been able to convert its profits into cash flow from operations.
Cumulative PAT during FY2007-16 is ₹423 cr. whereas the cumulative cash flow from operations (CFO)
over the similar period has been ₹880 cr. The key reasons for cCFO being higher than cPAT are:
1. Depreciation (₹208 cr), which is a non-cash expense where the cash outflow has happened
previously when the fixed assets were created and
2. Interest expense (₹400 cr), which even though deducted as an expense while arriving at PAT, is
added back (i.e. adjusted) when calculating CFO. This is done because interest expense is a
financing item and therefore, it is deducted from cash flow from financing while preparing the cash
flow statement.
Strong cash flow from operations position of the company has been sufficient to take care of the capex done
by Srikalahasthi Pipes Limited, which is about ₹456 cr. in FY2007-16, leading to the free cash flow (FCF)
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of about ₹430 cr to Srikalahasthi Pipes Limited. The company has used this FCF to pay the interest
obligations of the company and pay out dividends to shareholders.
As a result of the good cash flow position, credit rating of Srikalahasthi Pipes Limited has been upgraded
by the credit rating agency CARE Limited from A to A+ in FY2016:
Srikalahasthi Pipes Limited has been maintaining a low Self-Sustainable Growth Rate (SSGR) over the
years of about 4%-5%, which has recently improved to 10.7%. The recent improvement in SSGR is on
account of improvement in the net profit margins in recent years. As mentioned above an investor needs to
monitor whether Srikalahasthi Pipes Limited would be able to maintain its profitability margins in light of
cyclical raw material prices.
Anyway, if an investor reads the article on SSGR: Finding Self Sustainable Growth Rate (SSGR): a
measure of Inherent Growth Potential of a Company, then she would notice that Srikalahasthi Pipes
Limited falls in the third scenario in which companies are able to manage their working capital well. As a
result, Srikalahasthi Pipes Limited has been able to contain its debt levels within manageable range despite
witnessing significant growth over last 10 years (FY2007-16)
As mentioned above, the investor should monitor the company with respect to its profitability margins and
receivables management. If the company is not able to maintain its profitability or its working capital going
ahead, then it might be that the company witnesses its debt levels going up.
1) Promoter managers’ remuneration:
An investor would notice that Srikalahasthi Pipes Limited has paid its managing director, Mr. Mayank
Kejriwal, a remuneration of ₹9.8 cr, which is about 6.16% of the net profit after tax of ₹159 cr. for FY2016.
From the statutory requirements, the company needs to keep the remuneration of any of its director within
5% of the profits as calculated according to the section 197 of the Companies Act 2013. The rough estimate
of the profit under section 197 can be assumed to be the profit before tax and by adding back the
remuneration being paid to directors.
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Therefore, it seems that the company has followed statutory requirements, however, nevertheless, the
remuneration of ₹9.8 cr. being 6.16% of profit after-tax seems on a higher level from normal market
standards, where most of the promoters keep their salaries within the range of 2-4% of net profit after tax.
2) Issues with the promoter group:
Srikalahasthi Pipes Limited was acquired by Electrosteel group in 2002. Currently, Electrosteel group has
been facing a lot of liquidity-related issues.
One of the group companies, Electrosteel Steels Limited, has defaulted to its lenders and has turned a non-
performing asset for the lenders. As a result, the lenders have taken over the control of the company.
Most of the times, we notice that when any company in the group faces such liquidity challenges, then the
promoter management, which most of the times consider all the companies in the group as the family
business, uses the funds of one company to relieve the cash flow crunch being faced by the other group
company.
However, the same has not happened in the case of Srikalahasthi Pipes Limited, where despite Electrosteel
Steels Limited facing bankruptcy, the promoters have not used the cash resources of Srikalahasthi Pipes
Limited to help Electrosteel Steels Limited.
This might be a good shareholder friendly approach being adopted by the promoter management. However,
upon analysing the annual reports of Srikalahasthi Pipes Limited, an investor would notice that the company
has a government agency/department: Andhra Pradesh Development Corporation as one of the
shareholders, which holds 0.61% shares in the company.
Moreover, Andhra Pradesh Development Corporation has a nominee director position on the board of
Srikalahasthi Pipes Limited, which is being occupied by an IAS officer.
It seems highly plausible that the presence of a govt. nominee director on the board of the company has
been one of the reasons that promoter management of Electrosteel group has not been able to use the cash
resources of Srikalahasthi Pipes Limited for the benefit of its other group companies, which usually takes
place in the form of loans & advances to the group companies.
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We have seen other similar examples in Indian corporate world. One case that readily comes to mind is of
the Vedanta group, where the group used the cash resources of one of the group entities: Cairn India Limited
to give loan to its group entity and later on got the merger of Cairn India Limited approved so that the loan
need not be repaid by the group company. In the case of Cairn India Limited, the minority shareholders lost
out on the economic benefits of the funds provided by the company as a loan to the promoter group entity.
On the contrary, the same group, while dealing with the cash resources of another group company:
Hindustan Zinc Limited (HZL), used the dividend route to provide cash of the company to promoter entity.
As the dividend route was adopted, all the shareholders including the minority shareholders got the
proportionate benefits from the cash resources of HZL.
The key difference between Cairn India Limited and Hindustan Zinc Limited has been that in HZL, Govt.
of India has about 30% stake and without the consent of government-nominated directors, the company
could not have given loans and advances to promoter group entities as happened in the case of Cairn India
Limited.
However, whether similar factors have been at play in case of Srikalahasthi Pipes Limited or the
management has been shareholder friendly, remains to be seen. In any scenario, it is advised that the
investors should remain cautious and keep a close watch on the utilization of the cash resources by the
company. Investors should keep a close focus on the related party transactions being done by the company
to assess whether the promoters are showing any signs of benefiting at the cost of the minority shareholders.
3) New Ferro Alloy project:
As part of the FY2016 annual report, the management of Srikalahasthi Pipes Limited has stressed upon
investing in a Ferro Alloy Plant:
“.. attempt to achieve self-reliance in sourcing major and critical raw/essential materials, your
Company has planned to set up a Ferro Alloys Plant with an outlay of Rs.55 Crores to meet
the requirement of Ferro Silicon, Silico Manganese and Ferro Manganese in domestic and
overseas markets, besides catering the captive requirement of the Company. This additional
facility would help the Company in achieving higher revenues, in addition to maintaining a
lower cost of production. This facility will be commissioned during the second quarter of
2017-18. This project would be funded out of internal accruals.”
However, Srikalahasthi Pipes Limited has deferred/scrapped the project citing denial of the power subsidy
of ₹1.50 per unit to ferro alloy units in the state. The company has cited that the absence of subsidy would
render the plant unviable.
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It is surprising for the investors that the new capex was being planned in such low margins/returns that it
had to mandatorily rely on subsidies to make any money for shareholders. Nonetheless, such is the nature
of businesses which are commodity in nature.
Time and again, while analysing Srikalahasthi Pipes Limited, an investor is faced with scenarios which
stress that the business of the company does not have any sustainable business advantage over its peers as
the business is essentially commodity in nature.
In the past, the increase in raw material and power costs pushed the company into losses, as it could not
pass on the rise in costs to its customers. Even in present times, non-availability of power subsidy has turned
the management’s plans for ferro alloy plant unviable. Looking at such issues, an investor needs to keep a
close watch on its profitability margins.
4) Trading of goods (Coal):
The company has been trading on coal year on year. While analysing the information related to traded
goods in the FY2016 annual report, an investor would notice that:
1. In FY2016, Srikalahasthi Pipes Limited bought coal worth ₹28.7 cr. and sold it at ₹29.4 cr and in
turn making a profit margin of 2.4%.
2. In FY2015, Srikalahasthi Pipes Limited bought coal for ₹53.3 cr. and sold it for ₹53.8 cr at a profit
margin of 0.9%
The question would come to the mind of an investor about the reasons for the company getting involved in
the trading activity of coal unless the coal being traded has lost all its economic value and needs to be get
rid of at any cost.
Otherwise, if an investor allocates the establishment costs of the company (salaries, administrative expenses
etc.) on the traded goods, then the profitability figures on the trading would become further bleak and the
company might be wasting its precious resources on this activity, which could have been allocated to other
more fruitful purposes.
If possible, an investor should try to assess further the trading operations and rule out whether the buyer for
the traded coal is a related party. This is because if Srikalahasthi Pipes Limited is supplying coal to any
related party at wafer thin margins, then it might be benefiting the related party at the cost of shareholders
of Srikalahasthi Pipes Limited.
5) Related party transactions:
Srikalahasthi Pipes Limited has been entering into related party transactions with the group companies of
Electrosteel group.
The associate company, Electrosteel Castings Limited accounts for about 5% of the total sales of
Srikalahasthi Pipes Limited (₹61 cr. out of total sales of ₹1,146 cr), whereas the outstanding receivables to
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the Electrosteel Castings Limited are 19% of total outstanding trade receivables (₹39 cr. out of total
receivables of ₹207 cr).
It indicates that in comparison to other buyers, the related party Electrosteel Castings Limited is delaying
payment to Srikalahasthi Pipes Limited.
An investor should monitor the development of related party transactions and the receivables along with its
write-off if any closely to find out if there is any adverse development.
It is to be noted that as part of the AGM in 2016, Srikalahasthi Pipes Limited has got the approval of
shareholders for increasing the related party transactions with Electrosteel Castings Limited up to ₹225 cr.
Srikalahasthi Pipes Limited is currently (December 26, 2016) available at a P/E ratio of about 6.4, which
provides a margin of safety in the purchase price as described by Benjamin Graham in his book The
However, as highlighted by the above analysis, there are many issues related to the company being a part
of the financially stressed promoter group, like commodity business, fluctuating margins, inability to pass
on costs, dependence on govt. releasing timely payments to its buyers, seemingly costly trading activity
and related party transactions etc. might be the reasons that the market has been assigning low P/E multiple
to the company.
An investor should convince herself with all the aspects of the company before she gets attracted to the low
P/E multiple of the company.
Over last 10 years (FY2007-16), the company has retained earnings of about ₹361 cr out of its profits and
has generated a market value of ₹933 cr. It indicates that the company has generated about ₹2.58 for every
rupee retained by the company from its shareholders.
Overall, Srikalahasthi Pipes Limited seems to be a company, which has been growing its sales at a moderate
pace with fluctuating operating margins indicating low supplier’s power over its buyers. The recent increase
in profitability seems more due to the fall in commodity raw material prices and it remains to be seen,
whether the improving margins remain sustainable in future.
Srikalahasthi Pipes Limited has brought in the intermediary parties as contractors to govt. works, who buy
from Srikalahasthi Pipes Limited and execute govt. projects. However, an investor should keep it in mind
that ultimately the risk associated with the delayed payment clearance by govt. depts/agencies cannot be
eliminated as the buyers might default to Srikalahasthi Pipes Limited in absence of timely payment from
govt.
The company has been entering into related party transactions as well as seemingly unproductive trading
activities, which are stretching company’s resources.
Srikalahasthi Pipes Limited has been able to manage its inventory well, which over the years has led to the
sustained good cash flow position for the company that has led to credit rating improvement for the
company.
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The company until now has not got itself involved into bailing out stressed promoter group entities by
giving loans and advances to them. However, it might be due to the presence of govt. nominee directors on
the board of the company. An investor should closely monitor developments at this front to assess the
utilization of cash reserves available with the company.
These are our views about Srikalahasthi Pipes Limited. However, readers should do their own analysis
before taking any investment-related decision about Srikalahasthi Pipes Limited.
P.S:
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3) Indo Count Industries Limited
Indo Count Industries Limited is an Indian textile player, which has a significant share in the home textile
segment of USA and has marquee clients like Walmart, JC Penney, Target, etc. as customers.
It seems that Indo Count Industries Limited has been preparing only standalone financial statements until
FY2008. However, from FY2009 onward, it has been publishing consolidated financials as well.
It is preferable that while analyzing any company, the investor should take a view about the entire entity
including its subsidiaries if any, so that she is aware of the complete financial and business performance
picture of the company. Therefore, while analyzing the performance of last 10 years for Indo Count
Industries Limited, we have analyzed standalone financial performance until FY2008 and consolidated
financial performance from FY2009 onward.
Let us analyze the financial performance of Indo Count Industries Limited over last 10 years.
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Indo Count Industries Limited had been growing its sales at an excellent pace of 25-30% over last 10 years
(FY2007-16). However, despite the growth in its sales, the company has witnessed its fair share of troubles
on the profitability front. Indo Count Industries Limited had been making losses both on the operating as
well as net profitability levels in the initial part of last 10 years (FY2007-16).
The company has made operating level losses until FY2010. However, since FY2012, the operating
profitability of the company picked up and has been on the improvement path ever since. The operating
profit margins have improved from 3% in FY2012 to 20% in FY2016.
Apart from the operating profitability, the net profitability of the company has also witnessed similar kind
of pattern in the past. Indo Count Industries Limited made losses until FY2012. However, from FY2013,
the company has been making profits and improving its net profitability margins from 2% in FY2013 to
12% in FY2016
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The company has been going through a very rough phase during FY2008-10. The global financial
slowdown along with some specific decisions of the company worked against it and resulted in the company
facing deep losses. One of the decisions of Indo Count Industries Limited, which hurt it bad was the decision
to enter into a derivative contract that led to losses of ₹150 cr and pushed the company into corporate debt
restructuring (CDR).
An excerpt from the interview given by the company promoters to Forbes in August 2016, clearly tells the
situation faced by the company:
“The company had an unfortunate experience in June 2008, when their erstwhile CFO signed
a zero-cost derivative contract. This was a time when the rupee was quoting at 40 to the
dollar and consensus was that it was expected to strengthen further. In order to lock in their
dollar receivables, the company got into a contract that stipulated they would have to pay
double the amount if the rupee depreciated. That is exactly what happened and Indo Count
was saddled with a Rs 150 crore loss. “We just didn’t know what to do,” says Anil. They
could have sued the banks that sold them the contracts as they were sold without being signed
by two signatories. Instead, the company decided to repay what they owed. The decision
resulted in Indo Count going for corporate debt restructuring, which set them back by at least
three years.”
However, the company pulled its act together and improved its business performance going ahead. The
company started reporting operating profits from FY2011 and later on improved its margins. Subsequently,
the company paid its bankers for the loss of income that they had on account of restricting (recompense)
and successfully came out of the restructuring in April 2014, four years ahead of the projected exit.
This is very good performance shown by Indo Count Industries Limited. However, it remains to be seen
whether the company would be able to sustain such operating margins.
In the annual report for FY2016, the management has communicated to shareholders as part of its
management discussion & analysis section (pg. 59), that the company has the ability to pass on variations
in raw material to its customers.
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Over the years, the tax payout ratio of Indo Count Industries Limited has been fluctuating on account of
accumulated losses as well as the various incentives. However, since FY2015, the tax payout ratio has
stabilized, which is near the standard corporate tax rate in India.
Operating efficiency parameters of Indo Count Industries Limited reflect that it has been able to improve
its net fixed assets turnover (NFAT) over the years. NFAT has improved from 0.8 in FY2009 to 5.0 in
FY2016. This is a very significant improvement by the company in terms of asset utilization.
Reading the annual report of Indo Count Industries Limited indicates that the company has been
highlighting its asset-light business model to its shareholders (AR FY2016, pg. 16):
However, to verify the claim of the company of being an asset light company, it needs to be compared to
its peers. We have compared the net fixed assets turnover (NFAT) of Indo Count Industries Limited with
three of its listed peers: Welspun India Limited, Vardhman Textiles Limited and Trident Limited. The
following chart sums up the comparative performance of Indo Count Industries Limited and its peers on
NFAT, which is one of the key parameters to assess the capital intensity of any business:
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An investor would notice two things from the above chart:
1. Indo Count Industries Limited has the highest net fixed asset turnover among its peers: more than
double from its closed peer (Vardhman Textiles Limited) and
2. Indo Count Industries Limited has improved its asset turnover remarkably over the last decade from
being the lowest to the highest among its peers.
This is a good performance and the company deserves a pat on its back for such performance.
In the above interview with Forbes, the promoters had disclosed that they have outsourced a major part of
their yarn production, which has saved them a lot of capital expenditure:
“In order to move into the business of manufacturing finished products (which has higher
margins) Indo Count decided to outsource some part of its low-margin business of simply
spinning and selling yarn, a move that most other spinning companies don’t make. At
present, the company produces 30 to 40 percent of the yarn it consumes; the rest is
outsourced. “We could have either continued to invest in the spinning business or moved up
the value chain,” says Mohit, who, as a 29-year-old, led Indo Count’s charge into the home
textile business.”
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The outsourcing of yarn production seems to have led to significant improvement in the asset turnover of
the company.
Over the years, Indo Count Industries Limited has been able to maintain its Inventory turnover ratio (ITR)
at a stable level of about 5-7 times.
Indo Count Industries Limited has improved its receivables days significantly from 61 days in FY2008 to
23 days in FY2013. However, recently, an investor would notice that the receivables days has been going
up slowly and has risen to 28 days in FY2016. An investor should keep a close look at the receivables days
of the company and analyze any deterioration in depth.
While analyzing the receivables position of the company at March 31, 2016, the investor would notice that
at a consolidated level the outstanding receivables are ₹206 cr (AR FY2016, pg. 116) whereas, at the
standalone level, the outstanding receivables are ₹289 cr (AR FY2016, pg. 84).
It means that about ₹83 cr worth of funds have been collected by subsidiaries of the company but has not
been remitted to the company.
While analyzing the related party transactions section of the FY2016 annual report (pg. 106), the investor
would notice that Indo Count Industries Limited has outstanding receivables of about ₹122 cr from its
subsidiaries. The key subsidiary among these is Indo Count Global Inc. (USA). It might indicate that the
company is receiving money from its customers in the USA, however, the wholly owned subsidiary in the
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USA is not remitting the funds to India.
An investor should monitor the comparative receivables position closely and understand whether the
company has any Capex plans for the USA, which might be leading it to hold funds overseas. Otherwise,
keeping cash overseas, which would be earning very low returns on deposits when compared to India, might
not be a very good decision.
The sustained holding of cash overseas without utilization can also be a sign of caution, which might require
the investor to do an in-depth assessment by the investor.
When we analyze the cumulative profits and cash flow data for 10 years (FY2007-16)), then we realize that
Indo Count Industries Limited has been nearly able to convert its profits into cash flow from operations.
Cumulative PAT during FY2007-16 is ₹476 cr. whereas the cumulative cash flow from operations (CFO)
over the similar period has been ₹463 cr.
Over last 10 years (FY2007-16), Indo Count Industries Limited has done a capital expenditure (CAPEX)
of ₹385 cr. Due to the capital intensive business model in the initial part of last 10 years and the losses, the
company has relied heavily on debt to meet its funds requirements. The resulting heavy interest burden of
the debt resulted in the debt levels rising from ₹278 cr in FY2007 to ₹434 cr in FY2014 despite the company
staying away from any major Capex during FY2010-14.
However, as mentioned above, during last two year FY2015-FY2016, the company has witnessed
significant improvement in profitability and as a result, Indo Count Industries Limited has been able to
reduce its debt from ₹434 cr in FY2014 to ₹358 cr in FY2016 in spite of doing Capex of about ₹180 cr in
the last 2 years.
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This performance of Indo Count Industries Limited has been recognized by the credit rating agencies as
well. As a result, the credit rating agency CARE Limited has upgraded its credit rating twice in the current
financial year by total 6 steps/notches from BBB- to A (4 steps) in April 2016 and then from A to AA- (2
steps) in Oct. 2016.
This is an exceptional upgradation in credit rating of a company by any credit rating agency and the level
of upgrading should be taken with a pinch of salt by the investors as it was the same credit rating agency,
CARE Limited, which had suddenly suspended its credit rating of Amtek Auto Limited in August 2016
directly from AA- when Amtek Auto Limited could not repay its lenders despite being rated AA-, which is
a very strong credit rating.
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Nevertheless, the upgradation of the credit rating reflects the improving business & financial position of
Indo Count Industries Limited, which we have observed in our above analysis.
The company is currently doing a major capex of ₹175 cr in phase 1, which it expects to complete in the
current quarter and plans to do another Capex of about ₹300 cr in phase 2. These Capex plans along with
the customer contracts helping it to maintain operating profitability margins might present an attractive
combination of profitable growth for the company. However, an investor should monitor the execution
performance of the company closely lest delays in completion lead to the cost overruns in the projects and
as a result, the company might lose out on the promises made to customers.
Such a situation might lead to the company again lead the investors to face the tough times, which the
company faced in the past.
Nevertheless, using the funds generated from operations to do CAPEX and simultaneously reducing debt
is a good sign and the markets have rewarded Indo Count Industries Limited handsomely. Over last 5 years,
the share price (post adjusting for 1:5 split reducing the face value from ₹10 to ₹2, effective from current
month) has increased from about ₹1.86 (November 31, 2011) to ₹142.65 (November 25, 2016), which is a
handsome 7500% return in last 5 years.
However, upon deeper analysis of Indo Count Industries Limited and its annual reports an investor would
come across certain aspect, which an investor should analyze in-depth further before committing her hard-
earned money to the company:
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1) Allotment of warrants to promoters:
Indo Count Industries Limited approved the allotment of 28,98,300 warrants to promoters in the meeting
on September 11, 2013, at a price of ₹17.25 per share (pre-split price, the post-split equivalent price would
be 1/5 of it: i.e. ₹3.45 and the number of shares post-split would be 5 times: i.e. 1,44,91,500).
The (post-split) share price of the company on September 11, 2013, was in the range of ₹5.44 meaning that
the promoters had a gain of ₹2.9 cr [1.44 cr. Share * (5.44-3.45)] on the very day of allotment.
The warrants are allotted by companies based on a formula, which is based on the share price levels of past
6 months and are allotted by taking 25% of the value at warrants allotment. The balance 75% of the money
is collected when the warrant holder converts them into equity shares.
In the case of Indo Count Industries Limited, the promoters paid the 25% price of allotment i.e. ₹1.25 cr
(1.44 cr. Shares * ₹3.45 * 25%), which the company disclosed in the FY2014 annual report, as share price
money pending allotment.
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The above information indicates that the promoters paid ₹1.25 cr for something which was giving them a
profit of ₹2.9 cr right on the day of allotment.
An investor would notice that warrants are like call options where the holder has paid a premium of 25%
of the value and would convert the warrants into equity shares by paying balance 75% only at the time of
conversion the price of the equity share of the company is higher than the warrant allotment price. Warrants
are usually convertible within 18 months from the allotment.
An investor would notice that the warrants holder (promoter in this case) has got a right to subscribe to the
company shares and increase her stake in the company at a predetermined price without worrying about the
usual share price increase which happens if the promoters buy shares of their company from the open
market. In case the share price does not increase, then the promoter simply lets the warrants expire.
That’s even though the companies say that warrants are issued to the promoters in lieu of the capital infusion
by them at times when the company needed funds. However, I call warrants a legal instrument in the hands
of promoters/allottees to speculate on their company share price. And invariably, the persons to bear the
cost of such speculation are the minority shareholders.
An investor would see that the promoters infused ₹1.25 cr for allotment of warrants in FY2014. Looking at
the financials of the company in FY2014: Sales of about ₹1,468 cr, net profit of ₹110 cr, debt of ₹434 cr
and interest expense of ₹50 cr, the infusion of ₹1.25 cr by promoters seems insignificant in terms of overall
financial position of the company and that too by calling a special extraordinary general meeting.
If it was urgent, then Indo Count Industries Limited could have collected this much amount by making a
single phone call to any of their customers so that they may pay ₹1.25 cr from the outstanding trade
receivables of ₹127 cr on March 31, 2013, and ₹167 cr at March 31, 2014. Such collection in the time of
urgency would not have been difficult from long-standing customer relationships.
Moreover, even if the company needed funds, the promoters did not infuse the balance 75% of the warrants
funds i.e. ₹3.73 cr (1.44 cr. Shares * ₹3.45 * 75%), until December 20, 2014, which is good 15 months post
allotment. If the warrants were allotted supposedly for the urgent requirement of funds by the company,
then the balance 75% funds infusion would have come much sooner. However, even the balance 75% (₹3.73
cr) seems insignificant in terms of overall finance requirement of Indo Count Industries Limited.
Anyway, the promoters got 1.44 cr. Shares (post-split) at December 20, 2014, at an effective price of ₹3.45,
which is the original warrant allotment price. The post-split share price of Indo Count Industries Limited at
December 20, 2014, was about ₹60. Therefore, at the time of allotment of equity shares, the promoters had
a gain of about ₹56.55 per share (post-split, ₹60 - ₹3.45), amounting to a total gain of ₹81.43 cr (1.44 cr
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shares * ₹56.55).
Moreover, the conversion of warrants allowed the promoters to increase their stake in the company by
3.20%.
The increase in stake in the company for the promoters comes at a very low cost of ₹4.97 cr (1.44 cr shares
* warrant allotment price ₹3.45), which otherwise would have cost them about ₹86 cr (1.44 cr share * price
at equity conversion date ₹60). This is without considering the almost certain possibility that if the
promoters would have bought these additional shares from the open market, then the market would have
taken the share price at a much higher level than ₹60.
Further, there is a peculiar observation related to the timing of conversion of warrants into equity shares in
December 2014. As per our analysis above, we have observed that from FY2014, the performance of the
company had started improving a lot and as a result, the company came out of the corporate debt
restructuring (CDR) in March 2015, which is just 3 months after the promoters converted their warrants
into equity shares.
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No wonder, the promoters converted their warrants in December 2014, as they know the best out of all the
people, about the financial position of the company at any point of time and that the company would be
exiting the CDR very soon. As is normally expected with a company showing improving business
performance, after the exit from CDR, the share of Indo Count Industries Limited raced ahead and touched
the lifetime high of ₹249.69 on February 8, 2016, valuing the 1.44 cr shares (post-split) converted by
promoters from warrants at ₹360 cr. It must be remembered that promoters got these shares by getting the
warrant allotment at ₹4.97 cr. (1.44 cr share * ₹3.45 post-split allotment price).
This is an example of someone having her cake and eating it too.
An investor may read more about my view on warrants and use it as a tool along with other methods in
management assessment in the following article:
Read: Steps to Assess Management Quality before Buying Stocks (B) (Moneylife Session Part-3)
Read: Why Management Assessment is the Most Critical Factor in Stock Investing?
2) Revaluation of certain company assets:
While reading the FY2016 annual report of Indo Count Industries Limited (pg. 128), an investor would
come to know that the company had done a revaluation of its assets in 2008 and 2009:
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Assets held by companies, just like the assets held by us, keep on changing in valuation over the years e.g.
during growing times certain assets like land increase in value and the company is right in reassessing the
value of such assets and changing their value in the balance sheet. The original value of these assets in the
balance sheet is the acquisition cost, which can now be increased/decreased to reflect the current value so
that the balance sheet and book value can be closer to real valuations.
However, what is surprising in the revaluation done by Indo Count Industries Limited is that they have
revalued assets like building, plant & machinery, diesel generator (DG) sets as well and valued them at a
higher valuation than acquisition cost despite using them for their operation for some time.
The company may have its reasons to believe that building, plant & machinery and diesel generator sets
may also increase in value over usage & time. However, by common logic, it seems more probable that
value of diesel generator sets, plant & machinery and building goes down due to usage related wear & tear.
Therefore, an investor should analyze further to understand the peculiar nature of mentioned diesel
generator sets, plant & machinery and the building that they are increasing in value with usage over time.
By analyzing the FY2010 annual report, the investor would notice that the company has revalued its above-
mentioned assets by about ₹178.7 cr.
The investor would appreciate the importance of analysis of the extent of revaluation reserve when she
notices that the company has been reducing its depreciation expense every year by adjusting a part of the
revaluation reserve against it in the profit & loss statement, which is leading to lower depreciation expense
and thereby higher profits.
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A look at the notes to the accounts under depreciation section of the FY2016 annual report (pg. 135) would
indicate that Indo Count Industries Limited has used about ₹11 cr. (FY2016) and ₹12 cr (FY2015)
respectively from the revaluation reserve and reduced its depreciation expense by the same amount.
The equivalent adjustment from the revaluation reserve can be seen in the note on reserves in the FY2016
annual report (pg. 124):
The net impact of the above transaction is that in FY2015 the profit before tax (PBT) becomes higher by
about ₹12 cr and in FY2016, the PBT becomes higher by about ₹11 cr when compared to a scenario when
the company would not have revalued its diesel generator sets, plant & machinery and building and such
revaluation reserve would not have been there.
An investor would notice that in FY2010, the total amount of revaluation reserve created by Indo Count
Industries Limited was ₹178.7 cr. An investor would appreciate that the company would adjust this
revaluation reserve part by part over the years against depreciation expense, which would effectively
increase their profit before tax (PBT) by an equal amount over next few years.
The analysis of revaluation reserves section of the FY2016 annual report, shared above, indicates that by
FY2016, the company has already utilised about ₹84 cr worth of revaluation reserve and about ₹94 cr worth
of revaluation reserve still remains to be adjusted, which would be adjusted in coming years.
An investor can interpret that from FY2010 to FY2016, Indo Count Industries Limited has reported
cumulative PBT of ₹84 cr because of revaluation of diesel generator sets, plant & machinery and building
on a higher amount despite using them for some time and despite the usual wear & tear associated with
operational usage. And the company would further show PBT of ₹94 in future years by adjusting this
remaining revaluation reserve at March 31, 2016.
It is as good as a scenario, where if any company wishes to increase its profits by ₹100 cr in future years,
then it simply needs to revalue its assets up by ₹100 cr and keep on adjusting the revaluation reserve thus
created for reducing the depreciation expenses over coming years.
Alternatively, it can also be interpreted as a situation where:
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 First, the company revalued its assets upwards and created the revaluation reserve. This exercise
increased the amount of shareholder's equity by the amount of revaluation reserve. This step
increased the equity without impacting debt. Therefore, the debt to equity ratio, which is one of the
key parameters monitored by external stakeholders, declines and the capital structure of the
company becomes better.
 However, when the time comes to recognise the depreciation on the now increased size of assets,
the company adjusts the revaluation reserve against depreciation saying that it will provide
depreciation only on the actual cost of assets and not the revalued amount. This adjustment of the
depreciation expense removes the impact of the increase in asset value on the profits.
Therefore, the company is able to show a lower debt to equity ratio and maintain its profitability as well.
It's a win-win situation for the company on both the aspects of the balance sheet as well as P&L account.
Therefore, it becomes paramount that the investor should understand the nature of diesel generator sets,
plant & machinery and building which increased in value despite usage and the usual wear & tear associated
with operational usage. Otherwise, the profits shown by Indo Count Industries Limited to the extent of
₹178.7 cr at PBT level (equal to the revaluation reserve at FY2010) and related net profits after-tax of about
₹125 cr. (deducting 30% tax from PBT of ₹178.7 cr), would not have any sound basis.
3) Revenue recognition:
Analyzing the revenue recognition practice being followed by Indo Count Industries Limited at pg. 89 of
FY2016 annual report indicates that the company recognizes revenue from its sales the moment the goods
are dispatched from the factory:
Ideally, the revenue should be recognized when all the risk and reward of ownership are transferred from
the seller to the buyer and there is certainty of the purchase consideration being received from the buyer.
However, when a company, which has most of its revenue from exports, recognizes revenue when the goods
are shipped out from its factory gate, then an investor would notice that many factors still remain uncertain
like:
 damage to goods during sea & port transport,

 rejection by the buyer on account of unsatisfactory quality
 rejection by a buyer on account of delay in reaching goods to overseas location due to bad sea
weather or multiple of other factors like delay in port etc.
 cancellation of the order by the buyer due to any reason while the goods are still in transport
Therefore, it would seem reasonable to the investor that the revenue should be recognized when the goods
are delivered to the buyer and the buyer has accepted the goods with the delivered quality.
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However, while comparing the revenue recognition practice of Indo Count Industries Limited with its peers,
then it becomes evident that almost all the peers are following the same practice of recognizing revenue
when the goods leave the factory gate, which indicates that the revenue recognition practices of most of the
players in the industry have scope for improvement:
Arvind Limited (FY2016 annual report)
Trident Limited (FY2016 annual report)
Such revenue recognition practices leave a higher probability of the goods being rejected by the buyers on
receipt by them either due to delay, unacceptable quality etc. and thereby might lead to revenue reversals
when such events arise. From an investor’s perspective, the better revenue recognition practice would
involve recognition of revenue when the goods are accepted by the buyer at her premises.
4) Certain large expense/balance sheet items in the annual report do not have any
disclosure:
Indo Count Industries Limited has not provided any disclosure/details about certain large ticket items like:
 Other payables of ₹65 cr in FY2016, which is a significantly large amount. Even a one line
statement about the nature of items for which these payables are due would have been helpful for
investors.
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 Short term loans & advances of ₹51 cr in FY2016, which is a large sum but has been mentioned as
“others” in the annual report. It would have helped investors if the company would have disclosed
the nature of these advances and the counterparties even very briefly in the annual report.
It is not the case that the company has shown weak disclosure standards in all the sections. The company
has disclosed its yearly debt repayment schedule in the annual report, which is not disclosed by many other
companies:
Therefore, the company though has disclosed certain details like debt repayment schedule, which anyway
could have been extrapolated by investors, however, it has left out on key aspects like details of a large
amount of payables and loans & advances. Providing these details in the annual report would have helped
the investors in their analysis of the company.
5) High commission in Promoters’ Salary:
As rightly pointed out by you, the amount of commission being paid by Indo Count Industries Limited to
its founder promoter, Mr. Anil Kumar Jain, is about 5% of net profits, which is higher than the usual norm
of about 2% of the net profits being taken by promoter CEOs of many other companies in Indian corporate
sector.
Moreover, in the current year, the company has brought in the son of the founder promoter, Mr. Mohit Jain,
as managing director, whose starting salary for FY2017 is almost at the same level, which was earned by
his father for FY2016.
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It remains to be seen, whether, in FY2017, the total remuneration paid by Indo Count Industries Limited to
the father-son duo would exceed the reasonable levels.
Indo Count Industries Limited is currently (November 27, 2016) available at a P/E ratio of about 11, which
does provide a margin of safety in the purchase price as described by Benjamin Graham in his book The
Overall, Indo Count Industries Limited seems to be a company, which has turned around its fortune in last
2-3 years by showing significant sales growth with improving profitability. The company has used the funds
generated from operations to reduce debt and do further capital expenditure. Also, the company has been
able to achieve the highest asset turnover in the industry, all of which are good signs for investors.
However, there are certain aspects, which need to be kept in mind by the investors while doing their analysis
and taking final investment decision like usage of warrants by promoters to benefit to the tune of ₹350 cr
at the cost of minority shareholders.
The investors should also analyze further the revaluation of diesel generator sets, plant & machinery and
building done by the company on higher side despite using them for some time and despite normal wear &
tear as the revaluation has led the company to show higher profits before tax (PBT) to the tune of ₹84 cr
during FY2010-16 and would lead to further PBT of ₹94 cr in coming years. If the basis of revaluation of
the above-mentioned assets by the company is not sound, then it would tantamount to inflating profits by
using accounting juggleries.
These are our views about Indo Count Industries Limited. However, readers should do their own analysis
before taking any investment related decision about Indo Count Industries Limited.
P.S:
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4) Ruchira Papers Limited
Ruchira Papers Limited is a north India based paper manufacturing company dealing in writing & printing
paper and kraft paper (packaging paper).
Let us analyse the financial performance of Ruchira Papers Limited over last 10 years.
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Ruchira Papers Limited had been growing its sales at a good pace of 19% over last 10 years (FY2007-16).
However, as the size of the company is increasing the pace of sales is going down year on year. The sales
growth has toned down to 12% in last 7 years (FY2009-16) and further down to 7% in last 5 years (FY2011-
16).
As per the company, it has undertaken debottlenecking of its existing plant capacity towards the end of
FY2016, which might lead to the growth rate picking up in future. However, it remains to be seen to what
extent the company would be able to utilize the increased capacity. As per the H1-FY2017 results declared
by Ruchira Papers Limited, it has achieved a sales growth of about 9% over the previous year.
A look at the profitability trend of Ruchira Papers Limited would indicate that both the operating
profitability margin (OPM) and net profit margin (NPM) have been fluctuating widely during last 10 years
(FY2007-16). Operating profit margins (OPM) have been varying from 12-9-17-11-14% over the years and
similarly, net profit margins (NPM) have been fluctuating from -2% to 6% over the years.
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Such fluctuating margins are characteristic of companies, which have low bargaining power with their
customers. In such businesses, companies find it difficult to pass on the increase in raw material costs to
their customers quickly and thus take a hit on their profitability margins.
Ruchira Papers Limited has proudly communicated in its FY2016 annual report that they have been able to
maintain their operating margins in the business despite the fact that in the paper industry it is extremely
difficult to pass on the increase in raw material to customers. See pg. no. 4 of the FY2016 annual report:
If an investor analyses the comparative performance of Ruchira Papers Limited with its peers (JK Paper,
Tamil Nadu Newsprint, Emami Paper and West Coast Paper), then the investor realizes that neither Ruchira
Papers Limited seems to have been able to maintain its profitability margins nor it is the most cost
competitive player in the industry:
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The above chart clearly depicts that the operating margins of Ruchira Papers Limited have been fluctuating
more or less in the same manner as the margins of most of its peers like JK Paper, West Coast Paper, and
Emami Paper etc. The only paper manufacturer to stand out in terms of stable margin out of the five players
is Tamil Nadu Newsprint & Paper Limited, which without doubt has the most stable as well as the highest
operating profitability margins out of the five key players.
The above comparative analysis also indicates that the Ruchira Papers Limited is not the most competitive
paper producer in the country. Many other players e.g. Tamil Nadu Newsprint & Paper Limited are more
cost competitive than Ruchira Papers Limited.
Over the years, the tax payout ratio of Ruchira Papers Limited has been consistently above 30%. However,
as per the company, it has been availing multiple tax benefits including income tax benefits due to the
geographical location of its factory. Ruchira Papers Limited has provided details of the various incentives
available to the company at pg. 5, FY2016 annual report.
An investor can derive the following conclusions from the above information:
1. The income tax payout rate is expected to be lower than standard corporate tax rate due to the 30%
income tax benefit available to the company.
2. The profitability of the company will take a hit when the excise tax exemption & income tax
exemption end after FY2018
3. The company is not the most cost competitive despite availing lower power costs (due to incentives
as well as the co-generation plant) as well as excise duty benefits.
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Operating efficiency parameters of Ruchira Papers Limited reflect that it has been able to improve its net
fixed assets turnover (NFAT) over the years. NFAT has improved from 1.09 in FY2010 to 2.26 in FY2016.
Inventory turnover ratio (ITR) of Ruchira Papers Limited has been almost stable at about 7-8 times over
last 10 years.
Receivables days have been fluctuating wildly over the years. It has shown a sharp improvement in FY2008
when receivables days improved from 50 days to 35 days. However, since then the receivables days
deteriorated to 49 days in FY2014 and have now improved to 34 days in FY2016.
Ruchira Papers Limited has proudly claimed in its FY2016 annual report (pg. 9) that it has been performing
better than its peer in terms of receivables days and inventory management.
However, when we compare the receivables days of Ruchira Papers Limited with its other peers (JK Paper,
Tamil Nadu Newsprint, Emami Paper and West Coast Paper), then we come to know that other peers like
JK Paper and West Coast Paper are performing better than Ruchira Papers Limited. However, among the
peers compared, Ruchira Papers Limited along with JK Paper has the best inventory management.
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When we analyse the cumulative profits and cash flow data for 10 years (FY2007-16)), then we realize that
Ruchira Papers Limited has been able to convert its profits into cash flow from operations. Cumulative
PAT during FY2007-16 is ₹81 cr. whereas the cumulative cash flow from operations (CFO) over the similar
period has been ₹251 cr. Conversion of profits into cash is a good sign for the investors.
Over last 10 years (FY2007-16), Ruchira Papers Limited has done a capital expenditure (capex) of ₹199 cr.
which was primarily concentrated in FY2008 & FY2009 (₹141 cr.). Ruchira Papers Limited relied primarily
on debt to meet this capex, which led to the debt levels rising to ₹141 cr. In FY2009. However, over the
years the company has refrained from doing such debt funded capex and has accordingly used the cash
generated from operations for reduction of debt.
As a result, the total debt of Ruchira Papers Limited has reduced from ₹141cr in FY2009 to ₹73 cr in
FY2016. However, the prevalence of debt during the last decade has eaten up almost ₹110 cr from the funds
generated by the company during this period, assuming 11.75% rate of interest, which is company is paying
on its current debt taken from Punjab National Bank and Oriental Bank of Commerce (FY2016 annual
report, pg. 12).
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However, despite significant costs of the debt incurred by Ruchira Papers Limited, it has been able to
successfully reduce its debt and as a result, the company has witnessed improvement in its credit rating by
the credit rating agency CARE Limited in FY2016:
Using the funds generated from operations to reduce debt is a good sign of management. However, if an
investor analyses the FY2016 annual report of Ruchira Papers Limited, then she realizes that there are many
aspect/decisions of the management of the company, which require deeper assessment.
1) Salary of MD & whole time directors exceeds the statutory ceiling:
As per the annual report for FY2016, Ruchira Papers Limited has paid a salary of ₹3.13 cr to its executive
directors including managing director & whole time directors, which is 16% of its net profit after tax of
₹19.5 cr in FY2016.
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The company has declared that it does not have adequate profits for payment of managerial remuneration
under section 197 or Schedule 5 of Companies Act 2013. At page 34 of the FY2016 annual report:
"During the Financial Year ended 31st March 2016, the Company did not have adequate profits
for payment of managerial remuneration under section 197 and Schedule V of the Companies
Act, 2013. The profitability has increased during the year but the remuneration proposed does
not fall under the limits as specified under section 197 resulted inadequacy of profits during
the F.Y. 2015-16. "
As per the act:
“A director who is in whole time employment of the company or a managing director may be
paid remuneration either by way of a monthly payment or at a specified percentage of net
profits of the company or partly by one and partly by the other. Such remuneration cannot
exceed 5 % of the net profits of the company, except with the approval of the Central
Government in the case of one director and 10 % for all such directors.”
An investor should check with the company whether it has obtained the approval of the central government
for paying the stated remuneration to its executive directors.
2) The senior vice president in charge of corporate social responsibility spending (Sr. VP-
CSR), Ms. Praveen Garg, who is the wife of founder promoter of Ruchira Papers Limited,
is being paid a salary of ₹36.2 lakh, whereas the total CSR spending done by the company
in FY2016 is ₹7.47 lakh.
An investor may analyse different sections of the annual report to verify these expenses:
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3) The above image also indicates the strange fact that all the eight relatives of founder
promoters are being paid the same salary of ₹36.2 lakh by the company irrespective of
their experience (7 to 23 years) or qualifications or age (29 to 69 years).
It hardly seems a coincidence as in professionally run organizations, the remunerations of different persons
depend on their merit and are usually different for different employees.
Moreover, another strange finding that an investor would notice that all the eight relatives of founder
promoters got the same hike in remuneration in the current year over the previous year. Annual report
FY2016, page 100:
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It is very strange performance evaluation by the board/human resource department of Ruchira Papers
Limited that all the eight relatives have added exactly equal value to the company that all the eight of them
have received equal increments in remuneration.
By a far fledged leap of logic, it seems that the founder promoters are allocating equal allowances to the
relatives via the company, which cumulatively amounts to ₹2.9 cr per year (₹36.2 lakh * 8), which is about
15% of net profits of the company.
An investor should explore further about the value being added to the company by the eight relatives of the
founder promoters.
4) Related party transactions:
As per the annual report for the company for FY2016, page 32, Ruchira Papers Limited has been dealing
with the entities, which are held by relatives of founder promoters: Mr. Umesh Chander Garg and Mr.
Jatinder Singh.
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The extent of the sales to these entities has been mentioned as ₹95 cr, which is about 25% of the total sales
of Ruchira Papers Limited. An investor should further analyse that whether these transactions are at arm’s
length despite being stated so in the annual report.
An investor should always vary of increasing sales/transaction of the companies with promoters and their
related parties as historically, such transactions have very high probability of benefiting the said related
parties than the minority shareholders. Therefore, it is advised that the investor should explore more about
these transactions through various sources and then make her final opinion.
Ruchira Papers Limited is currently (November 21, 2016) available at a P/E ratio of about 9.4, which does
provide a margin of safety in the purchase price as described by Benjamin Graham in his book The
Overall, Ruchira Papers Limited seems to be a company, which has been growing at a good pace in the past
but is currently witnessing a slowdown in growth. The management has recently undertaken capacity
expansion by debottlenecking, which might contribute to the growth in future. The company has been facing
fluctuating operating margins in line with changing raw material prices, which is in contrast to the claims
made by the company in its shareholders’ communications like an annual report.
The company has utilized its funds generated from operations in the past to reduce debt and give dividends
to shareholders. However, multiple aspects of the management decisions like high salary to executive
directors, equal allowances to relatives of founder promoters and significant amount sales transactions with
entities of relatives of promoters indicate that an investor should analyse the management aspect of Ruchira
Papers Limited in further depth before taking the final decision of putting her hard earned money in the
stock.
These are our views about Ruchira Papers Limited. However, readers should do their own analysis before
taking any investment related decision about Ruchira Papers Limited.
P.S:
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5) TVS Srichakra Limited
TVS Srichakra Limited is a part of famous TVS group and the leading producer of 2 and 3 wheeler tyres in
India under the brand name “TVS Tyres”.
TVS Srichakra Limited has been preparing only standalone financial statements until FY2010. However,
in February 2010, it incorporated its first subsidiary, TVS Srichakra Investment Limited and it started
publishing consolidated financials from FY2011 onward.
It is preferable that while analysing any company, the investor should take a view about the entire entity
including its subsidiaries if any, so that she is aware of the complete financial and performance picture of
the company. Therefore, while analysing the performance of last 10 years for TVS Srichakra Limited, we
have analysed standalone financial performance until FY2010 and consolidated financial performance from
FY2011 onward.
Let us now analyse the past financial performance of TVS Srichakra Limited.
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TVS Srichakra Limited has been growing its sales at a good pace of 20% year on year for last 10 years
(FY2007-16). It is important to notice that the operating profit margins (OPM) of TVS Srichakra Limited,
was following a cyclical pattern until FY2013 as visible from the OPM movement from 6% in FY2007 to
9% in FY2010 and again going down to 6% in FY2013. However, from FY2013 onwards, the OPM has
been witnessing steady improvement and has steadily improved up to 14% in FY2016.
Such improvement in operating profit margins is a very good development about any business and requires
additional due diligence on part of the investor.
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If the investor reads the summary credit rating report for TVS Srichakra Limited released by India Ratings
on August 19, 2015, then she comes to know quite a lot of features about the business of TVS Srichakra
Limited, which have led to such improvement in the operating profitability margins, namely:
1. higher contribution of aftermarket segment in the revenue, which apparently has higher profit
margins
2. formula based pricing contracts with OEMs, which allow for passage of changes in the raw
material costs to the customers and thereby keeping the profitability margins intact and
3. improvements in the manufacturing processes leading to cost savings.
All these key informational inputs can be identified in the summary rationale for TVS Srichakra Limited,
released by India Ratings, which is in the public domain and available freely to all the investors:
“Over the last three years, the company has increased the contribution of revenue from the
aftermarket segment (FY15: 30%; FY13: 25%) and undertaken sustained improvements in
manufacturing processes, leading to a decrease in input costs. Consequently, TVSSC has
retained some of the benefits of falling commodity prices as reflected in its higher operating
EBITDA margins of 10.8% in FY15 (FY13: 5.8%). TVSSC’s agreements with OEMs provide
for a formula based pass through of raw material price changes”
We are of the opinion that every investor should read credit rating reports for the companies, which she is
analysing so that she may come to know about many key informational inputs about the companies.
The investor would notice that the net profit margin (NPM) of TVS Srichakra Limited has also followed
the similar pattern like its OPM. NPM witnessed a cyclical pattern from FY2007 to FY2013 and has been
witnessing steady improvement since then.
The sudden improvement in NPM from 5% in FY2015 to 8% in FY2016 is also a result of the sale of
investments/subsidiary stake by TVS Srichakra Limited in one of its subsidiary companies TVS Europe
Distribution Limited. TVS Srichakra Limited has sold its entire stake in TVS Europe Distribution Limited
to another TVS group company VS Automobile Solutions Limited.
As per the annual report of TVS Srichakra Limited for FY2016, it has recognized profits of ₹18.17 cr. as
part of other income, which is the major component of the total other income of ₹21.44 cr. recognized by
TVS Srichakra Limited in FY2016.
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The tax payout ratio of the company has been consistently around 30-33%, except one year (FY2014),
which is a good sign.
Operating efficiency parameters of TVS Srichakra Limited reflect that the net fixed assets turnover (NFAT)
has been witnessing a mixed picture over last 10 years (FY2007-16). Over this period, TVS Srichakra
Limited has been making significant investments in its manufacturing plants to increase its operating
capacity to fulfil the growth requirements. Net fixed assets of TVS Srichakra Limited has increased from
₹59 cr. in FY2007 to ₹395 cr. in FY2016.
The capacity expansion seems to be still going on as the company has a capital work in progress (CWIP)
of ₹44 cr at the end of FY2016. The continued capex, which might not have been fully utilized right after
becoming operational, has ensured that the NFAT has been fluctuating between 5-7 over the years and
currently hovering around 6.
Working capital efficiency parameters of TVS Srichakra Limited reflect that the efficiency has improved
over the years. The inventory turnover ratio (ITR) has improved from 6 in FY2007 to 10 in FY2016.
Similarly, the analysis of receivables days of TVS Srichakra Limited also reflects that it has been able to
improve its receivables position by a significant margin. TVS Srichakra Limited has witnessed its
receivables days declining from 62 days in FY2007 to 31 days in FY2016.
The management has also acknowledged this improvement in the working capital position of the company
and has informed the shareholders about it as part of the section Management Discussion & Analysis in the
annual report of FY2016:
Moreover, when we analyse the key test of a collection of receivables and working capital efficiency, which
is the conversion of profits into cash flow from operations by comparing cumulative profit after tax (cPAT)
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over last 10 years with the cumulative cash flow from operations (cCFO), then TVS Srichakra Limited
passes with flying colors.
Over last 10 years (FY2007-16), TVS Srichakra Limited had a profit after tax (PAT) of ₹502 cr. whereas
the CFO over the similar period has been ₹998 cr. The above analysis of inventory turnover and receivables
days clearly leads an investor to conclude that TVS Srichakra Limited has been able to manage its working
capital situation in a significantly better manner, thereby leading to healthy generation of cash flow from
operations.
The case of TVS Srichakra Limited is another good example of a case where the limitation of SSGR that it
does not factor in working capital changes, gets highlighted. Another such case discussed on our website is
“Chaman Lal Setia Exports Limited”:
Read: Analysis: Chaman Lal Setia Exports Limited (Maharani Basmati Rice)
The investor would notice that TVS Srichakra Limited has an SSGR almost in single digits over the years,
which is much lower than the sales growth rate of 20% being achieved by the company. As a result, the
investor would have expected that the company would have been reeling under debt, which it would have
taken to expand capacity to fuel the sales growth.
However, the analysis of debt levels of TVS Srichakra Limited over last 10 years (FY2007-16) indicates
that the debt of TVS Srichakra Limited has increased only by ₹15 cr. from ₹121 cr. in FY2007 to ₹136 cr.
in FY2016 despite continuous capex being done by the company over these years. TVS Srichakra Limited
has done a capex of ₹427 cr. over last 10 years (FY2007-16), which is visible in the steady increase in the
net fixed assets and capital work in progress of the company over the years.
The company had taken debt in the interim period, which led to the debt levels spiralling to ₹402 cr. at the
end of FY2012. However, since the healthy cash generation has led the company to repay most of its debt
and bring the debt levels almost at the same levels of FY2007.
Improvement in the working capital management, as discussed above, is one of the primary factors in the
generation of healthy cash flow from operations for the company leading to TVS Srichakra Limited being
able to grow at a pace higher than SSGR and still being able to keep its leverage levels under control.
In such cases, where the comparative analysis of SSGR and past sales growth does not explain the debt
position of the company, an investor should analyse the free cash flow (FCF) position of the company. As
FCF reveals a composite picture after factoring in the working capital and capex parameters.
An investor would notice that over last 10 years (FY2007-16), TVS Srichakra has generated ₹998 cr. from
CFO whereas it has used only ₹427 cr. in capital expenditure over the same period (FY2007-16), thereby
generating a significant amount of free cash flows (FCF).
FCF is one of the key parameters to determine the margin of safety present in the business of any company.
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This situation of surplus cash has enabled TVS Srichakra Limited to manage its sales growth and
simultaneously bringing its leverage levels under control and also declare dividends to shareholders.
Dividend levels of TVS Srichakra Limited have witnessed an increase in line with the profits of the
company, which is a good sign as the funds for the dividend (₹125 cr. over FY2007-16) seems to have been
generated from operating cash flows. The increase in the dividend in line with profits also highlights the
shareholder friendliness of the management, which seems to believe in sharing the fruits of the growth with
its shareholders.
However, if the investor reads the annual report for FY2016 of TVS Srichakra Limited, then she would
notice that it has invested about ₹40 cr in one of the TVS group companies: TVS Automobiles Solutions
Limited.
An investor should read the terms of these preferred shares to understand whether the company has taken
a decision in favour of shareholders when it invested money in a group company instead of reducing its
debt further.
An investor would also notice that TVS Automobiles Solutions Limited is the same company, to whom
TVS Srichakra Limited has sold its subsidiary, TVS Europe Distribution Limited in FY2016 and booked a
profit of ₹18.17 cr. on the sale. It remains to be seen whether the value of the sale transaction between TVS
Srichakra Limited and TVS Automobiles Solutions Limited is the reflection of the true market value of
TVS Europe Distribution Limited.
In the annual report for FY2016, the management of TVS Srichakra Limited has informed the shareholders
in the section "Management Discussion & Analysis" that it plans to focus more on building the brand of its
products:
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If the investor analyses the annual report of FY2016 further, then she would notice that the management
has been increasing its spending on the advertisement & sales promotions:
The investor would notice that the “Advertisement and Sales Promotion” expenses have witnessed a sharp
increase from ₹30 cr. in FY2015 to ₹50 cr. in FY2016.
The investor would also notice that the company has been giving more & more discounts to its buyers. As
a result, the expense on “Commission and Discount” has also witnessed sharp increase from ₹100 cr. in
FY2015 to ₹135 cr. in FY2016. It might be one of the strategy of the company to spend more on the
advertisements to increase brand recognition in the minds of end customers and simultaneously giving more
commission & discount to the dealers to increase its market share in the aftermarket segment, which is more
profitable than OEM segment.
This seems to be in line with the management’s belief that the aftermarket (replacement market) is going
to be the biggest market segment of the tyre industry in future, as intimated by the company in the section
Management Discussion & Analysis in the FY2016 annual report:
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TVS Srichakra Limited is currently (September 4, 2016) available at a P/E ratio of about 10.4, which does
offer a small margin of safety in the purchase price as described by Benjamin Graham in his book The
Overall, TVS Srichakra Limited seems to be a company growing at a decent pace of 20%, which has been
witnessing steady improvement in the profitability margins due to improvement in the sales mix by focusing
more on the high profitability aftermarkets segment and by entering into formula linked cost escalation
contracts with OEMs.
TVS Srichakra Limited has been able to significantly improve its working capital management over the
years, which has led it to keep its debt levels under check despite doing significant capex to support the
sales growth. The management seems to be sharing fruits of the business growth with shareholders by
increasing the dividends in line with profits and making sure that the dividends are funded out of the
operating cash surplus of the company.
However, an investor would be better off, if she keeps a track of working capital management by TVS
Srichakra Limited to monitor whether it is able to maintain/continue such working capital position by
holding on to its credit policies with buyers and suppliers.
These are our views about TVS Srichakra Limited. However, readers should do their own analysis before
taking any investment related decision about TVS Srichakra Limited.
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P.S:
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6) Poddar Pigments Limited
Poddar Pigments Limited is a manufacturer of colour & additive masterbatches for dope dyeing of man-
made fibres like Polypropylene, Nylon & Polyester Multifilament Yarn/Fibers.
Let us analyze the financial performance of Poddar Pigments Limited over last 10 years.
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Poddar Pigments Limited had been growing its sales at a pace of 10-15% over last 10 years (FY2007-16).
However, as the company has been growing in size over the years, its growth rate has been slowing down
from 15% in 10 (2007-16) and 7 years period (2009-16) to 12% in 5 years (FY2011-16) to 6% in last 3
years (FY2013-16).
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Poddar Pigments Limited has mentioned in the management discussion & analysis section of the FY2016
annual report that it is currently running its plant at near full capacity. Therefore, it seems logical that the
company should do capital expenditure to add to the existing manufacturing capacity so that the growth
rate can be sustained in future.
A look at the profitability trend of Poddar Pigments Limited would indicate that the both the operating
profitability margin (OPM) and net profitability margins (NPM) have been highly fluctuating over the
years. OPM has been varying from 4.5% in FY2007 to 8.5% in FY2011 and then falling to 6.9% in FY2014
and currently improving to 7.4% in FY2016.
Similarly, NPM has been witnessing wide fluctuations from 1.9% to 9.3% in the past and currently hovering
around 5.1-5.5% in FY2016.
Such low and fluctuating margins indicate that Poddar Pigments Limited is exposed to margins pressure
with changes in the raw material prices. Poddar Pigments Limited finds it difficult to pass on the increase
in raw material prices to end customers.
Such situation indicates that the company operates in such an industry where the buyers have much more
bargaining power over suppliers and thus can make the suppliers agree to their terms. It is typical for
industries, which do not have any entry barriers like technological barriers, high capital requirements etc.
As new suppliers can keep on coming into the market and easily produce the material, therefore, the
companies in the industry find it difficult to maintain their profitability margins by passing on the rising
costs to buyers.
The management of Poddar Pigments Limited has communicated the same to its shareholders in the
FY2016 annual report:
The increase in operating profitability margins of Poddar Pigments Limited in recent years can easily be
attributed to the decline in crude oil prices in last 1.5-2 years and the margins may decline in future if the
crude prices increase.
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The above chart indicates that the crude oil prices have declined from in excess of $105 per barrel in June
2014 to about $33 in February 2016. This sharp decline of about 70% in the crude oil prices coincides with
the improvement in the operating profitability margin of Poddar Pigments Limited from 6.9% in FY2014
to 7.5% in FY2016.
It remains to be seen whether the company would be able to maintain its profitability margins when the raw
material prices increase in future. An investor should keep a close watch on the profitability margins of the
company to monitor how Poddar Pigments Limited responds to the vagaries of commodity cycles.
Poddar Pigments Limited has been witnessing fluctuating tax payout ratio over the years. However, the tax
payout ratio though seems to be within a healthy range of 26-32%. Moreover, the company has not disclosed
further details about the factors impacting the tax payouts.
One of the reasons for the fluctuating tax payout is expected to be the presence of deferred tax liability
(DTL), which might be a result of the differential tax treatment of depreciation. For reasons other than the
depreciation like export incentives etc. it is advised that the investor should contact the company and get
clarifications if any.
Looking at the net fixed asset turnover (NFAT) of Poddar Pigments Limited over the years, an investor
would notice that its net fixed assets turnover (NFAT) has improved over the years. NFAT has improved
from 5.6 in FY2007 to 12.7 in FY2016. It indicates that there is a lot of improvement in the asset utilization
levels.
The factor of good asset utilization is one of the reasons that the company has been able to grow without
leveraging its balance sheet as it could fund its growth by doing limited capital expenditure.
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Similarly, when an investor assesses the inventory turnover of Poddar Pigments Limited, then the investor
notices that the inventory turnover of Poddar Pigments Limited has improved over the years from 5.5 in
FY2007 to 8.5 in FY2016. Such an improvement in the inventory turnover is a significant achievement for
the company as it leads to relatively lower working capital costs for the company as the relatively lower
amount of funds remains blocked in the form of inventory.
Receivables days of Poddar Pigments Limited has in the initial period witnessed improvement from 51 days
in FY2009 to 44 days in FY2015. However, as highlighted by you, the receivables have increased sharply
from ₹34 cr in FY2015 to ₹51 cr. in FY2016 and thereby resulted in an increase in receivables days to 48
days.
The receivables have been considered good by management despite part of the receivables being secured
and part of them being unsecured as the management believes that they would be able to collect these
receivables within stipulated time (credit period).
The classification of the receivables in good or bad is at the first level decided by the management itself
and the auditors do not necessarily disagree unless the receivables get unduly delayed say beyond 6 months
from the date they were to be collected. If the receivables get delayed for more than 6 months and the
auditor notices that the probability of the receivables getting collected has deteriorated, then the auditor
may ask the management to write-off such receivables.
When an investor notices the receivables position of Poddar Pigments Limited at September 2016, then the
investor notices that the receivables are nearly stable at ₹51 cr. It indicates that the sharp rise in receivables
at March 31, 2016, was not a one-off year-end incidence but seems that the buyers, in general, have started
delaying payments to Poddar Pigments Limited.
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Over last 10 years (FY2007-16), Poddar Pigments Limited has not been able to convert its profits into cash
flow from operations. Cumulative PAT during FY2007-16 is ₹104 cr. whereas the cumulative cash flow
from operations (CFO) over the similar period has been ₹83 cr.
Let us understand the key comparative factor in the comparison of cCFO and cPAT are:
1. Depreciation (₹25 cr), which is a non-cash expense where the cash outflow has happened
previously when the fixed assets were created and
2. Interest expense (₹16 cr), which even though deducted as an expense while arriving at PAT, is
added back (i.e. adjusted) when calculating CFO. This is done because interest expense is a
financing item and therefore, it is deducted from cash flow from financing while preparing the cash
flow statement.
These two items of depreciation and interest expense, totalling to ₹41 cr (25+16), tend to make the cCFO
higher than cPAT. However, there are other factors like money getting consumed in the working capital,
the need for which increases with growing size of the company:
1. Trade receivables consumed ₹39 cr. over last 10 years when trade receivables increased from ₹12
cr. in FY2007 to ₹51 cr. in FY2016.
2. Inventory consumed ₹18 cr. in last 10 years when the inventory levels increased from ₹19 cr. in
FY2007 to ₹39 cr. in FY2016.
The working capital changes consumed about ₹57 cr. (39+18) thereby reducing the cCFO by equal extent
when compared to cPAT.
Thereby the expected level of cCFO should be about 104+41-57 = ₹88 cr.
The further difference of cCFO actually being ₹83 cr. instead of ₹88 cr. as calculated above, could be
explained as a result of the capital gains of about ₹6.5 cr. on the sale of investments recognized by Poddar
Pigments Limited in FY2010. The capital gains that are included in PAT are removed while calculating
CFO as these pertain to the investing section and therefore, are added to CFI.
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The Self-Sustainable Growth Rate (SSGR) of Poddar Pigments Limited is about 25-30%. Analysis of SSGR
indicates that if Poddar Pigments Limited can manage its working capital management and operating
efficiency properly, then it can grow continuously at about 25-30% growth rate without creating additional
debt burden on the balance sheet
As Poddar Pigments Limited has been growing at a rate of 10-15%, it has been able to manage its growth
story without leveraging its balance sheet.
At March 31, 2016, Poddar Pigments Limited has a short-term debt of about ₹3 cr. on its books, which
consists short-term working capital facilities that are required for day to day operations of a company.
These findings of SSGR get re-affirmed when an investor analyses the cash flow from operations (CFO) of
Poddar Pigments Limited with its capital expenditure (Capex) requirements over last 10 years (FY2007-
16).
During FY2007-16, Poddar Pigments Limited realized total CFO of ₹83 cr. and out of it, Poddar Pigments
Limited needed to spend ₹31 cr. into capital expenditure, thereby releasing free cash flow (FCF) of ₹52 cr.
as surplus for shareholders.
The investors would agree that a company which generates good amount of free cash flow (FCF) post
meeting entire capex requirement from its operating cash flow (CFO) would not need any debt or equity
dilution. The same is true for Poddar Pigments Limited; it is almost a debt free company with no history of
equity raising over last 10 years. All the debt of Poddar Pigments Limited is short term working capital
debt.
This data indicates that Poddar Pigments Limited has used its capital efficiently. Despite meeting its entire
capex requirements, Poddar Pigments Limited was able to generate FCF of ₹52 cr. out of which it
distributed ₹15 cr. as a dividend to shareholders (excluding dividend distribution tax) over last 10 years
(FY2007-16) and it could also do a buyback of shares in FY2010.
Higher SSGR and positive free cash flow indicate the presence of a margin of safety in the business model
of the company. This margin of safety has been primarily added by the high fixed asset turnover enjoyed
by the company.
An investor would notice that the same factor of high net fixed asset turnover (NFAT), which is leading to
Poddar Pigments Limited being able to grow in a debt-free manner over last 10 years, is also the factor that
is rendering the industry to very high competitive factors like low barrier to entry.
Therefore, an investor would appreciate that very high as well as very low values of NFAT might not be
optimal for companies in the long run:
1. very high NFAT would mean that the business requires very low capital investment and any new
player can come up without a lot of entry barriers, which would lead the industry to be very
competitive.
2. very low NFAT would mean that the business is highly capital intensive and the companies might
not be able to fund their growth from internal sources, thereby leading to frequent debt financing
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or equity dilution to meet funds requirements. Such companies are characterized by debt-funded
growth leading to higher debt burden as the company grows in size over the years.
Investors should be cautious of investing in companies, which have continuously increasing debt levels, as
high debt has the potential of increasing the risk of bankruptcy and reduced profitability under tough
business conditions.
An investor should read the analysis of two other companies: Ahmednagar Forgings Limited and Amtek
India Limited, to understand the impact low fixed asset turnover can have on the debt levels of companies.
You may read their analysis here:
Also Read: Q&A Analysis: Ahmednagar Forgings Limited
Also Read: Q&A Analysis: Amtek India Limited
Therefore, as with all other parameters like sales growth, profit margins etc. even with fixed asset turnover,
very high as well as very low turnover levels might not be sustainable for the companies in the long run.
Strong overall cash flow position of Poddar Pigments Limited has led to the assignment of a credit rating
of “A” to the debt facilities of the company by the credit rating agency CRISIL Limited, which is a good
credit rating.
While analysing the annual report for FY2016, an investor would notice that the company has received 2
complaints from SEBI, which as per company were resolved. An internet search did not provide any
meaningful information about the nature of these complaints. It is suggested that an investor should contact
the company directly to understand what these complaints pertained to.
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Lets’ address other specific queries raised by the readers:
1) Remuneration of directors:
The statutory ceiling of 10% of net profits put on the remuneration of directors of the companies by
companies act, stipulates the calculation of net profits as per section 197 of the act. The broad adjustments
to the PAT, which approximate it close the net profit as per the section 197 are mainly: income tax and the
remuneration of the directors though there are many other adjustments need for exact calculations.
However, from our assessment purpose, we believe that the investors should compare the managerial
remuneration with the net profit after tax (PAT). The total remuneration of the directors of Poddar Pigments
Limited (₹1.92 cr) is about 10% of PAT for FY2016 (₹18.34 cr). The remuneration of 10% of the PAT is
on a higher side with both CEO and the MD taking remuneration of about 5% each.
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We have seen that most of the times the promoter directors take remuneration of about 2-4% of the profits,
which includes the commission of about 2% of the profits and the rest being salary and other components.
Regarding the difference in the remuneration figures in different sections of the annual report, we suggest
that the investors should write to the company. The company would be able to clarify whether the same is
a typological error or they have treated different components of remuneration differently at separate
sections of the annual report.
2) No final dividend for FY2016
Poddar Pigments Limited has been paying a regular dividend every year since FY2011. In FY2016, it
declared an interim dividend of ₹2.50 per share in March 2016 and skipped the final dividend.
An investor would remember that in the budget for FY2017, the union govt. has proposed a tax on dividend
income exceeding ₹10 lac in the hands of the investors, which came into force on April 1, 2016. As a result,
many companies rushed to declare dividends in March 2016 to avoid the impact of the new tax.
The case of Poddar Pigments Limited also seems to be a similar one in which the company preponed the
dividend payment to March 2016 as interim dividend to avoid the tax impact on key shareholders and as a
result did not declare any final dividend for FY2016.
3) The increase in the unpaid dividends:
Companies are required to deposit unpaid dividends in the Investor Education & Protection Fund if such
dividends remain unclaimed by the shareholder for a period of seven years. Such cases of unclaimed
dividends may arise because of any reasons like loss of dividend cheque in transit, change in address of
shareholders, the demise of the shareholders etc.
The increase in such dividends in not in the hands of the company, therefore, we should not derive anything
from this information until the company fails to deposit the unpaid dividends older than seven years into
the Investor Education & Protection Fund. Failure to deposit the dividends might indicate the liquidity
crunch within the company.
4) Deferred Tax Liabilities:
Deferred tax liabilities arise on account of differences in the income tax to be paid by the company as per
the companies act and the income tax act. Whenever the tax liability as per the companies act is higher than
that as per income tax act, a deferred tax liability is created. Similarly, a deferred tax asset is created when
the tax to be paid as per the income tax act is higher than that as per companies act.
We believe that deferred tax liabilities are a good for companies as they are able to defer tax payments to
the future. However, this is only true for companies, which are able to defer tax payments using legal routes.
The tax payments, which are deferred in future effectively provide an interest-free source of funds for the
company.
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5) Investment in shares of other companies:
An investor is right in questioning the rationale of investing shares of other companies especially when
these companies are not the business extension of the company like subsidiaries or joint ventures.
In the case of Poddar Pigments Limited, it comes to the investor’s notice that not only the company is
investing in stocks of listed companies but it also keeps on rotating the investment in stocks in quick time.
This might tantamount to an effort at short term trading and speculation, which is visible from the analysis
of annual reports of FY2016 and FY2012 when the company sold its equity investments within one year.
FY2016
FY2012
Moreover, the investor would notice that the non-current investments done by Poddar Pigments Limited
have increased significantly in H1-FY2017 and now stand at ₹10 cr at Sept 30, 2016, rising from ₹2.76 cr.
at March 31, 2016.
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6) Increase in capital advances
Capital advances are usually the advance payment for procuring capital goods, which in turn get used in
the plant & machinery of the company as part of fixed assets. The increase in capital advances indicates
that the company is doing/planning any capacity expansion, upgradation of plant & equipment or major
maintenance capex.
7) The increase in the short term loans & advances including those recoverable in cash or
kind and the interest income on these advances:
Advances recoverable in cash or kind are usually items like prepaid expenses like an insurance premium,
advance tax, VAT credit receivable, Service tax credit receivable etc. Other advances items are self-
explanatory.
The interest income on these advances will depend upon the contribution of different items in these
advances as many of these advances do not earn any interest income.
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Therefore, we do not believe that a comparison of interest income on short term loans & advances (STLA)
with the total amount of STLA and then comparing it with the normal fixed deposit yield etc. would lead
to a correct conclusion.
8) Capital Commitment:
It is usually expressed as “estimated amount of contracts remaining to be executed on capital account and
not provided for”. This amount includes all pending expenses to be incurred by the company on its capex
plans (both expansion and maintenance capex) as per its immediate plans.
9) The amount of tax disputes not matching up in auditor's report section and contingent
liabilities:
We believe that the best source to get clarification of these differences is to contact the company directly.
10) Company paying rent to CEO’s wife and consultancy charges to MD’s daughter:
Related party transactions where a company pays rent or consulting charges to the relatives of the promoter
are always grey areas. This is because it can easily be a method to take funds out of the company for the
benefit of the promoter/family members.
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On the contrary, when an entrepreneur is setting up her business, then she might rely on family members
to provide support in terms of office space in their premises etc. However, once the business reaches a
significant size and more so when the company gets listed, then such kind of transactions should be avoided
by companies.
11) Intermediaries:
Intermediary products are the products, which are formed in the intermediate steps in the process of
conversion from raw material to final product. Moreover, any product which is formed during the product
manufacturing process can be termed as an intermediary. Many times, companies find buyers for such
products and sell them into the market.
Different agencies like Govt agencies classify products under multiple segments for the ease of categorizing
companies & products for taxation and other administrative purposes. Many times, multiple products of the
manufacturing chain are clubbed together as intermediaries. The companies, for whom the sale of these
products constitutes more than 10% of their sales, need to classify it as a separate segment.
12) The position of Poddar Pigments Limited as compared to its industry peers:
Our analysis above has indicated that Poddar Pigments Limited operates in an industry, which does not
have any entry barriers and thereby the suppliers do not have any power over the buyers. This is reflected
clearly in the fluctuating profitability margins of the companies, which find it difficult to pass on
fluctuations in the raw material prices (including those linked to the global crude prices) to the buyers.
There are many more players in the industry, which have much higher capacity than Poddar Pigments
Limited, is one of the reasons, which leads to the industry being highly competitive.
Poddar Pigments Limited is currently (December 31, 2016) available at a P/E ratio of about 10, which
provides a margin of safety in the purchase price as described by Benjamin Graham in his book The
However, as highlighted by the above analysis, there are many issues related to the company’s business
operations like lack of pricing power and the management aspects like high remunerations and related party
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transactions, which would always influence the price multiples that the markets would assign to any
company.
An investor should convince herself with all the aspects of the company before she gets attracted to the low
P/E multiple of any company.
Over last 10 years (FY2007-16), the company has retained earnings of about ₹89 cr out of its profits and
has generated a market value of about ₹180 cr. It indicates that the company has generated about ₹2 for
every rupee retained by the company from its shareholders.
Overall, Poddar Pigments Limited seems to be a company, which has been growing its sales at a moderate
pace with fluctuating operating margins indicating low supplier’s power over its buyers. The recent increase
in profitability seems more due to the fall in commodity raw material prices and it remains to be seen,
whether the improving margins remain sustainable in future.
The high net fixed asset turnover has enabled the company to achieve its growth with limited capex leading
to good cash flow position. However, the same high fixed asset turnover has been working against the
industry and the company by making the market open to easy supply additions by existing and new players.
The Recent rise in receivables of the company are a cause of concern and an investor should keep a close
watch on the receivables position of the company going ahead.
These are our views about Poddar Pigments Limited. However, readers should do their own analysis before
taking any investment related decision about Poddar Pigments Limited.
P.S:
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7) MBL Infrastructure Limited
MBL Infrastructure Limited is an Indian infrastructure player focusing on the construction of roads in both
build operate & transfer (BOT) as well as engineering, procurement and construction (EPC) segments.
As mentioned by us on the “Ask Your Queries” section of the website, until now we did not use to analyse
the infrastructure/EPC players for our website. Our belief has been that from the publically available
information, it is difficult to judge the exact business position of an EPC/infrastructure player. Following
are the key reasons for it:
1. The EPC contractor's business is nothing but an accumulation of all its projects under execution.
Unless each of these projects is assessed individually, the complete business position of the EPC
player cannot be understood. From the publically available information, we find it difficult to assess
whether these projects have key factors like land acquisition, govt. approvals etc. in place. We have
always been sceptical about the cost estimates shared in the publically available information
whether these are the real ones or there have been escalations, which companies usually hide from
stakeholders.
2. The revenue of the EPC players is derived from the cost incurred by them as these companies use
a percentage of completion method. The revenue declaration has no linkage to the actual cash that
an EPC player might or might not receive. There are always disputes between the stage of project
claimed by the EPC player and the Govt depts/project allottees that have to release the payments
etc. It cannot be assessed from the publically available information how the situations are on this
front.
3. The EPC players usually have a lot of subsidiaries and the assimilation of subsidiary financials into
main company leads to many areas of accounting manipulations, which always raise an alarm in
business assessment.
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However, despite all the above-mentioned challenges, the publically available information does provide
some insights into the functioning of the EPC players. We believe that such insights, though limited in their
extent of analysis, do provide some actionable assessment to investors. Therefore, we have tried to analyse
the publically available information of MBL Infrastructure Limited and tried to form some views about the
company, which might be useful to all the readers.
Let us analyse the consolidated financial performance of MBL Infrastructure Limited for last 10 years
(FY2007-16):
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As per the reported numbers, MBL Infrastructure Limited has increased its revenue by a brisk pace of 25-
35% over last 10 years (FY2007-16). This is a great performance by any company. MBL Infrastructure
Limited uses a percentage of completion method for revenue recognition (FY2016 annual report, page 83):
As mentioned above, we do not have much confidence in the revenue numbers arrived by management
using a percentage of completion method of revenue recognition as this method relies on many assumptions
on the part of management. The limitation of auditors’ expertise in understanding the business dynamics
and thereby properly verifying the management assumptions is another factor, which leads to our scepticism
in taking these numbers at face value.
Out of the total revenue of ₹2,342 cr. reported by MBL Infrastructure Limited, the only part that can be
ascertained with reasonable certainty is the toll revenue, which contributed about ₹26 cr in FY2016 (annual
report page: 31):
Over the years, the profitability margins of MBL Infrastructure Limited have been declining. Operating
profitability margin (OPM) has reduced from 14% up to FY2012 to current 11% in FY2016. Similarly, the
net profitability margin (NPM) has declined from 6% up to FY2012 to about 4% in FY2016.
An investor should also note that MBL Infrastructure Limited has reported losses in the Q2-FY2017 both
at OPM and NPM levels.
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As per the reported numbers, MBL Infrastructure Limited had a cumulative profit of ₹528 cr in last 10 years
(FY2007-16), however, it had cash flow from operations of only ₹176 cr. during this period.
This is not a surprise considering our belief mentioned above that in the case of EPC project execution, the
stage of project accomplished by the EPC player is always disputed by the project awarding agency. It
frequently leads to disputes related to receivables leading to delays in realization.
A look at the receivables position of MBL Infrastructure Limited at March 31, 2016, indicates two
interesting facts:
1) The comparison of standalone & consolidated receivables position indicates that more receivables are
outstanding at the standalone level than at the consolidated level. It indicates that the money received from
third parties by its subsidiaries is not being paid by subsidiaries to the holding company.
Standalone Trade Receivables
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Consolidated Trade Receivables
An investor would notice that about ₹203 cr. worth of receivables (Standalone receivables of ₹708 cr. –
consolidated receivables of ₹605 cr.) have been withheld by subsidiary companies. We believe that it might
be due to the pressure being put by the lenders of subsidiary companies that the money received by
subsidiary companies should first be used to repay them rather than sending this money to the holding
company.
2) The receivables details shared above also highlight the key comment by the auditor that “trade
receivables are subject to confirmation by certain parties”. It indicates that the auditor is yet to get
confirmation by certain counterparties that they agree with the receivables claimed by MBL Infrastructure
Limited from them. It might turn out that the counterparties might dispute these receivables and the actual
money received might get delayed and might be less in amount than the claimed amount.
As witnessed by the investors earlier that MBL Infrastructure Limited has not been able to collect its cash
from operations. However, the business of an EPC player is a capital-intensive business, which requires
frequent capital infusion by the company in its projects.
The investor would notice that MBL Infrastructure Limited has to do a capex of ₹1,062 cr in last 10 years
(FY2007-16). This amount seems huge considering that the money MBL Infrastructure Limited collected
from operations during the same period is very low at ₹176 cr.
Therefore, it would not come as a surprise to the investor that the company has to rely both on equity
dilution as well as debt to meet this significant cash flow shortfall.
MBL Infrastructure Limited has diluted its equity twice in past 10 years. It raised about ₹110 cr. in FY2010
and then again ₹115 cr. in FY2015. Over and above the equity infusion, the company had to resort to debt
funding as well. During FY2007-16, MBL Infrastructure Limited raised incremental debt of about ₹1,325
cr. as its debt increased from ₹77 cr. in FY2007 to ₹1,402 cr. in FY2016.
An investor would notice that such amount of capital requirement is huge in comparison to the cash
generation ability displayed by MBL Infrastructure Limited in last 10 years.
Such situations usually lead to companies facing cash/liquidity crunch. An investor comes upon a lot of
signs depicting the cash flow crunch being faced by the company. Let’s see a few of them:
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1) Delay in depositing the undisputed statutory dues to govt. authorities as well as the dividend distribution
tax, which it deducted in FY2015. (Page 77 of FY2016 annual report):
2) A significant rise in the cheque overdrawn, which indicates utilization of bank limits over and above the
authorized limit. It seems like a toned down term for bounced cheque, which should have been returned by
the bank stating insufficient funds.
3) The stressing by the lenders for increasing pledge of shared by the holding company for the loans being
availed by the company and its subsidiaries:
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4) This is a recent development taken from the exchange filing done by MBL Infrastructure Limited on
January 20, 2017. MBL Infrastructure Limited informed the exchange that a project, which was awarded
by NHAI to it, has been terminated because the banks did not give it performance guarantee, which was
asked by NHAI.
This development assumes significance as it indicates that a project, which MBL Infrastructure Limited
believed that it would be able to complete successfully and profitably has been rejected by lenders. It might
be either that lenders no longer believe that MBL Infrastructure Limited could complete the project or the
lenders believe that the project would not be able to be completed profitably. In both the cases, it raises
questions about the project assessment and execution ability of MBL Infrastructure Limited.
The fact that the project was finally terminated is serious as the company would have approached multiple
banks when initial one or two banks would have shown their inability to provide the performance guarantee.
This development raises questions about the claims being made by the company that it would be able to
achieve revenue of ₹5,000 cr by 2020. Moreover, if the company does not improve its cash realization by
a significant proportion, then we fear that every incremental rupee of revenue chased by MBL Infrastructure
Limited would further increase the debt burden on the company. This would, in turn, worsen the cash flow
crunch being faced by the company.
It is surprising that despite the cash shortfall situation and deeply negative free cash flow (FCF) situation,
the company has been continuously paying a dividend to its shareholders. Dividends in a negative FCF
company are effectively funded by debt and is not a good decision on part of the management as instead of
conserving resources, such dividend payments push the company into further debt burden.
An investor should read the analyses of two other companies: Ahmednagar Forgings Limited and Amtek
India Limited, to understand the impact of debt funded growth stories of companies. The analyses may
read here:
Also Read: Q&A Analysis: Ahmednagar Forgings Limited
Also Read: Q&A Analysis: Amtek India Limited
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Infrastructure/EPC projects always carry a lot of uncertain risk factors, which vary from land acquisition,
social unrest, political risk etc. These factors have a potential of delaying the project completion, which in
turn increase the cost of projects primarily due to higher finance costs on the debt taken to fund the project.
MBL Infrastructure Limited has acknowledged that land acquisition delays influence the profitability
margins of the projects:
If we analyse the other public sources of information, which MBL Infrastructure Limited has shared on its
website, which includes various research reports, then we come to know that the projects being developed
by the company are getting delayed.
JP Morgan report in Oct 2015 mentioned that the management believes that 3 under-construction BOT
projects would be completed by June 2016 (within 9 months from the publication of the report).
However, the Brickwork credit rating report of July 2016 mentioned that the project was yet to be completed
and in fact have been delayed and would be completed by FY2017
Moreover, the investor presentation of MBL Infrastructure Limited for December 2016 has highlighted that
all the BOT under-construction projects are yet to be completed as they are under implementation.
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This brings the important point about taking management forecasts on the face value. The company
believed in October 2015 that it would complete the nearing completion projects within next 9 months,
which is not a very long period to forecast for a professional management, which is into the business for a
long time. However, the near-term forecast could not be met and the projects seem to be yet to be completed.
Therefore, we advise our readers to take all management forecasts with a pinch of salt and not accept them
without doing the own analysis.
The frequent delay in projects, reducing margins, high capex requirements, low cash realization, high debt
requirements present a very tough business environment for EPC players. No wonder in recent past many
infrastructure/EPC players have shut shop.
The following information from the page 7 of the JP Morgan report made available by MBL Infrastructure
Limited on its website assumes significance in this matter:
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MBL Infrastructure Limited has claimed that in last 2 years, the number of players bidding for projects has
reduced from earlier 147 to current 53 players. The number of bidders per project have come down from
20 bidders per project to 6-7 bidders per project. It means that about 2/3rd of the industry players have shut
shop in last 2 years.
Investors who have analysed the business situation of the EPC industry would not be surprised by this
information. We advise our readers to always keep this information in their consideration whenever they
analyse any EPC player for investment.
MBL Infrastructure Limited is currently available at a P/E ratio of 2.5, which if seen on an exclusive basis,
might seem to indicate that there is a margin of safety. However, looking at the stressed business
performance and liquidity crunch being faced by MBL Infrastructure Limited, it seems plausible that the
market is not able to assign higher P/E ratio to it.
In the last 7 years since the listing of MBL Infrastructure Limited in FY2010, the company has retained
earnings of ₹439 cr (FY2010-16). During this period the market capitalization of MBL Infrastructure
Limited has declined from ₹463 cr. to ₹222 cr. This data indicates that MBL Infrastructure Limited has
destroyed the wealth of its shareholders. No wonder that market is not keen to assign it higher P/E multiples.
Overall, MBL Infrastructure Limited seems to be a company, which has been growing its revenue at a fast
pace, however, it has not been able to maintain its profitability with the revenue growth. It has performed
very poorly on a collection of its receivables and as a result, has to rely on equity dilution and debt funding
to meet its heavy capital investment requirements.
Poor cash flow from operations and heavy debt burden seem to have led to a liquidity crunch situation for
the company where it is delaying statutory payments, deposition of dividend distribution tax and cheque
overdrawn etc. MBL Infrastructure Limited now seems to have been losing the confidence of lenders who
seems to have refused to provide performance guarantee to its project, which got terminated by NHAI.
As a result, we advise readers to be cautious while analsing and investing in MBL Infrastructure Limited
and keep a close watch on its receivables collection status and debt levels.
EPC industry has seemed to have witnessed about 2/3rd of its players shut shop and this sector bears the
risk of permanent loss of capital for investors.
These are our views about MBL Infrastructure Limited. However, readers should do their own analysis
before taking any investment-related decision about MBL Infrastructure Limited.
P.S:
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8) Ultramarine & Pigments Limited
Ultramarine & Pigments Limited is a leading Indian manufacturer of inorganic pigments and surfactants
including “OOB” brand of dishwashing liquid & bars, liquid detergents & bars and scouring powder.
Let us first analyse the financial performance of Ultramarine & Pigments Limited over last 10 years.
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Ultramarine & Pigments Limited has been growing its sales consistently at a good pace of 10-15% year on
year since last 10 years (FY2007-16). It is important to note that this sales growth has been accompanied
by sustained profitability. Operating profit margins (OPM) of Ultramarine & Pigments Limited has been
consistent at 15-18% throughout last decade. Similarly, net profit margins (NPM) have also been consistent
at 9-10% in last 10 years barring the first 2 years, when the scale of the company’s operations was quite
small as compared to current levels. Sales growth with sustained profitability margins is the first sign of
any exciting investment opportunity.
Ultramarine & Pigments Limited has been paying taxes at 30-32% rate, which is similar to the standard
corporate tax rate in India. This is another good sign.
Similarly, net profit margins (NPM) of Ultramarine & Pigments Limited has been consistent at 9-12%
throughout most of the last decade. The profitability margins have witnessed improvement in the recent
years, which as per management is the result of better working capital management and increasing focus
on the usage of own sales channels bypassing the intermediaries.
Management’s focus on these parameters becomes clear when the investor reads through the management
and discussion analysis (MDA) section of the annual report for the year FY2016:
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The management has been candid about sharing the details of the performance of different segments in the
management & discussion analysis of the FY2016 annual report. For example, the performance of the wind
power division:
The management has indicated that the reduction in the performance of the wind energy division of the
company has been due to low wind season and due to issues related to power offtake/evacuation by the
Tamil Nadu state grid.
The management is right in explaining the reasons to the shareholders, as upon analysis of other companies,
which have wind power plants in Tamil Nadu, like Ambika Cotton Mills Limited, have also faced the
similar challenges. The below excerpt from the FY2016 annual report of Ambika Cotton Mills Limited also
highlights the similar reasons for reduced performance of wind power and the resultant reduction in
profitability:
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Over the years, Ultramarine & Pigments Limited has been reflecting improved operating efficiency.
The company has been doing capex after every 3-4 years as has been visible from the year on year capital
expenditure data. Ultramarine & Pigments Limited has done major capex in the years FY2009, FY2011-12
and FY2016.
Net fixed assets turnover (NFAT) witnessed a decline after the initial years of capex until the capacity
utilization reached optimal levels as a result, the NFAT reduced from 4.08 in FY2007 to 3.34 in FY2013.
However, once the capacity utilization reached optimal levels in the later years, the NFAT has started
increasing consistently and has improved from 3.34 in FY2013 to 4.86 in FY2016.
The management has disclosed these developments in the MDA section of FY2016 annual report:
Inventory turnover ratio of Ultramarine & Pigments Limited has improved from 7.0 in FY2008 to 11 in
FY2016. Improving asset and inventory turnovers indicate that Ultramarine & Pigments Limited is able to
use its capital more efficiently and generate higher sales from the same level of assets.
Receivables days of Ultramarine & Pigments Limited have improved from 55 days in FY2008 to 40 days
in FY2016. Moreover, the company has been able to bring the receivables days, which during the last
decade seemed to go out of control to 58 days in FY2013, which might be a result of aggressive sales push.
However, in recent 3-4 years, the receivables days have improved to 40 days.
Improvement in receivables days indicates that the company has been able to collect the money from its
customers faster, indicating its growing influence in the market. Improved collection practices lead to lower
working capital finance requirements and thereby lower interest costs and improved profitability.
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Ultramarine & Pigments Limited has PAT for last 10 years (FY2007-16) of ₹163 cr. whereas the CFO over
the similar period is ₹176 cr. indicating that PAT has been converted into CFO, which is a good sign.
Self-Sustainable Growth Rate (SSGR) of Ultramarine & Pigments Limited used to be about 4-6%,
however, it has improved to 17% in the recent years.
The improvement in SSGR in recent years has resulted from improvement in profitability margins,
reduction in the dividend payout ratio as well as the improvement in the net fixed assets turnover ratio in
the recent years. Analysis of the dividend payout ratio will reflect that the dividend payout ratio has come
down from 64% of net profits in FY2012 to 37% of net profits in FY2016.
Moreover, as mentioned in the article on Self-Sustainable Growth Rate, SSGR does not factor in working
capital changes. However, we can estimate whether funds are being tied up in working capital by comparing
cPAT with cCFO. In the case of Ultramarine & Pigments Limited, the cCFO is higher than cPAT, which
indicates that the funds are not getting stuck in the working capital.
Analysis of SSGR indicates that if Ultramarine & Pigments Limited can manage its working capital
management and operating efficiency properly, then it can grow continuously at about 15-17% growth rate
without creating an additional debt burden on the balance sheet. As Ultramarine & Pigments Limited has
been growing at a rate of 10-15%, it has been able to manage its growth story without leveraging its balance
sheet.
These findings of SSGR get re-affirmed when an investor analyses the cash flow from operations (CFO) of
Ultramarine & Pigments Limited with its capital expenditure (Capex) requirements over last 10 years
(FY2007-16).
During FY2007-16, Ultramarine & Pigments Limited realized total CFO of ₹176 cr. and out of it
Ultramarine & Pigments Limited to spend ₹71 cr. into capital expenditure, thereby releasing free cash flow
(FCF) of ₹105 cr. as surplus for shareholders.
This data indicates that Ultramarine & Pigments Limited is a good example of efficient capital utilization.
Despite meeting its entire capex requirements, Ultramarine & Pigments Limited was able to generate FCF
of ₹105 cr. out of which it distributed ₹84 cr. as dividends to shareholders.
The ability of Ultramarine & Pigments Limited to grow its sales with limited capex from its CFO and
generating a good amount of free cash flow (FCF) indicates that the company has a good advantageous
business model.
The investors would agree that a company which generates good amount of free cash flow (FCF) post
meeting entire capex requirement from its operating cash flow (CFO) would not need any debt or equity
dilution. The same is true for Ultramarine & Pigments Limited; it is almost a debt free company with no
history of equity raising over last 10 years.
I advise investors to put a lot of focus on the free cash flow (FCF) generating ability of the company as it
is only the free cash flow, which is the real value generating ability of the company for its shareholders.
FCF is like the net savings of a salaried person after deducting all the expenses and constitute the disposable
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income. If a company does not have positive FCF, then the company might turnout to be a permanent cash
flow drain for the shareholders, which is continuously asking for more and more funds to be deployed in
either working capital or plant & machinery.
Ultramarine & Pigments Limited has been paying a regular dividend to its shareholders though the payout
ratio has been witnessing a decline as the company is retaining funds to invest in its expansion projects.
Paying regular dividends amounts to sharing the fruits of growth with shareholders.
Let’s analyse some of the issues, which become glaring upon reading FY2016 annual report of the
company:
1) Management remuneration higher than the statutory limit:
The regulatory cap on the salary to all the directors is 10% of net profits. The act states that:
“A director who is in whole time employment of the company or a managing director may be
paid remuneration either by way of a monthly payment or at a specified percentage of net
profits of the company or partly by one and partly by the other. Such remuneration cannot
exceed 5 % of the net profits of the company, except with the approval of the Central
Government in the case of one director and 10 % for all such directors.”
However, if an investor analyses the remuneration of whole time/executive directors of Ultramarine &
Pigments Limited, then she would notice that the remuneration of each of the two of the directors is more
than 5% of net profits of the company for FY2016 and the sum of the remuneration of all the whole time
directors (WTD) is 16.7% of the FY2016 net profits of the company, which is more than the regulatory cap
of 10% of net profits of the company.
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To pay the remuneration to the WTDs, which is more than the regulatory cap, a company needs to take the
central government approval. Therefore, an investor should analyse whether Ultramarine & Pigments
Limited has taken the central government approval for giving such remuneration to its whole time directors.
There is no doubt that Ultramarine & Pigments Limited has shown good business performance over the
years and the senior management has been a key factor to achieve such growth. However, a comparative
assessment of the sharing of rewards with the junior management/employees brings the following picture:
“Average percentage increase made in the salaries of Employees other than the managerial
personnel in the financial year is 14.32% whereas the increase in the managerial remuneration
was 57.77%.”
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2) Sourcing of Raw Material:
The procurement of some of the raw materials of Ultramarine & Pigments Limited are presenting a
challenge to the company. The supply, as well as the price of the raw material, is very volatile and erratic.
E.g. Alpha Olefin, which is a key imported raw-material of Sulphonation as well as the crude oil prices.
However, the sustained profitability of Ultramarine & Pigments Limited over the years indicates that the
company has been managing such raw material related issues quite well and may continue with the same
performance in future unless the management and outside environment changes drastically.
3) Diversification in IT industry/BPO:
The commencement of the IT/BPO unit by a pigment/chemical company seems quite odd as it falls outside
the purview of the management competence. As rightly pointed out by you, this diversification may very
well turnout to be a “Diworsification”. Therefore, an investor should keep an eye on developments related
to the IT division as part of her monitoring exercise so that she is able to detect any adverse changes soon
and is able to take an appropriate decision about her investments.
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4) Change in auditor:
Change/rotation of auditor after a few years should be seen as a positive development unless the change is
too frequent/every year. Change in auditor bring in a new outside perspective to audit and is expected to
increase the independence of the audit process.
5) Inter-corporate deposits and writing off bad debts:
Ultramarine & Pigments Limited has been giving inter-corporate deposits to other parties, which are visible
upon analysis of the notes to financial statements to the annual report of FY2016:
An investor would notice that the amount of inter corporate deposits have come down in FY2016, however,
it is essential that the investor keeps an eye on the level of inter-corporate deposits continuously, as it is one
of the key ways used by smart managements to take the money out of the companies.
In the FY2016 annual report of Ultramarine & Pigments Limited, an investor would also notice that the
company has written off bad debts to the tune of ₹1.5 cr. These are the dues, which the company thought
that the counterparties would pay to it, however, now the company feels that there is no possibility of these
dues being recovered from the counterparties:
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An investor should focus on bad debt being written off, as this can be one of the ways, which smart
managements deploy to take advantage of minority investors. Smart management may first offer inter-
corporate deposits to others and then write off such advances in the “other expenses”. Therefore, it becomes
imperative that the investor be vigilant when reading the annual reports and while monitoring the company.
6) Greenfield plant in Gujarat:
The company has been facing issues related to its expansion project in Dahej, Gujarat. The company is
facing penalty by the Gujarat Govt for delays in project completion, which Ultramarine & Pigments Limited
is contesting on account of delays in the handover of the land by the govt. All these details are available in
the contingent liability section of the annual report for FY2016 of the company:
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However, as per the management disclosure in the management discussion & analysis (MDA) section in
the FY2016 annual report, the management is having second thoughts about this plant:
Therefore, an investor should keep a constant vigil on the developments related to the Dahej, Gujarat plant
of the company and the enforcement of the penalty by the Gujarat Govt, if any.
Ultramarine & Pigments Limited is currently (October 2, 2016)available at a P/E ratio of about 16.55, which
does not offer any margin of safety in the purchase price as described by Benjamin Graham in his book The
However, the FCF analysis of the company indicates that the company has some margin of safety built in
its business model. An investor should read more about the margin of safety in the following article to
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understand more about the margin of safety in the purchase price and margin of safety in the business model
of any company:
Overall, Ultramarine & Pigments Limited appears to be a company growing at a decent pace, with sustained
profitability margins & operating efficiency. It has been able to meet its capex requirements from its cash
flow from operations and is able to generate free cash flows and generate surplus distributable funds for its
shareholders.
These are our views about Ultramarine & Pigments Limited. However, readers should do their own analysis
before taking any investment related decision about Ultramarine & Pigments Limited.
P.S:
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9) Emmbi Industries Limited
Emmbi Industries Limited is engaged in the manufacturing of technical textile products: flexible
intermediate bulk container (FIBC) / various polymer based packaging products, geotextiles, water
conservation products (Aqua Sure) etc.
Let us analyze the financial performance of Emmbi Industries Limited over last 10 years.
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Emmbi Industries Limited had been growing its sales at a good pace of 28% over last 10 years (FY2007-
16). However, as the size of the company is increasing the pace of sales is going down year on year. The
sales growth has toned down to 27% in last 7 years (FY2009-16) and further down to 22% in last 5 years
(FY2011-16) and 14% in last 3 years (FY2013-16).
As per the H1-FY2017 results, Emmbi Industries Limited has reached 83% capacity utilization in its current
installed manufacturing capacity. Therefore, it needs to be assessed whether the company has the visibility
of future growth in its plans.
Emmbi Industries Limited has disclosed that it is currently undertaking capacity expansion by creating a
clean room project for the FIBC manufacturing and a separate facility for the water conservation and
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agricultural business project. Moreover, the company is also expanding its presence in Indian markets along
with a heightened focus on direct retail sales (B2C). However, it remains to be seen to what extent the
company would be able to utilize the increased capacity.
A look at the profitability trend of Emmbi Industries Limited would indicate that the operating profitability
margin (OPM) has been largely stable over the last 10 years (FY2007-16) within the range of 9% - 11%.
In the recent years, the OPM has improved to 13%. Sustained and improving profitability margins are a
good sign for any business and it needs assessment to find out what features of the company help it in
maintaining its profitability margins.
During last year, in two different shareholder communications, Emmbi Industries Limited has disclosed the
reasons for sustained margins:
1) Annual Report for FY2016:
In management discussion & analysis (MDA) section, while discussing inventory management (pg. 37),
the management of Emmbi Industries Limited has mentioned that the order booking and procurement of
raw material happen simultaneously, therefore the fluctuation of raw material does not impact the
profitability. It leads an investor to conclude that the orders are priced to the customers based on ongoing
raw material prices by adding a profitability margin, which in turn leads to stable profitability.
2) Earnings conference call H1-FY2017 results:
On November 17, 2016, while discussing the H1-FY2017 results of Emmbi Industries Limited, the
management while responding to a question about Brexit & Pound depreciation, replied that the company
does not have long-term contracts with customers and enters into monthly contracts with them. The
presence of monthly contracts allows the company to renegotiate the prices of its products in light of the
ongoing raw material prices.
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Moreover, the presence of monthly contracts with customers and the business practice of booking customer
order and the raw material procurement simultaneously, do not take the credit away from Emmbi Industries
Limited that the product it manufactures and its customer relationships allow it the buyer’s power to pass
on rising costs to customers.
Further, the increasing capacity utilization levels of the manufacturing capacity of Emmbi Industries
Limited is leading to the operating leverage coming into play and the company is able to further improve
its margins recently. As per the company, its capacity utilization has increased from 83% in H1-FY2016 to
89% in H1-FY2017, which effectively leads to the production of more products with same fixed costs and
thereby increasing the profit margin per product unit.
The net profit margin (NPM) of Emmbi Industries Limited has been fluctuating at a very low level of 2%-
4% during last 10 years (FY2007-16) and has touched 5% in FY2016. The major reason for the low net
profit margin is the capital-intensive nature of the business of the company. High capital intensity leads to
higher depreciation as well as high-interest cost due to debt funded operations. As a result, a major portion
of the operating profit of the company is eaten up by interest and depreciation expenses.
To understand the capital-intensive nature of the business of Emmbi Industries Limited, we need to assess
the avenues, which are primary capital consumption segments of any business: fixed assets and working
capital.
Looking at the net fixed asset turnover (NFAT) of Emmbi Industries Limited over the years, an investor
would notice that the company has been able to improve its net fixed assets turnover (NFAT) over the years.
NFAT has improved from 2.82 in FY2012 to 3.55 in FY2016. The improving NFAT of the company is in
line with the growing capacity utilization of the existing manufacturing capacity of the company, which
was installed post the IPO of Emmbi Industries Limited in FY2010 from the IPO proceeds.
NFAT of the company indicates that the company has been doing well on utilization levels of its fixed
assets.
However, when we see the working capital position of the Emmbi Industries Limited, then we notice that
working capital has been consuming a lot of funds for the company.
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Receivables days of Emmbi Industries Limited has been range bound within 60-68 days over last 10 years
(FY2007-16). Therefore, more or less about 2 months’ worth of sales proceeds are tied up as receivables
with the customers at any point of time.
Emmbi Industries Limited has about 50% of its sales coming from exports. We see that most of the exports
are usually backed by a letter of credit, which in turn are discounted by the companies to get immediate
access to funds. In such a case, the receivables days of 2 months for a company into exports seems a bit
higher.
When an investor assesses the inventory turnover of the company, then the investor notices that the
inventory turnover of Emmbi Industries Limited has deteriorated over the years from 5.9 in FY2009 to 3.7
in FY2016. An inventory turnover of 3.7 means that about 3.25 months of sales (12/3.7) are tied up in
inventory at any point in time.
The combined impact of receivables days and inventory turnover means that at any point of time about 5.25
months (2+3.25) worth of sales proceeds are tied up in the inventory at any point in time. For a small size
corporate, having about 5-6 months’ sales worth of funds (i.e. about ₹80-₹100 cr. for sales of ₹200 cr.) tied
up in receivables and inventory is a huge cost and has been one of the major reasons for the financial drag
on the company leading to debt overhang.
When we assess the company on the front of payment to its vendors, then we notice that Emmbi Industries
Limited buys most of its raw material from Reliance Industries Limited, where it has to pay entire money
advance.
Emmbi Industries Limited disclosed its payment terms with the suppliers in its shareholders’ conference
call on September 16, 2016 (pg. 9):
So there seems to be little that Emmbi Industries Limited can do at the suppliers’ end to improve its working
capital efficiency.
The management of Emmbi Industries Limited acknowledges its limitations in improving the working
capital efficiency situation and has also communicated its situation to the investors in the conference call
on November 17, 2016 (pg. 15):
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The continuous consumption of funds in the working capital is evident when an investor analyses the
cumulative profits and cash flow data of Emmbi Industries Limited for 10 years (FY2007-16). The investor
would notice that Emmbi Industries Limited has not been able to convert its profits into cash flow from
operations. Cumulative PAT during FY2007-16 is ₹34 cr. whereas the cumulative cash flow from
operations (CFO) over the similar period has been ₹22 cr.
No wonder that the company has been continuously reeling under debt and high-interest payments due to
the working capital intensity of its business.
The tight cash flow situation of the company has been highlighted at times by credit rating agencies as well.
Below is the excerpt of the April 2015 credit rating report of Emmbi Industries Limited by rating agency
CARE Limited, which highlights the insufficiency of operating cash flow along with working capital-
intensive nature of the business being funded by debt:
Over last 10 years (FY2007-16), Emmbi Industries Limited has done a capital expenditure (capex) of ₹67
cr whereas we noticed above that its cash flow from operations for the same period was only ₹22 cr leaving
a gap of ₹45 cr [negative free cash flow (FCF)] to be funded from other sources. The company has relied
on a mix of debt and equity to meet the fund's shortfall in its business.
The continuous high debt levels have ensured that the company had to pay about ₹45 cr as interest to its
lenders, assuming 12% rate of interest, which is reasonable for a BBB (negative/neutral) rated company.
The resultant gap of about ₹90 cr (₹45 cr negative FCF + interest outgo of ₹45 cr), has been funded by
raising incremental debt of ₹47 cr (total debt levels of Emmbi Industries Limited increased from ₹15 cr in
FY2007 to ₹62 cr in FY2016) and by equity infusion of about ₹ 40 cr, which was primarily by way initial
public offer (IPO) proceeds in FY2010 when the company offered its shares to the public at BSE and NSE.
An investor would notice that Emmbi Industries Limited continuously had negative cash flow from
operations for the initial part of last 10 years i.e. until FY2013. During this stressful period, it became urgent
for Emmbi Industries Limited, that it should infuse additional equity as the lenders would have been finding
it difficult to lend incremental funds to a small company, whose operations were continuously guzzling
money.
The result was that the company approached equity markets for funding in FY2010. When an investor tries
to assess the costs the company paid for raising the funds from IPO, then she finds out that the company
paid about 9% of the IPO proceeds as issue expenses.
To assess the exact amount of funds paid by Emmbi Industries Limited for the IPO, the investor needs to
analyse the FY2010 annual report (pg. 22):
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Emmbi Industries Limited raised about ₹43.6 cr. (increase in share capital of ₹13.3 cr and increase in share
premium of ₹30.3 cr) and paid ₹3.9 cr as issue expenses, which is about 9% (3.9/43.6) of the total IPO
proceeds.
Paying 9% as commission to merchant bankers/underwriters for raising funds seems high and might be an
indicator of the urgency on part of the company to raise the funds.
As we know that Emmbi Industries Limited had been facing continuous years of negative cash flow from
operations over the years and the issue price of ₹45 in February 2010 with FY2009 EPS of 1.62 (FY2010
annual report pg. 21), meant that the issue was priced at a P/E of 27.7 times. Such P/E levels look high for
a company which is not making cash profits.
It was not surprising that on the listing day (February 24, 2010), the price crashed heavily and closed at
₹28.65, witnessing a decline of 36%.
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The share price of the company recovered to the issue price of ₹45 only in October 2015, about 5.5 years
from the listing.
The tight liquidity situation of Emmbi Industries Limited under which the IPO was brought and it barely
managed to get subscribed to 1.20 times and the high issue expenses paid by the company (9% of total issue
proceeds), it seems that the company has to rely on underwriters to get the issue through.
As per a report published by the PwC deals practice group in September 2012, named: “Considering an
IPO? The costs of going and being public may surprise you” the underwriting charges of small IPOs
with gross proceeds up to $50 million (about ₹335 cr at ₹67/$), can go up to 6.9% (pg. 7 of the report).
In light of the same, it seems plausible that Emmbi Industries Limited had to pay up to 9% of IPO proceeds
as issue expenses for its ₹43.6 cr. IPO to become successful.
Without the backing of fundamentals to support the P/E ratio of 27.7 at the issue price, it was not surprising
that the share price could not hold at the issue price levels.
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Therefore, we have noticed that Emmbi Industries Limited has been operating in a business, which is capital
intensive and eats up a lot of funds as working capital and the company had to rely on equity dilution as
well as debt funding to meet its growing fund requirements to sustain its sales growth.
As per the company, its current capex plans of ₹22 cr are to be funded by ₹15 cr of debt and ₹10 cr of
equity.
When the said capacity becomes operational, then as per the high working capital needs of the company’s
business, it would need more working capital funds. Such pattern indicates that Emmbi Industries Limited
would be in continuous need of debt for sustaining its growth.
An investor should read the analysis of two other companies: Ahmednagar Forgings Limited and Amtek
India Limited, to understand the sales growth funded by debt can have on the financial situation of any
company. You may read their analysis here:
Also Read: Analysis: Ahmednagar Forgings Limited
Also Read: Analysis: Amtek India Limited
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Moreover, there are certain other aspects as well, which also need an investor's attention before making the
final investment decision about Emmbi Industries Limited:
1) Promoter-managers’ remuneration:
Upon further analysis of Emmbi Industries Limited, the investor would notice that the company has paid
its promoter-managers a remuneration of ₹1.50 cr in FY2016 (pg. 29 of the FY2016 annual report), which
is about 14% of the net profit after tax of FY2016 (₹10.6 cr).
The companies act mandates that the remuneration of all the executive directors/whole time directors
including MD should be capped at 10% of the profits of the company as per section 197 of the companies
act, 2013. The company needs to take central govt. approval to give remuneration higher than the stipulated
cap, to its executive directors.
It seems that the company is paying remuneration higher than the stipulated cap and as per the audit report
of the FY2016 annual report (pg. 59), Emmbi Industries Limited has taken approval for it:
However, promoters’ remuneration of 14% of net profits after tax seems high from conventional standards.
2) Dividends apparently being funded by debt:
Emmbi Industries Limited has been paying dividends to its shareholders since FY2011. However, in the
light of the company being free cash flow negative over the years and even since FY2011 (CFO for FY2011-
16 is ₹33 cr whereas Capex for FY2011-16 is ₹61 cr. leading to negative FCF of ₹28 cr), the dividends
seem to be effectively funded by debt (as the money is fungible).
It is advisable that an investor should not take any comfort of the dividend yield of the companies, which
declare dividends to shareholders despite having negative free cash flow situation. Such are paid usually
paid out of debt proceeds and when a company decides to pay a dividend out of debt and not from the free
cash flows, then there is hardly any limit to which the company can declare dividends to appease
shareholders.
Moreover, if the shareholders including promoters of such free cash flow negative companies use these
dividends (which are effectively paid out of debt raised by the company), then the situation might
tantamount to increasing personal shareholding by leveraging the company balance sheet.
An investor would note that the promoters of Emmbi Industries Limited have increased their shareholding
in the company from about 47% to about 57% in last 5 years.
As per the shareholders’ conference call on September 16, 2016, the promoter has clarified that he is putting
most of the dividend and other income in buying shares of Emmbi Industries Limited.
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We believe that declaring dividends when the companies are not making free cash flows is not a good
practice as the company does not have an inherent surplus to pay to shareholders so in turn the company
ends up leveraging its already indebted balance sheet further to pay dividends. And the use of such
dividends by shareholders including promoters (which also get a comparative higher salary) to increase
stake in the company, as mentioned above, is tantamount to benefit at the cost of the company.
3) Capitalization of certain expenses:
As per page 72, FY2016 annual report, Emmbi Industries Limited has been capitalizing certain expenses
like brand development expenses, foreign trade fair expenses and knowledge development expenses, which
on the face of it looks like expenses which should be charged to P&L and not capitalized.
It is advised that an investor should examine these expenses further and may get a clarification from the
company about the nature of these expenses, which warrants them to be capitalized.
Emmbi Industries Limited is the first company, which I have analysed until date that holds a shareholders
conference call at the AGM. This is a very nice gesture from the promoter management of the company
that they are offering an alternative channel to the shareholders to interact with them and virtually attend
the AGM despite being based away from the AGM location.
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As per the transcript of the shareholders’ conference call held by the company on September 16, 2016,
about 10 shareholders attended the AGM in person and about 30 other shareholders were present on the
conference call where the management of the company listened to their queries and answered to their
questions.
Such conference call seemed a nice gesture in the times, where many companies seemingly deliberately
hold their AGMs at far-flung plant locations where it becomes difficult for public shareholders to go and
attend the AGMs.
Further, Emmbi Industries Limited is the first company that I have come across, which issued a clarification
to stock exchanges (July 13, 2016) when an anonymous person wrote on Moneycontrol message board that
one of its directors has been arrested:
Emmbi Industries Limited is currently available at a P/E ratio of about 17, which does not provide a margin
of safety in the purchase price as described by Benjamin Graham in his book The Intelligent Investor.
Overall, Emmbi Industries Limited seems to be a company, which has been growing its sales at a decent
pace with sustained operating margins. However, the profitability margins of the company do not seem
sufficient to meet the funds requirements of its highly capital intensive business. In the past, Emmbi
Industries Limited has funded its cash shortfall, which was required to sustain its growth, through a mixture
of debt and equity
Currently also, Emmbi Industries Limited has been working on capacity addition plans, which are about
70% debt funded and might need further debt to meet increased working capital requirements looking at
the nature of its business in the past. Therefore, the primary parameter that an investor should monitor going
ahead is the debt level of Emmbi Industries Limited, lest it should fall into a debt trap.
An investor should take note of the high salaries of promoters as compared to the net profit after tax levels.
The investor should also focus on the fact that the dividends seem primarily debt funded due to the company
being in a free cash flow negative state. Moreover, usage of these debt-funded dividend proceeds by the
shareholders, including promoters, to increase their stake in the company might tantamount to benefiting at
company’s expense.
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These are our views about Emmbi Industries Limited. However, readers should do their own analysis before
taking any investment-related decision about Emmbi Industries Limited.
P.S:
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10) Jenburkt Pharmaceuticals Limited
Jenburkt Pharmaceuticals Limited, an Indian pharmaceutical player.
Let us analyze the financial performance of Jenburkt Pharmaceuticals Limited over last 10 years.
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Jenburkt Pharmaceuticals Limited has been witnessing moderate sales growth of about 10-11% over the
years, which has seen fluctuations year on year. The same trend is observed in its profitability margins,
where both operating profitability margin, as well as net profit margin, have witnessed fluctuations year on
year.
However, looking at the trend of profitability margins and upon comparison with similarly place peers, it
does not look like that the company does not have any power to maintain its profitability margins.
The below chart compares the profitability margins of Jenburkt Pharmaceuticals Limited with similarly
placed peers like SMS Pharmaceuticals Limited (M-Cap: ₹770 cr), Mangalam Drugs & Organics Limited
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(M-Cap: ₹230 cr), Lincoln Pharmaceuticals Limited (M-Cap: ₹400 cr) and Nectar Lifescience Limited (M-
Cap: ₹825 cr).
The comparison clearly indicates that Jenburkt Pharmaceuticals Limited has been able to perform better
than most of its similar-sized peers and has been able to improve its profitability margin over the years from
8% in FY2007 to 18% in FY2016. On the contrary, peers like SMS Pharmaceuticals Limited and Mangalam
Drugs & Organics Limited have seen very wide fluctuations in the operating profitability margins to the
extent that in FY2013, both these companies reported operating losses.
Therefore, we believe that the company has been designing its products/market profile as well as
negotiating with the customers in a way, which is resulting in the improving operating margins over the
years. It remains to be seen whether Jenburkt Pharmaceuticals Limited would be able to maintain such long-
term trend of improving margins in future.
Regarding the fluctuation of operating margins due to fuel costs:
Analysis of the cost structure of Jenburkt Pharmaceuticals Limited for FY2016 would indicate that the key
cost inputs as a percentage of total sales (₹94 cr) are:
1. Raw material costs: 31% of total operating income (TOI): ₹29 cr
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2. Employee costs: 23% of TOI: ₹21.5 cr and

3. Selling and administration costs 28% of TOI: ₹26 cr.
Moreover, the fuel costs of ₹0.57 cr. are a minuscule part of the total expense and therefore, does not seem
to be very material to impact profitability margins in a huge manner. The key factors determining the costing
or in turn operating margins of the company would be its raw material costs, employee costs (which are
very high in comparison to the industry) and the selling & administration costs. An investor should monitor
these expenses going ahead.
As rightly mentioned by you, Jenburkt Pharmaceuticals Limited seems to be paying its taxes regularly and
at the standard corporate tax rate, which is a good sign.
On the operating efficiency parameters as well, Jenburkt Pharmaceuticals Limited has been doing good
with each of the parameters of net fixed assets turnover, receivables days as well as inventory turnover ratio
witnessing improvements over last 10 years.
We agree with your findings that Jenburkt Pharmaceuticals Limited has a good Self-Sustainable Growth
Rate (SSGR) of 25%-35%, which is more than the growth rate being achieved by it. As a result, the
company seems to have grown well from sales of ₹38cr. in FY2007 to ₹94 cr in FY2016 without getting
into debt burden. On the contrary, it has reduced its total debt from ₹9cr in FY2007 to ₹5 cr in FY2016.
When we analyse free cash-flow generation, then the company scores well. Healthy cash flow generation,
good working capital management and efficient assets utilization have ensured that Jenburkt
Pharmaceuticals Limited has been able to accumulate cash & investments worth of about ₹30 cr after
meeting all the capex needs as well as dividend payouts.
Employee costs:
When we compare the employee costs as a percentage of total operating income of Jenburkt
Pharmaceuticals Limited with its above-mentioned similar-sized peers, then we notice that the employee
costs of Jenburkt Pharmaceuticals Limited are disproportionately high.
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The above chart indicates that the employee costs of Jenburkt Pharmaceuticals Limited at 23% of operating
income in FY2016 are about 2.5 times of the nearest peer (Lincoln Pharmaceuticals Limited: 9%) and about
6 times of Nectar Lifescience Limited (4%).
The argument that the higher employee costs of Jenburkt Pharmaceuticals Limited might be the reason for
its healthy operating margins (OPM: 18%) as the good employees lead to good products/marketing and in
turn good margins, does not hold well. This is because of the peer, Nectar Lifescience Limited, which has
almost similar OPM: 16% has the lowest employee costs at 4% of the total operating income.
Promoter/Managerial Remuneration:
Moreover, an investor would also notice that the remuneration of chairman & managing director (CMD) of
Jenburkt Pharmaceuticals Limited, Mr. Ashish U. Bhuta for FY2016 is ₹0.96 cr, which is about 8.7% of
the net profit after-tax (PAT) of the company for FY2016 (₹11cr).
The remuneration of promoter director at 8.7% of PAT is on the higher side. We have noticed that in most
of the cases, the remuneration of promoter directors is about 2.5 to 4% of PAT, which includes the
commission of about 2% on the profits of their companies.
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Upon reading the annual report for FY2016 of Jenburkt Pharmaceuticals Limited, an investor would notice
that the remuneration of the promoter/CMD for FY2016 does not include the variable component, which
in most cases is the commission on the profits.
To understand the commission structure being offered to the promoter/CMD by Jenburkt Pharmaceuticals
Limited, an investor needs to read the annual report of FY2013 in which the appointment of CMD was
approved by shareholders for a period of 5 years (page 8 of the FY2013 annual report)
An investor would notice that the commission terms assigned by Jenburkt Pharmaceuticals Limited to the
promoter/CMD is 3%, which is higher than the normal industry levels. This assumes further significance
in the light that the current remuneration of 8.7% of net PAT is without any commission.
Therefore, as rightly pointed by you, an investor needs to keep a track of the managerial remuneration of
the promoter directors at Jenburkt Pharmaceuticals Limited.
Contingent Liabilities:
Jenburkt Pharmaceuticals Limited has been facing a litigation with the drug pricing regulator asking for a
penalty of ₹16.45 cr. from the company for alleged violation of its orders. The case has been settled in the
favour of the company in the High Court and currently, the appeal is pending in the Hon. Supreme Court
of India.
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The amount of ₹16.45 cr. is higher than the annual profits of the company and therefore, if the case is settled
against the company, then it would wipe out profits of a year. However, looking at the current cash position
of the company, as it has about ₹25 cr. in bank fixed deposits, it does not seem to risk the viability of the
company. However, an investor needs to keep a track on the progress of the litigation in the Hon. Supreme
Court of India.
Promoter’s Shareholding:
The shareholding of the promoters at December 2016 is 45.81%, which has seen an increase from the
shareholding level of 43.94% in September 2010. So overall it seems that the promoters are comfortable at
this level of shareholding and are able to execute their plans comfortably. It might be that other key
shareholders, which, currently, are not included in promoters’ shareholding, might be people close to
management and therefore, the promoters are comfortable maintaining a shareholding below 50%.
Related Party Transactions:
An assessment of the related party transactions section of the FY2016 annual report of Jenburkt
Pharmaceuticals Limited indicates that the company does not have a lot of transactions within the group
apart from a leave & license arrangement with Bhuta Holding Pvt. Ltd., which is also one of the major
shareholders of Jenburkt Pharmaceuticals Limited.
The rent being paid to Bhuta Holding Pvt. Ltd by the company has been increased by 27% in FY2016 to
₹48 lac from ₹37.8 lac in FY2015. The increase in rent by 27% seems high from market benchmarks
perspective. Usually, the rentals in commercial spaces/retail malls witness increases of usually 4%-5% each
year or about 12%-15% every three years. An investor may do further assessment of the property, which
has been taken on rent by the company and the market rental in the locality. The investor may get the details
of the property being taken on rent by the company from the investors’ contact of the company/company
secretary.
Apart from the above aspects, there are certain more aspects, which come to the notice of the investor upon
reading the annual report for FY2016:
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Purchase of finished goods by the company but no trading income was shown:
As per the FY2016 annual report, page 50, Jenburkt Pharmaceuticals Limited has disclosed that it has
purchased finished goods worth of ₹22 cr. It is expected that if the company has purchased goods in ready
to sell condition from vendors and sold it into the market, then it should show it as trading activity.
Assuming that entire finished goods of ₹22 cr. were sold in the current year, then the trading activity would
have at least contributed 23% (22/94) of sales. By this assessment, the company should provide details of
trading activity as a separate business segment.
However, the important aspect to note here is that the company is giving away its profitability margins by
sourcing finished goods from the third party. An investor should assess whether the third party from which
the finished goods are sourced is a related party, which has not been disclosed in the annual report. Such
assessment becomes necessary as such arrangements are one of the tools to divert profits from one corporate
entity to another entity at the cost of shareholders.
Data of short-term provisions not getting reconciled:
When an investor analyses the FY2016 annual report, page 47, then she would notice that the data presented
in the short-term provisions has issues.
The data for FY2016 is not getting reconciled when the reader totals the items. Similarly, the data for
FY2015 has one key element “provisions for income tax” of ₹5.15 cr. wrongly placed under FY2016. An
investor should get clarification from the company about the data of the short-term provisions.
We agree with your assessment that at the current P/E ratio (January 11, 2017) being above 20, the share
price of Jenburkt Pharmaceuticals Limited does not offer any margin of safety in the purchase price.
However, if an investor focuses on the business aspect of the margin of safety by analysing the self-
sustainable growth rate (SSGR) and free cash flow (FCF) generation, then she would notice that Jenburkt
Pharmaceuticals Limited has a good margin of safety in its business model.
Therefore, we would recommend that the investor should factor the margin of safety in the business model
as well while making an opinion about the available share price of Jenburkt Pharmaceuticals Limited.
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Overall, Jenburkt Pharmaceuticals Limited seems to be a company growing at a moderate pace with
improving profitability year on year. The company has been able to manage its asset utilization, working
capital management in a very good manner and therefore, it has been able to generate a very good amount
of cash flows, which have led to a reduction in debt, payment of dividends and generation of good amount
cash reserves with the company.
However, the company has very high employee costs when compared to its similarly placed peers. The
remuneration of the promoter/CMD as well as his commission arrangements with the company is at a higher
level than the normal industry levels.
The investor should focus on the aspects of sourcing of finished goods, get clarifications about the data
issues in the annual report as well as the property being taken on rent from related parties before she makes
any final opinion about Jenburkt Pharmaceuticals Limited.
These are our views about Jenburkt Pharmaceuticals Limited. However, readers should do their own
analysis before taking any investment related decision about Jenburkt Pharmaceuticals Limited.
P.S:
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11) IST Limited
IST Limited is an Indian auto ancillary player, which is primarily earning its profits by being the parent
company of the landowner of a Unitech Infospace.
Let us try to analyse the IST Limited on a consolidated basis:
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According to the FY2016 consolidated annual accounts disclosed by the IST Limited, its major net worth,
as well as profits, are comprised of:
1. IST Limited, which is into high precision auto ancillary business

2. Gurgaon Infospace Limited, which has jointly developed the “Unitech Infospace Sector 21” project
with Unitech group. Gurgaon Infospace Limited is entitled to 28% of the revenue share generated
by this project.
3. IST Steel & Power Limited
Let us first try to see IST Limited segment by segment:
1) IST Steel & Power Limited:
We notice that IST Steel & Power Limited constitutes only 0.7% of the profits and has about 2% of the net
worth tied up in it. The profits, which IST Limited generates from IST Steel & Power Limited is meagre
₹61 lac, whereas, as per the annual report, IST Limited has invested close to ₹23.8 cr. into this company.
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The company has been making investments in IST Steel & Power Limited at least since FY2009, which is
visible from the investments section of the FY2010 annual report, which is the earliest available annual
report present at BSE India website.
Analysis of past annual reports indicates that IST Limited incrementally invested ₹15 cr in IST Steel &
Power Limited in FY2012 by preferred shares and further invested ₹2.6 cr. in FY2013 by investing in equity
shares.
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The investment of ₹23.8 cr. done in IST Steel & Power Limited does not seem to have given any reasonable
returns to shareholders of IST Limited over last 7 years (FY2009-16). It is good that IST Limited has
stopped putting in additional money in IST Steel & Power Limited since FY2013.
As there are no details available about the operations or the assets held by IST Steel & Power Limited, it is
difficult to make any reasonable assumption whether IST Limited’s investment in IST Steel & Power
Limited would be able to give any significant return to IST Limited. An investor should contact the
company to understand the purpose of these investments and their current fate.
At March 31, 2016, the disclosure of contribution of IST Steel & Power Limited to the net worth of IST
Limited (shown above) being ₹9.5 cr. gives an indication that the investment done in IST Steel & Power
Limited has been eroded by possibly the accumulated losses in IST Steel & Power Limited.
Looking at the scale of operations of IST Steel & Power Limited by the relative profit contribution and the
asset size as compared to IST Limited, we believe that an investor can safely ignore this segment from
consolidated assessment. i.e. assign it nil value.
An investor should keep a continuous check on the investments being done by IST Limited in IST Steel &
Power Limited and if in future the company puts in further money into IST Steel & Power Limited without
any justifications or further details, then the investor should take it very cautiously.
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2) IST Limited:
IST Limited is into manufacturing of high precision auto components. However, as rightly pointed out by
you, this business seems to be making operating losses. The initial level assessment indicates that almost
all the profits of ₹6.6 cr. in FY2016 (standalone) can be attributed to the other income of ₹10.4 cr. The
situation was no different in FY2015 when the entire profits of ₹2.5 cr. could be attributed to the other
income of ₹5.6 cr.
An investor would notice that the other income (standalone) primarily consists of interest income from tax-
free bonds, profit on the sale of noncurrent assets and the rental income. All of these avenues of income are
unrelated to the auto ancillary business, which is core to the operations housed in IST Limited, leading to a
safe conclusion that the operating segment of auto ancillaries in IST Limited is not making profits.
Moreover, the management has also been upfront in acknowledging the fact of operating losses in the
FY2016 annual report, when they justify nil expenditure on CSR at page no. 38:
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Moreover, as part of the management discussion & analysis section of the FY2016 annual report, the
management has been described about the challenges faced by the auto ancillary business, where it
acknowledges that the buyers (OEMs) have so much power in this industry that the vendors are not able to
pass on the increase in raw material costs to the customers (OEMs), even at the cost of having operating
losses.
Almost all the auto ancillary vendors to OEMs face such a situation and it is very difficult for these
companies to generate good operating profitability margins unless they supply their products in the
aftermarket segment. However, even in the aftermarket segment, there is competition from the un-organised
sector. No wonder, the auto-ancillary sector is a tough sector to operate for the players.
Therefore, in light of the minuscule contribution of profits from IST Steel & Power Limited and the
operating losses of the auto ancillary business in IST Limited, it becomes clear that almost all the
profitability and future cash generation for IST Limited is dependent upon the fate of its wholly owned
subsidiary Gurgaon Infospace Limited and other investments made by it.
Therefore, it becomes paramount that the investor should analyse the business of Gurgaon Infospace
Limited and other investments of IST Limited to understand the probability for future value generating
ability of IST Limited. The FY2016 annual report of IST Limited in the noncurrent investments section of
the consolidated financials provides a gist of the investments made by the IST group apart from the wholly
owned subsidiary (Gurgaon Infospace Limited).
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However, the biggest challenge that an investor faces here is that Gurgaon Infospace Limited is an unlisted
entity and the IST Limited’s annual report provides very minimal information about it. Furthermore, the
details of other investment entities Vinayak Infra Developers Private Limited, IST Softech Private Limited,
Subham Infradevelopers (P) Limited and the commercial properties in NOIDA are not available for
assessment.
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Gurgaon Infospace Limited
FY2016 annual report of IST Limited provides the following information about Gurgaon Infospace Limited
at page 39:
The above data indicates that the Gurgaon Infospace Limited has very high margin business with a net
profitability margin of about 85% (PAT of ₹63 cr. /Sales of ₹74 cr). This is evident from the details of the
business of Gurgaon Infospace Limited available as part of schedules in the consolidated financials:
It indicates that Gurgaon Infospace Limited has the right to receive 28% of the revenue from the project
“Unitech Infospace Sector 21”. Further, searching the public sources indicates that this project is fully
complete and functional. Further, Unitech has sold its 72% stake in this project to Brookfield (Livemint)
“In addition, in respect of the InfoSpace Gurgaon G2-IST (”G2”) Project, a third party,
Gurgaon InfoSpace Ltd (’’GIL’’) holds the title to the land and through a joint development
agreement is entitled to 28% of the revenue arising from that project with Candor and the third
party in their capacity as shareholders in the G2 Project being entitled to the remaining 72%.”
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The fact that the building is complete and Gurgaon Infospace Limited is entitled to revenue share for its
contribution of land in the project, means that the expenses, if any, in the project are to be borne by the
other joint development partner (earlier Unitech and now Brookefield) from their share. Such an
arrangement creates a situation where the property becomes a cash cow for the landowner (Gurgaon
Infospace Limited in this case) as it has to only collect revenue with minimal expenses. No wonder Gurgaon
Infospace Limited has been able to enjoy net profitability margin of 85%. Such a business situation leads
to rapid generation and accumulation of cash in the balance sheet.
From the summary of financials of Gurgaon Infospace Limited shared above, an investor would notice that
Gurgaon Infospace Limited has accumulated a lot of cash and has made investments of ₹125 cr. It becomes
paramount to analyse the avenues where the cash has been invested as it would indicate whether the
management has been using the cash conservatively or is splurging it at the cost of minority shareholders
of the parent entity.
An investor can find out the avenues of these investments by comparing the details of non-current
investments of IST Limited in consolidated financials (shared above, which includes the investments done
by Gurgaon Infospace Limited) and the non-current investments of IST Limited in standalone financials
(given below, which exclude the investments done by Gurgaon Infospace Limited). This assessment
becomes essential to understand the manner in which the promoters have utilized the cash available with
the company.
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By comparing the two sections of noncurrent investments (i.e. by deducting standalone investments from
consolidated investments), it can be estimated that Gurgaon Infospace Limited has made its investments in
primarily the following avenues:
 Tax-free bonds of HUDCO, NTPC, IRFC, and NHAI about ₹85 cr.
 IFCI debentures: ₹10 cr
 SBI Premier Liquid Fund: ₹2.6 cr
 Sublease of commercial property in NOIDA: ₹19.8 cr
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 Related parties: Vinayakinfra Developers Private Limited and IST Softech Private Limited: ₹8 cr.
 Total: about ₹125 cr.
It indicates that primarily the money has been invested in debt instruments (bonds/debentures/mutual funds)
etc. However, the management has also given about ₹8 cr. of cash to related parties, which is a concern as
despite being cash rich, the management has not been paying dividends to shareholders.
From the assessment until now it would be clear to an investor that the only key operating and profit
generating asset owned by IST group is the IT/ITeS SEZ property (Unitech Infospace Sector 21) in
Gurgaon, which is currently being managed by Brookfield. The property is in one of the good location in
Gurgaon at Old Delhi Road and enjoys good marketability.
The revenue share of IST Group from the property (through Gurgaon Infospace Limited) is ₹74.5 cr. As
per the general commercial real estate industry standards, the commercial lease transactions include
escalation of rentals by about 12-15% every 3 years. In a property with multiple tenants, it might lead to
about 4-5% rental escalation every year. Therefore, it can be assumed that in case Brookfield is able to
maintain the property in a good condition and the marketability of the property remains intact, then the
rental income from the SEZ building would be able to increase by 4-5% every year.
Moreover, from a valuation point of view, the commercial properties usually sell between 8-10% of rental
yields. Assuming 9% rental yield, the 28% stake of Gurgaon Infospace Limited in the SEZ project “Unitech
Infospace Sector 21” which leads to annual rental income of ₹74.5 cr., can be assessed at about ₹827 cr.
(74.5 / 0.09). If realized, then the tax aspect on this valuation would differ according to the manner in which
the transaction is structured. With the tax experts' advice, the transaction (property sale/shares sale) might
be structured with minimal tax impact.
Overall Net Asset Valuation of IST Limited
An investor may arrive at an overall valuation of IST Limited by cumulating its different investments
(consolidated view):
 28% stake in Unitech Infospace Sector 21: ₹827 cr.

 Tax free bonds, debentures, liquid mutual funds: ₹140 cr.
 Commercial properties bought in FY2016: ₹66 cr.
Total Assets: ₹1,033 cr.
Other pertinent points from asset valuation perspective:
 Debt outstanding of ₹12.6 cr.

 Security deposits to be repaid: ₹36.9 cr. (Note 6 of consolidated financials FY2016)
 Assigning “Nil” value to the investments done in associates (IST Steel & Power Limited), related
parties (Vinayak and IST Softech), others (Shubham Infradevelopers) etc.
 Assuming current liabilities of ₹4 cr. would be easily covered by cash of ₹4 cr. and rest of current
assets of about ₹36 cr.
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Total deductible: about ₹50 cr.
Therefore, it might seem that from gross level analysis of assets, IST Limited should have a valuation of
about ₹983 cr. (1,033 - 50)
However, an investor must not forget that there is a very big factor, which stands between the investor and
the fruits of the business of the company. This factor is “management” of the company. We have seen in
multiple cases where the retail investors in the fundamentally sound businesses could not get any benefit
as the management siphoned off all the past, present and future gains of the business from the company and
the interest of retail shareholders were not kept in mind.
One such example of the management taking away the gains of business away from retail shareholders in
case of Gujarat Automotive Gears Limited has been discussed in detail in the following article:
Read: Why Management Assessment is the Most Critical Factor in Stock Investing?
Therefore, looking at the data analysis until now, it seems certain that the net assets & investments owned
by IST Limited are valued more than the current market capitalization of the company. However, it remains
to be seen whether the current management is the right agent, which would ensure that the value of the
assets of IST Limited, can ultimately flow to the shareholders.
Out of the three segments of the businesses of IST Limited: auto-ancillary, steel & power and real estate,
the only segment that is making some money for the company is real estate. Auto ancillary business is
making operating losses and the steel & power business has declined in its net worth and is barely profitable
now (PAT ₹61 lac).
The real estate business of Gurgaon Infospace Limited is also a venture in which the company owned a
piece of land and entered into a development agreement with Unitech group in which the Unitech group
seems to have built the property, marketed it as “Unitech Infospace Sector 21” and leased it. In lieu of the
contribution of land, the IST group is getting 28% of the revenue of the project.
It remains to be seen whether IST group could have constructed the property on its own, marketed and
leased it without being associated with other large real estate developer groups like Unitech.
Currently, in FY2016, IST group has invested in/purchased sublease of two commercial properties at
NOIDA. It remains to be seen whether these properties are barren land taken directly on sublease from
NOIDA, which are yet to be developed or these are completely built & functional/nearing completion
buildings.
If these newly bought properties are at the land stage, then it remains to be seen, whether the management
would be able to find another partner who could develop these properties. However, if these newly bought
properties are nearing completion/completed buildings, then it remains to be seen whether the IST group
would be able to find lessees/buyers for the commercial spaces in these buildings.
An investor may see a sample of the marketing attempts of a lease transaction by the IST group by visiting
the website of the IST group.
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Following the above “For Lease” link leads an investor to know that IST group is out in the market to lease
out 66,443 sq. ft. space in IST House in Sector 44, Gurgaon. It is not clear since how many days the group
has been out in the market looking for the leasing of this property as it could not be ascertained since how
many days this link has been live. However, if I see this link and the pdf document attached at the link as
an attempt to market a space in a good locality in Gurgaon, then I find a lot of scope for improvement in
the marketing effort by the IST group.
On the assessment of the IST group apart from its business segments, an investor would notice quite a few
other pertinent points:
1) The group has invested ₹23.8 cr. in IST Steel & Power Limited since at least last 7 years, however, the
investment is yet to create any significant return to investors.
2) The group has invested funds (₹8 cr) in related parties: Vinayakinfra Developers Private Limited and
IST Softech Private Limited. There is no information in the annual report or in the public domain, which
can lead any investor to assess whether these companies have any operating business and if the money can
be safely returned. Moreover, as per the related party section of FY2016 annual report, these investments
are earning an interest of about ₹63 lac, which amounts to 7.65% of return.
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The rate of interest of 7.65% being charged from related parties is low because as per FY2016 annual report
IST Limited has taken a loan of ₹12.5 cr. from an NBFC at 9.50%. It is tantamount to borrowing at a higher
rate of interest from the market at the cost of shareholders of IST Limited and then giving benefit to related
parties by passing on the loan to them at a lower cost.
3) The group has done investments in another entity Subham Infradevelopers P. Ltd. (₹11.5 cr.) since
FY2013. There is no information in the annual report or in the public domain, which can lead any investor
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to assess whether Subham Infradevelopers P. Ltd. is an operating company, which can give the money back
when asked and also how this investment is beneficial for the minority shareholders.
4) IST Limited is the only company that I have come across until now in which the company secretary is
the highest paid person in the company, even higher than the executive director.
5) While analysing past annual reports, in FY2013 annual report, I am not able to reconcile the cash flow
from the balance sheet.
The cash outflow of ₹26.2 cr. shown in the CFO calculations under other current liabilities, could not be
ascertained from the analysis of the balance sheet for FY2013
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6) Moreover, there is a typo error in the above cash flow statement for FY2013, where the net cash from
operating activities, which is shown as negative ₹10 cr. is actually coming out to be positive ₹10 cr. i.e. an
inflow of ₹10 cr.
Without a doubt, the company is currently earning a lot of cash by way of rental revenue from the “Unitech
Infospace Sector 21” project, however, it is not paying out dividends to the shareholders. Instead, the
company is investing the money in related party entities, other seemingly real estate entities like Subham
Infradevelopers P. Ltd. etc.
Moreover, despite being cash-rich, the company has taken a loan from NBFC at a higher rate than the rate
at which it has given loans to related parties.
From an overall operating performance perspective, none of the operating segments in which the company
is in charge of the activities is making good money. The only source of money the company is earning is
where it owned land and gave it to a developer to construct a building and in return, it is earning a steady
income. This is just like what a lot of landowners/farmers did at the peak of real estate boom in Gurgaon
when they gave their land parcels to large real estate developers to construct the building and in turn assured
steady income for them.
Therefore, overall the management efficiency leaves a lot to be desired in terms of business operations
management. It remains to be seen how the investment in two NOIDA properties turns out in future.
IST Limited is currently (November 9, 2016) available at a P/E ratio of 6.69, which does provide a margin
of safety in the purchase price as described by Benjamin Graham in his book The Intelligent Investor.
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However, I personally feel a lot of uncertainties while assessing the management of IST Limited and as has
been discussed in multiple articles on this website, the management is the key factor that determines
whether the fruits of the business would flow to the minority shareholders.
Similarly in case of IST Limited also, it remains to be seen, whether the value of the net assets on its books,
which is higher than the current market capitalization, would flow to the shareholders.
These are our views about IST Limited. However, readers should do their own analysis before taking any
investment related decision about IST Limited.
P.S:
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12) Vikram Thermo (India) Limited
Vikram Thermo (India) Limited is an Indian player active in manufacturing pharmaceutical excipients and
other chemicals under brands: DRUGCOAT, DRCOAT and DPO.
Let us analyse the past financial performance of Vikram Thermo (India) Limited over last 10 years:
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Vikram Thermo (India) Limited has been growing its sales since last 10 years (FY2007-16) at a moderate
pace of about 10-15% year on year. However, since last 5 years, the sales growth has slowed down a lot
and the company has hardly achieved a growth rate of about 2% during FY2012-16.
The key reason for the muted growth has been the revenue de-growth witnessed by the company during
FY2015 when the revenue of the company declined from ₹43 cr. in FY2014 to ₹37 cr. in FY2015. The
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management of Vikram Thermo (India) Limited has cited the global slowdown as one of the key reasons
for the decline in revenue during FY2015.
The company has communicated the same to its shareholders during FY2015 annual report: Director’s
report, page 9:
“During the current year under report the Indian economy witnessed challenges on account of
global depression and the business confidence index was at low ebb. Despite all out efforts of
the company management, the company’s operations have resulted in lower revenue of
Rs.37,21,27,483/- (Previous year Rs.43,25,21,584/-). This lower revenue has affected the
profitability adversely”
This period of FY2012-16 seems to be particularly tough for Vikram Thermo (India) Limited as the
company has witnessed its profitability profile undergo a change during this period.
In the past, during FY2007-11, Vikram Thermo (India) Limited had reported near stable operating profit
margin (OPM) of about 20% with a few percentage points variation year on year. Such stable profitability
margins are good for any company because the stable margins indicate that company has the ability to pass
on the raw material prices to its customers. Such companies are expected to have a competitive advantage
in their business.
However, since FY2012, the profitability margins have started fluctuating wildly. OPM first rose to 26%
in FY2012 and then declined to 14% in FY2015 and have now recovered to 20% in FY2016. Such cyclical
OPM indicates that the current contracts of the company with its end consumer might not have the cost pass
on clauses and therefore, its profitability margins depend a lot on the raw material prices movements.
A look at the cost of raw material (RM) as a percentage of sales revenue would indicate to the customer
that the company, which used to have a constant RM to Sales % until 2010 have later on started witnessing
significant fluctuation in the RM as a cost of sales.
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The above graph indicates that the composition of the raw material to sales used to be about constant at
about 50% until FY2010 indicating that the company could pass on the changes in the raw material prices
to its customers. However, since FY2011 onwards, the RM as % of sales have been varying from 50 to
65% in a cyclical manner. Such fluctuations indicate that the company might have lost its ability to pass on
the changes in the raw material prices to customers.
Vikram Thermo (India) Limited has highlighted the same to the shareholders in its FY2016 annual report,
Management Discussion & Analysis section, page 41:
“Risk and Concern:
The company’s raw materials are based on petrochemicals. Major fluctuations in the petroleum
products can affect the company’s performance.”
The change in the pattern of the OPM indicates that either the earlier contracts allowing for passing on the
raw material cost changes are no longer in force or the new customers for the company are not willing to
have such contracts. Anyway, fluctuating OPM seems to be the new norm for Vikram Thermo (India)
Limited now. A look at the OPM for last 10 quarters reaffirms this pattern.
The net profit margin (NPM) has also followed the same pattern as OPM. NPM used to be stable at 9-10%
until FY2011 and has witnessed fluctuations since then.
Vikram Thermo (India) Limited has been paying taxes at a rate, which is similar to the standard corporate
tax rate in India, which is a good sign.
An investor would notice that the net fixed asset turnover ratio (NFAT) of Vikram Thermo (India) Limited,
which has increased from 2.14 in FY2009 to 4.70 in FY2014 has now been declining since last two years
and has reduced to a level of 2.84 in FY2016. The primary reason for the decline in NFAT seems to be the
capital expenditure (capex) done by the company during the recent years.
Out of the total capex of ₹19 cr. done by Vikram Thermo (India) Limited in last 10 years (FY2007-16), the
major portion ₹13 cr. has been done in recent years since FY2013. This is the same period during, which
the sales growth of the company has slowed down by a significant amount.
In absence of the capacity utilization data in the annual report and other sources, it is difficult to assess the
utilization levels of its manufacturing units. However, the financial data indicates that the capex being done
since last 4 years is now nearly complete as almost the entire amount has been transferred from capital work
in progress (CWIP) to net fixed assets (NFA) by FY2016.
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Therefore, if the company were facing any capacity constraints in its manufacturing plants, then the same
might ease out now.
When an investor analyses the inventory turnover ratio (ITR) of Vikram Thermo (India) Limited, then she
would observe that the ITR has declined from 13.7 in FY2011 to 9.6 in FY2016. Such deteriorating
performance of the company on ITR leaves a lot of room for improvement.
At the same time, the receivables days of Vikram Thermo (India) Limited have also witnessed sharp
increase from 83 days in FY2014 to 133 days in FY2016. An investor would notice that the period of
increasing receivables days coincides with the period of slow down of the sales growth for the company.
Deteriorating receivables days along with muted sales growth (including a decline in sales in FY2015),
indicates to the tough business situation being faced by the company over the recent period. At one hand,
the company seems to be finding it difficult to generate new orders and at the other hand, it is finding it
difficult to collect the money from the orders that it has already supplied.
The customers are delaying receivables to an extent that some of the customers have not paid the company
even 180 days after the date of payment becoming due. Moreover, Vikram Thermo (India) Limited
acknowledges that it might not be able to recover the money from some of these customers. Therefore, it
has also provided for such customers considering them as doubtful.
Looking at the above table, an investor would notice that at March 31, 2016, the amount of receivables,
which are pending for more than 180 days since they became due for payment is about ₹2 cr., which is
about 50% of the reported net profit of ₹4 cr. for FY2016. This signifies the crucial nature of these
receivables.
The significant increase in receivables days from 83 days to 133 days in the last 2 years indicates that the
business sourced by the company in recent years might not be of very good quality. Going ahead, an investor
should keep a close watch on the receivables position of Vikram Thermo (India) Limited and probably get
clarifications from the company in case the receivables position does not improve.
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The investor would notice that Vikram Thermo (India) Limited has an SSGR of about 25-35% over the
years, which is more than the sales growth rate of 10-15% being achieved by the company in the past.
Upon reading the SSGR article, an investor would appreciate that SSGR being higher than the achieved
sales growth indicates that the company can sustain its current sales growth from its internal sources without
relying on the fund's infusion from outside in terms of debt or equity.
Over FY2007-16, Vikram Thermo (India) Limited has witnessed its sales increase from ₹14 cr. in FY2007
to ₹38 cr. in FY2016. For achieving this sales growth the company has done an additional capital
expenditure (capex) of ₹19 cr.
Vikram Thermo (India) Limited has been able to fulfil the entire requirement of these funds from its internal
sources. As a result, along with meeting the capex requirements, the company has been able to reduce its
debt from ₹2.4 cr. in FY2007 to ₹0.6 cr. in FY2016.
This assessment of SSGR gets substantiated when the investor analyses the free cash flow (FCF) position
of Vikram Thermo (India) Limited.
An investor would notice that Vikram Thermo (India) Limited has generated ₹32 cr. from cash flow from
operations (CFO) over FY2007-16 whereas it has spent ₹19 cr as capital expenditure over the same period
resulting in a free cash flow (FCF) of ₹13 cr. Moreover, the company has utilized the free cash to pay
dividends to shareholders of about ₹7 cr.
SSGR and FCF are two of the main pillars of assessing the margin of safety in the business model of any
company.
Sales growth, which has been funded entirely from internal sources and the associated debt reductions
seems to have been taken positively by the market and the market has rewarded the company and its
shareholders handsomely over the past years.
The company could achieve an increase in market capitalization of about ₹65 cr. over FY2007-16 versus
the earnings retained and not distributed to shareholders of about ₹27 cr. indicating that a market value of
about ₹2.41 has been created by the company for its shareholders for each ₹1 of earnings retained by it over
the years.
Upon analysis of Vikram Thermo (India) Limited, the investor notices multiple other aspects, which
deserve attention:
1) Increasing promoter’s stake:
Over last few years, the promoters have been steadily increasing their stake in the company. Promoter’s
stake has increased from 53.28% at March 31, 2010, to 61.12% at March 31, 2017.
Rising promoter’s stake is a positive parameter while assessing any company.
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2) Promoter’s remuneration being higher than the statutory ceiling:
As rightly mentioned by you, the remuneration of promoter directors for FY2016 is ₹65 lac, which is higher
than the statutory ceiling, which as mentioned by the company is about ₹42 lac. However, it seems that the
company has taken the requisite approval from the central govt. for giving this remuneration to the promoter
directors.
As per the independent auditor’s report in the FY2016 annual report, page 46:
“According to the information and explanations give to us and based on our examination of
the records of the Company, the Company has paid/provided for managerial remuneration in
accordance with the requisite approvals mandated by the provisions of section 197 read with
Schedule V to the Act.”
Moreover, if the investor analyses the related party transactions section of the FY2016 annual report, page
62, then she would notice that the total remuneration taken by the promoters and their relatives from the
company is about ₹1.5 cr.:
Vikram Thermo (India) Limited is currently available at a P/E ratio of about 15-16, which does not offer
any significant margin of safety in the purchase price as described by Benjamin Graham in his book The
Overall, Vikram Thermo (India) Limited seems to be a company, which was enjoying good sales growth
along with stable profitability margins over the first half of last 10 years (FY2007-16). However, since last
4-5 years, the company has been facing tough times including sales de-growth in FY2015, fluctuating
profitability margins, deteriorating inventory management efficiency, difficulty in collecting cash from
customers etc. The company’s customers have been delaying payments and Vikram Thermo (India) Limited
has even had to write off some of the receivables.
Vikram Thermo (India) Limited has been doing capital expenditure since last 3-4 years, which now it seems
to have completed. The completed capex should help the company in achieving future growth.
The company has been paying remuneration to promoters, which is higher than the statutory ceiling.
However, if the investor analyses the remuneration of individual promoter directors, then she would notice
that the remuneration is about ₹20-30 lac per annum per director. This is a modest level of remuneration on
an absolute basis as currently, ₹20-30 lac is the starting corporate salary for any tier A business school
graduate in India.
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The key monitoring factor for any investor in Vikram Thermo (India) Limited would be to assess the
working capital management going ahead especially the collection of receivables from the customers. We
have noticed that the receivables overdue for more than 180 days are about 50% of the reported profits for
FY2016 and non-collection of the same would be detrimental to the economic interest of the shareholders.
These are our views about Vikram Thermo (India) Limited. However, readers should do their own analysis
before taking any investment related decision about Vikram Thermo (India) Limited.
P.S:
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13) Chaman Lal Setia Exports Limited
Chaman Lal Setia Exports Limited is an Indian basmati rice producer and exporter company owning the
Maharani Basmati rice brand.
Let us analyse the past financial performance of Chaman Lal Setia Exports Limited:
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Chaman Lal Setia Exports Limited has been growing its sales at a good pace of 23% year on year for last
10 years (FY2006-15). It is important to notice that the operating profit margins (OPM) of Chaman Lal
Setia Exports Limited have been stable in the range of 7-9% over the years. This is a very good sign
considering that the main product of the company “Rice” is an agricultural commodity where wide
fluctuations in the raw material prices are very common.
Stable operating margins speak about the strength of its rice brand “Maharani” where Chaman Lal Setia
Exports Limited is able to pass on the input cost escalations to the end consumers and protect its profitability
margins.
The brand Maharani, though being an established brand, however, does not come close to the brand India
Gate rice of KRBL Limited, which commands a premium over its peers and sells at a significantly higher
price than other brands. A cursory analysis of operating profitability margins of KRBL Limited and its
quick comparison with OPM of Chaman Lal Setia Exports Limited would tell the reader that KRBL Limited
which has almost double OPM than Chaman Lal Setia Exports Limited, commands better brand recognition
and pricing power.
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Chaman Lal Setia Exports Limited has been paying its taxes in the range of 30-34%, which is in line with
the standard corporate tax rate applicable in India, which is a good sign for the investors.
Operating efficiency parameters of Chaman Lal Setia Exports Limited reflect that the efficiency has
improved over the years. Net fixed assets turnover has been increased from 16 to 24 over last 10 years
(FY2006-15). Similarly, the inventory turnover ratio (ITR) has improved from 3 in FY2007 to 7 in FY2015.
This efficiency is evident in the fact that Chaman Lal Setia Exports Limited has been able to earn higher
revenue from its existing plants without a lot of increase in operating capacity in recent years.
As highlighted by the company in its annual report, the primary reason for the increase in revenue with a
similar level of operating capacity is on account of increase in prices of the products and strengthening of
the US Dollar against Indian Rupee.
This is also corroborated by the fact that most of the growth in the revenue of the company has come from
its exports operations. Domestic sales are almost flat.
The analysis of the receivable position of the company presents an interesting picture. The receivables
position of Chaman Lal Setia Exports Limited is following a cyclical pattern with movement between 38-
45-38-49-32-34 days over the years. However, if noticed from a 10-year perspective, the receivables days
has improved from 38 days to 34 days, which is an improvement overall.
So, over all, it seems that Chaman Lal Setia Exports Limited has been improving its net fixed assets
turnover, inventory turnover as well as the receivables days.
Yet, when we analyse the key test of a collection of receivables and working capital efficiency, which is
the conversion of profits into cash flow from operations by comparing cumulative profit after tax (cPAT)
over last 10 years with the cumulative cash flow from operations (cCFO), then the company fails miserably.
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We realize that during these years (FY2006-15), Chaman Lal Setia Exports Limited had a profit after tax
(PAT) of ₹83 cr. whereas the CFO over the similar period has been ₹20 cr. To resolve the mystery, we need
to see the absolute levels of inventory and receivables over the years, instead of relative parameters of
inventory turnover and receivables days, to assess whether the funds are getting blocked in working capital.
Upon analysis of absolute levels of inventory and receivables, we get the following picture:
Looking at the above data, it becomes clear that working capital has consumed at least ₹76 cr. from the
profits with receivables and inventory amounting for ₹40 cr. and ₹36 cr. respectively. This roughly explains
the difference between cPAT of ₹83 cr. and cCFO of ₹20 cr. (An investor may do further reconciliation of
figures by analysing cumulative depreciation and incremental trade payables over the years).
The case of Chaman Lal Setia Exports Limited is a good example of a case where the limitation of SSGR
that it does not factor in working capital changes, gets highlighted.
Chaman Lal Setia Exports Limited has stable profitability margins, improving net fixed asset turnover,
which are key parameters in the assessment of the self-sustainable growth rate. As a result, an investor
would notice that Chaman Lal Setia Exports Limited has an SSGR of 30% -60% over the years, which is
much higher than the sales growth rate of 23% being achieved by the company. As a result, if the investor
ignores the working capital position of the company, it might be concluded that the company can keep
growing at a rate of 20%-25% without needing to raise debt/additional equity.
However, such a conclusion would be erroneous. As mentioned in the article on SSGR, the investors must
look at the working capital position before making a final opinion about the company from SSGR.
In such cases, FCF would reveal a composite picture after factoring in the working capital and capex
parameters.
It is obvious from the above analysis that Chaman Lal Setia Exports Limited has generated only ₹20 cr.
from CFO during FY2006-15, whereas it has used ₹34 cr. in capital expenditure and declared dividends of
₹15 cr. over the same period (FY2006-15). Thus the inflow of cash is only ₹20 cr. whereas the utilization
is ₹49 cr.
This cash flow gap of ₹29 cr. (49-20) has been bridged by the company by raising additional debt of ₹27
cr. An investor would notice that the total debt of Chaman Lal Setia Exports Limited has increased from
₹23 cr. in FY2006 to ₹50 cr. in FY2015.
I advise investors to put a lot of focus on the free cash flow (FCF) generating ability of the company as it
is only the free cash flow, which is the real value generating ability of the company for its shareholders.
FCF is like the net savings of a salaried person after deducting all the expenses and constitute the disposable
income. If a company does not have positive FCF, then the company might turn out to be a permanent cash
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flow drain for the shareholders, which is continuously asking for more and more funds to be deployed in
either working capital or plant & machinery.
Increasing debt levels with growing business are the features of companies operating in capital-intensive
businesses.
An investor should read the analysis of two other companies: Metalyst Forgings Limited (erstwhile
Ahmednagar Forgings Limited) and Castex Technologies Limited (erstwhile Amtek India Limited), to
understand the impact low fixed asset turnover can have on the debt levels of companies. You may read
their analysis here:
Q&A Analysis: Metalyst Forgings Limited (erstwhile Ahmednagar Forgings Limited)
Q&A Analysis: Castex Technologies Limited (erstwhile Amtek India Limited)
An assessment of the capacity utilization of the company would lead us to a useful conclusion that Chaman
Lal Setia Exports Limited might not lead to huge capex in near future to sustain its growth and the key
aspect of cash flow management by the company remains better handling of working capital, primarily
inventories and receivables. Therefore, any investor should continuously have the working capital position
of Chaman Lal Setia Exports Limited as one of the key monitoring parameters.
Let us address other specific queries raised by readers:
1) Status of Star Export House:
The company has been awarded a Star Export House by the government and it is a concern whether Chaman
Lal Setia Exports Limited is exporting rice of other small players as well. In order to promote exports, the
government has initiated many schemes out of which Star Export House is one. The exports labelled as Star
Export House get many benefits like preferential clearance of consignments, the sufficiency of self-
declaration for many documentary requirements etc. and many other benefits. Chaman Lal Setia Exports
Limited has more than 80% of the income from exports and it would have made sense for them to apply
for Star Export House recognition.
The annual report of the company for FY2015 does not disclose any meaningful income from trading/other
activities, which would have been the income from exporting the rice of other players. Also, the notes to
accounts do not contain any provision and accounting treatment of such income. Therefore, I believe that
trading of rice of other players might not be a key activity for Chaman Lal Setia Exports Limited. However,
an investor may check on the ground with different rice traders to know more about whether Chaman Lal
Setia Exports Limited is involved in trading of rice.
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2) Negative figure in cash flow from financing:
The proceeds from borrowings of ₹ (-11) cr in cash flow from financing in FY2015, is the cash outflow for
repayment of debt by Chaman Lal Setia Exports Limited. The repayment of the debt is also visible in the
reduction of the total debt from ₹61 cr. in FY2014 to ₹50 cr. in FY2015.
3) Self-Sustainable Growth Rate and the data assumptions:
In our assessment of SSGR, we take the net block as NFA. However, we take 3 years average data for each
of SSGR constituent parameter, which smoothens the abrupt year on year changes.
For FCF and capex calculation, all the requisite data is available in screen excel output.
4) Loan from promoters/directors’:
The company has taken loans from its promoters. As per the FY2015 annual report, page 67, about ₹16.7
cr. of loans were outstanding at March 31, 2015.
An investor would notice that, in the FY2015 annual report at page 51, the company has disclosed that it
has paid an interest of about ₹2.6 cr. to directors for the loans.
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If an investor calculates the effective interest rate, which is being paid by the company to the
promoters’/directors’ for their deposits/loans, then it would be 15.6% (₹2.6 cr./₹16.7 cr.).
An interest rate of 15.6% seems high considering that the company can get cheaper financing from banks
than the interest rate being paid to promoters.
5) Management compensation being high at 12% of profits:
While reading the annual report, an investor would notice that the company seems to be paying a high
salary to its directors/ management compensation in comparison to the profits.
As per the FY2015 annual report, page 39, the company has paid a total of ₹2.3 cr. of remuneration to the
directors. The net profit of the company for FY2015 is ₹19.5 cr. Therefore, the total remuneration of all the
directors should not exceed ₹1.95 cr. (10% of ₹19.5 cr.) from industry benchmark perspective.
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There is another section of the FY2015 annual report of Chaman Lal Setia Exports Limited, where I would
want to draw the attention of the investor:
6) Change in Promoter’s Shareholding:
At page 36 of the FY2015 annual report, the company declares that there is no change in the shareholding
of promoters in FY2015:
Whereas in another section of the annual report, at page 33, where the calculation of promoter’s
shareholding is detailed, it is disclosed that the promoter’s shareholding has reduced by 0.2% during the
year:
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It seems that the error has skipped the eyes of those responsible for making and verifying the annual report
before publishing.
Chaman Lal Setia Exports Limited is currently (August 6, 2016) available at a P/E ratio of about 8,
which does offer a margin of safety in the purchase price as described by Benjamin Graham in his
book The Intelligent Investor.
However, the analysis of FCF indicates that the company does not have a margin of safety in its business.
It might be that due to lack of effective margin of safety in the business, the market might be pricing the
company at a lower price to earnings ratio (P/E ratio). In such a situation, the attractiveness of low P/E ratio
is many times might be proved erroneous and the investor may end up getting into a value-trap.
One should read the analysis of NOIDA Toll Bridge Company Limited to understand the situation of a
typical value-trap.
Read: Analysis: Noida Toll Bridge Company Limited (DND Flyway)
Overall, Chaman Lal Setia Exports Limited seems to be a company growing at a decent pace of 20-23%,
which enjoys a value for its brand Maharani Basmati rice and thereby maintaining its operating profitability
margins. However, the working capital intensive nature of its operations has resulted in most of its reported
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profits getting stuck in its inventory. Therefore, Chaman Lal Setia Exports Limited has to borrow funds
from lenders to meet the gap for its capex and paying a dividend to its shareholders.
An investor should keep a track of working capital management by Chaman Lal Setia Exports Limited to
assess whether it is able to turn itself into a free cash flow positive company. The investor should also keep
in mind issues related to management like higher interest rate on deposits by promoters, high remuneration
when compared to profits etc. while making her final opinion about Chaman Lal Setia Exports Limited.
These are our views about Chaman Lal Setia Exports Limited. However, readers should do their own
analysis before taking any investment-related decision about Chaman Lal Setia Exports Limited.
P.S:
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How to Use Screener.in "Export to Excel" Tool
Screener.in is one of the best resources available to equity investors in Indian markets. It is a website, which
provides the investors with the key information about companies listed on Indian stock exchanges (BSE
and NSE).
We have been using screener.in as an integral part of our stock analysis and investments since last many
years and have been continuously impressed by the tools offered by it that cut down the hard work of an
investor. Some of these features, which are very useful for equity investors are:
 Filtering of stocks based on multiple objective financial parameters. Investors can share these
parameters in the form of “Saved Screens”.
 Company information page, which collates the critical information about a company on one single
page including balance sheet, profit & loss, cash flow, quarterly results, corporate announcements,
links to annual reports, credit rating reports, past stock price movement etc. A scroll down on the
company page provides an investor most of the critical information, which is needed to make a
provisional opinion about any company.
 Email alerts to investors for new stocks meeting their “Saved Screens”
 Email alerts to investors on updates about companies in their watchlist.
All these features are good and have proved very beneficial to investors. However, there is one additional
feature of screener.in, which we have found unique to screener.in. This feature is “Export to Excel”.
“Export to Excel” feature of screener.in lets an investor download an Excel file containing the financial
data of a company on the investor’s computer. The investor can use this excel file with the data to do a
further in-depth analysis of the company.
The most important part of the “Export to Excel” feature is that it allows the investor to customize the Excel
file as per her preferences. The investor can create her own ratios in the excel file. She can arrange the data
as per her preferred layout in the excel file and when she uploads her customized excel file in her account
at screener.in, then whenever she downloads the “Export to Excel” sheet for any company, she gets the data
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of the company in her customized format with all her own ratios auto calculated and presented to her in her
preferred layout.
The ability to get the financial data of any company in our customized format with our key ratios and
parameters auto-calculated has proved very useful to us in our stock analysis. “Export to Excel” feature of
screener.in allows us to analyse our preferred financial ratios of any company at the click of a mouse, which
makes it very easy for us to make a preliminary view about any company within a short amount of time.
Sometimes within a few minutes.
We have been using the “Export to Excel” feature since last many years and it has become an essential part
of our stock analysis. It has helped us immensely while doing an analysis of different stocks and while
providing our inputs to the stock analysis shared by the readers of our website. Investors may read the
“Analysis” articles at our website on the following link: Stocks’ Analysis articles
Over time, more and more investors have started using the “Export to Excel” feature of screener.in and as
a result, we have been getting a lot of queries about it at the “Ask Your Queries” section of our website.
These queries have been ranging from:
 Why is there a difference between the data provided by the screener and the company’s annual
report?
 How does screener calculate/group the annual report data in the “Export to Excel” tool?
 What is the source of the data that screener.in provides to its users?
 How to customize the “Export to Excel” file?
 How to upload the customized file in one’s account at screener.in
We have been replying to such queries based on our understanding of screener.in, which we have gained
by using the website for multiple years and based on our learning by listening to the founders of screener.in
(Ayush Mittal and Pratyush Mittal) in June 2016 at the Moneylife event in Mumbai.
In June 2016, Moneylife arranged a session, “How to Effectively Use screener.in” by Ayush and Pratyush
at BSE, Mumbai in which Ayush and Pratyush explained the features of screener.in in great detail. This
session was recorded by Moneylife and has been made available as a premium feature on their private
YouTube channel.
The recorded session can be accessed at the following link, which would require the viewers to pay to view
it:
https://advisor.moneylife.in/icvideos/
(Disclaimer: we do not receive any referral fee from Moneylife or Screener.in to recommend the above
video link to the session by Ayush and Pratyush. For any further information about the video, investors may
contact Moneylife directly)
As mentioned earlier that we have been replying to investors’ queries related to “Export to Excel” feature
on “Ask Your Queries” section of our website. However, in light of repeated queries from different
investors, we have decided to write this article, which addresses key aspects of “Export to Excel” feature
of screener.in.
The current article contains explanations about:
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 The financial data provided by screener.in in its “Export to Excel” file and its reconciliation with
the annual report of companies
 Steps to customize the “Export to Excel” template by investors
 Steps to upload the customized Excel file on screener.in so that in future whenever any investor
downloads the “Export to Excel” file of any company, then it would have the data in the customized
preferred format of the investor.
Financial Data
The “Export to Excel” file of screener.in contains a “Data Sheet”, which contains the financial data of the
company, which in turn is used to calculate all the ratios and do in-depth analysis. As informed by Ayush
and Pratyush in the Moneylife session, screener.in sources its data from capitaline.com, which is a
renowned source of financial data in India.
The data sheet contains the data of the balance sheet, profit & loss, quarterly results, cash flow statement
etc. about the company.
We have taken the example of a company Omkar Speciality Chemicals Limited (FY2016: standalone
financials) to illustrate the reconciliation of the data provided by screener.in in its “Export to Excel” file
and data presented in the annual report.
Read: Analysis: Omkar Speciality Chemicals Limited
Let’s now understand the data about any company, which is provided by screener.in.
Balance Sheet:
This is the section, where investors get most of the queries as screener.in groups the annual report items
differently while presenting the data to investors. Let’s understand the data in the balance sheet section of
the “Data Sheet” of “Export to Excel” file taking the example of FY2016 data of Omkar Speciality
Chemicals Limited:
Balance Sheet Screener.in "Data Sheet"
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Balance Sheet (Annual Report FY2016)
 Equity Share Capital: It represents the paid up share capital taken directly from the balance sheet
(₹20.58 cr.).
 Reserves: It represents the Reserves & Surplus taken directly from the balance sheet (₹160.87 cr.).
 Borrowings: It represents the entire debt outstanding for the company at March 31, 2016 (₹185.76
cr.). It comprises of the following components:
o Long-Term Borrowings: ₹79.23 cr taken directly from the balance sheet.
o Short-Term Borrowings: ₹95.49 cr. taken directly from the balance sheet.
o Current Liabilities of long-term borrowings: ₹11.04 cr. taken from the notes to the
financial statements. This data is included as part of “Other Current Liabilities” of ₹15.89
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cr. under “Current Liabilities” in the summary balance sheet. In the annual report of Omkar
Speciality Chemicals Limited, “Current Liabilities of long-term borrowings” can be found
in Note No. 7 at page 89 of the FY2016 annual report.
o Sum of these three items: 79.23 + 95.49 + 11.04 = ₹185.76 cr. Investors might find a small
difference for various companies, which might be due to rounding off.
 Other Liabilities: It represents the sum of rest of the liabilities (₹79.52 cr.) like:
o Deferred Tax Liabilities: ₹8.04 cr. taken directly from the balance sheet
o Long - Term provisions: ₹2.42 cr. taken directly from the balance sheet
o Trade Payables: ₹50.52 cr. taken directly from the balance sheet
o Other Current Liabilities net of “Current Maturity of Long Term Debt”: ₹15.89 - ₹11.04
= ₹4.85 cr. is considered in this section.
o Short-Term Provisions: ₹13.69 cr. taken directly from the balance sheet
o Sum of these items: 8.04 + 2.42 + 50.52 + 4.85 + 13.69 = ₹79.52 cr. Investors might find
a small difference for various companies, which might be due to rounding off.
 Net Block: It represents the sum of Tangible Assets (₹ 77.75 cr) and Intangible Assets (0.15 cr.)
taken directly from the balance sheet. The total net block in the “Data Sheet” is ₹77.90 cr, which is
the sum of the tangible and intangible assets.
 Capital Work in Progress: It represents the paid up Capital Work in Progress taken directly from
the balance sheet (₹112.67 cr.).
 Investments: It is the sum of both the Current Investments and the Non-Current Investments
presented in the balance sheet. The Current Investments are shown under “Current Assets” in the
balance sheet whereas the Non-Current Investments are shown under “Non-Current Assets” in the
balance sheet.
o In the case of Omkar Speciality Chemicals Limited, there are no current investments,
therefore, the “Investments” (₹13.91 cr.) in the “Data Sheet” of “Export to Excel” file is
equal to the Non-Current Investments in the balance sheet (₹13.91 cr.)
 Other Assets: It represents (₹242.25 cr.) the sum of rest of the assets:
o Long-term Loans and Advances: ₹26.53 cr. taken directly from the balance sheet
o Inventories: ₹61.78 cr. taken directly from the balance sheet
o Trade Receivables: ₹102.26 cr. taken directly from the balance sheet
o Cash and Cash Equivalents: ₹6.63 cr. taken directly from the balance sheet
o Short-term Loans and Advances: ₹44.14 cr. taken directly from the balance sheet
o Other Current Assets: ₹0.89 cr. taken directly from the balance sheet
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o Sum of these items: 26.53 + 61.78 + 102.26 + 6.63 + 44.14 + 0.89 = ₹242.23 cr. The
difference of ₹0.02 cr. in this sum and the figure in the “Data Sheet” of ₹242.25 cr. is due
rounding off.
It is important to note that certain additional items, if present in the balance sheet, are usually shown by
screener.in as part of “Other Liabilities” or “Other Assets” depending upon their nature (Liability/Assets).
E.g. “Money Received Against Share Warrants” is shown as a part of “Other Liabilities” in the “Data
Sheet” in the “Export to Excel” file.
Profit and Loss:
Let us now study the reconciliation of the profit and loss data of the company provided by screener.in in
the "Data Sheet" of "Export to Excel" and the annual report:
Profit & Loss Statement Screener.in "Data Sheet"
Profit & Loss Statement Annual Report FY2016
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 Sales: It represents only the “Revenue from Operation” of ₹300.02 cr. taken directly from the P&L
statement.
 Raw Material Cost: It represents the sum of Cost of Material Consumed (₹167.09 cr) and Purchase
of stock in trade (₹73.42 cr.) taken directly from the P&L statement.
o Sum of these two items: 167.09 + 73.42 = ₹240.51 cr. Investors might find a small
difference for various companies, which might be due to rounding off. In the case of Omkar
Speciality Chemicals Limited, the difference is ₹0.01 cr.
 Change in Inventory: ₹12.93 cr. taken directly from the P&L statement: “Changes in Inventories
of Finished Goods, Work in progress and Stock in Trade”.
o It is to be noted that if the inventories have increased during the period, then this figure
would be negative and if the inventories have decreased during the period, then this figure
would be positive.
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o Negative figure (increase in inventory) indicates that some material was purchased whose
cost is included in the Raw Material Cost, but this material is yet to be sold as finished
goods because this material is still lying in inventory. That’s why this cost is not the cost
for this period and thus deducted from the expenses of this period.
o Positive figure (reduction in inventory) indicates that some amount of finished goods sold
in this period were created from the raw material purchased in previous periods. Therefore,
the raw material cost of the current period does not include the cost of these goods whereas
the sales of this period include the revenue from these sales. That’s why the cost is added
in the expense of this period.
 Power and Fuel, Other Mfr. Exp, Selling and admin, Other Expenses: together constitute the
“Other Expenses” item of the P&L statement. The breakup of “Other Expenses” is present in the
notes to financial statements in the annual report.
o Sum of these four items in the “Data Sheet”: 1.45 + 4.74 + 4.08 + 5.87 = ₹16.14 cr. is equal
to the “Other Expenses” figure in the P&L statement. Any small difference might be due
to rounding off.
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o Many times, there are 10-30 items, which come under “Other Expenses” in the annual
report and it becomes difficult for investors to segregate, which of these items are grouped
by screener under “Other Mfr. Exp” or under “Other Expenses” or under “Selling and
admin” etc. E.g. in the case of Omkar Speciality Chemicals Limited, the Power and Fuel
costs of ₹1.45 cr. seem to include both the “Factory Electricity charge” of ₹1.28 cr. and
“Water Charges” of ₹0.17 cr.
o Therefore, an investor would need to put some extra effort in the analysis in case the “Other
Expenses” item is a large number.
 Employee Cost: ₹12.93 cr. taken directly from the P&L statement
 Other Income: ₹8.89 cr. taken directly from the P&L statement. For some companies, it might be
shown as non-operating income in the P&L statement.
 Depreciation: ₹4.28 cr. taken directly from the P&L statement.
 Interest: ₹16.52 cr. taken directly from the P&L statement.
 Profit before tax: ₹33.37cr. taken directly from the P&L statement.
 Tax: It represents the sum total of all the tax-related entries in the P&L statement including all
credits, debits and previous year adjustments. E.g. for Omkar Speciality Chemical Limited, the tax
for FY2016 (₹11.16 cr.) represents the sum of:
o Previous year adjustments of ₹0.50 cr.
o Current Tax of ₹6.99 cr.
o Deferred Tax of ₹5.81 cr.
o MAT Credit Entitlement of negative ₹2.14 cr. This effectively adds to the profit of the
company for the period.
o Total of all these entries: 0.50 + 6.99 + 5.81 – 2.14 = ₹11.16 cr. is equal to the “Tax” in
“Data Sheet” in screener.in. Investors might find a small difference for various companies,
which might be due to rounding off.
 Net profit: ₹22.21 cr. taken directly from the P&L statement.
 Dividend Amount: It represents the entire dividend paid/declared/proposed for the financial
year without considering the dividend distribution tax. We may get to know about this figure
from the Reserves & Surplus section of the annual report. E.g. for Omkar Speciality Chemical
Limited, the dividend amount (₹3.09 cr.) in the “Data Sheet” of screener.in has been taken from
the reserves & surplus section of the annual report on page 88:
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Cash Flow:
 The data for three key constituents of the cash flow statement i.e. Cash from Operating Activity
(CFO), Cash from Investing Activity (CFI) and Cash from Financing Activity (CFF) are taken
directly from the cash flow statement in the annual report
 Net Cash Flow is the sum of CFO, CFI and CFF for the financial year.
 Sometimes, investors may find small differences in the data, which might be due to rounding off.
Cash Flow Statement Screener.in "Data Sheet"
Cash Flow Statement Annual Report FY2016
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Quarterly Results:
Quarterly Results Screener.in "Data Sheet"
Quarterly Results March 2017, Company Filings to Stock Exchange
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 Sales: it represents the revenue from operations from the quarterly results filing of the company.
E.g. for Omkar Speciality Chemical Limited, the sales of ₹91.56 cr. in March 2017 quarter
represents the revenue from operations from the March 2017 results of the company.
 Expenses: it represents all the expenses from the quarterly results filing except finance cost and
depreciation. “Expenses” in the “Data Sheet” of screener.in includes the exceptional items if any
disclosed by the companies in their results. E.g. for Omkar Speciality Chemical Limited, the
“Expenses” in the data sheet of the amount of ₹135.84 cr. is the sum of:
o Cost of material consumed: ₹50.09 cr.
o Purchase of stock in trade: Nil
o Changes in Inventories of Finished Goods, Stock in Trade, Work in progress and
Stock in Trade: ₹12.75 cr.
o Employee benefits expense: ₹2.11 cr.
o Other expenses: ₹7.68 cr.
o Exceptional Items: ₹63.21 cr.
o Total of all these entries: 50.09 + 12.75 + 2.11 + 7.68 + 63.21 = ₹135.84 cr. is equal to the
“Expenses” in “Data Sheet” in screener.in. Investors might find a small difference for
various companies, which might be due to rounding off
 Other Income: (₹5.47 cr.) taken directly from the quarterly Statement. For some companies, it
might be shown as non-operating income in the quarterly statement.
 Depreciation and Interest: are directly taken from the “Depreciation and Amortization Expense”
of ₹0.99 cr. and “Finance Costs” of ₹5.14 cr. in the quarterly statement.
 Profit before tax: Loss of ₹55.89cr. taken directly from the quarterly statement.
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 Tax: It represents the sum total of all the tax-related entries in the quarterly statement including all
credits, debits and previous year adjustments. E.g. for Omkar Speciality Chemical Limited, the tax
for March 2017 quarter (positive change of ₹11.59 cr.) represents the sum of:
o Current Tax of negative ₹5.37 cr. This effectively adds to the profit of the company for
the period.
o Previous year adjustments of negative ₹6.75 cr. This also effectively adds to the profit
of the company for the period.
o MAT Credit Entitlement of ₹1.14 cr. This also effectively adds to the profit of the
company for the period.
o Deferred Tax of ₹1.67 cr.
o Total of all these entries: -5.37 – 6.75 – 1.14 + 1.67 = - ₹11.59 cr. is equal to the “Tax” in
“Data Sheet” in screener.in. The negative tax effectively adds to the profit of the company
for the period.
o Investors might find a small difference for various companies, which might be due to
rounding off.
 Net profit: Loss of ₹44.29cr. taken directly from the quarterly statement.
 Operating Profit: represents sales – expenses (as calculated in the description above). E.g. for
Omkar Speciality Chemical Limited, the operating profit for March 2017 quarter (loss of ₹44.28
cr.) represents the impact of:
o Sales of ₹91.56 cr. less Expenses of ₹135.84 cr. = Loss of ₹44.28 cr.
With this, we have come to the end of the current section of this article, which elaborated the reconciliation
of the data presented by screener.in with the annual report and quarterly filings of the companies. Now we
would elaborate on the steps to customize the default “Export to Excel” template sheet provided by
screener.in.
Customizing the Default “Export to Excel” Sheet
Customizing the “Export to Excel” template and uploading it on screener.in in the account of an investor is
the feature, which differentiates screener.in from all the other data sources that we have come across.
We have used premium data sources like CMIE Prowess, Capitaline during educational and professional
assignments in the past as part of the subscription of MBA college and the employer. These premium
sources as well as other free sources like Moneycontrol etc. provide the functionality of data export to excel.
However, the exporting features of these websites are primitive, which provide the data present on the
screen to the investor in an Excel or CSV file on which the investor then needs to separately apply the
formulas etc. to do the analysis, which is very time-consuming.
Screener.in is better than the above-mentioned sources in the terms that it allows investors to customize the
Excel template and upload it on the website. The next time any investor downloads the data of any company
from the screener.in website, the downloaded file has the data of the company along with all the formulas
put in by the investor auto calculated, which saves a lot of time of the investor in doing in-depth data
analysis.
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Steps to customize:
Once the investor downloads the data of any company by clicking the “Export to Excel” button from the
screener.in website, then she gets the data of the company in the default Excel template of screener.in.
The default Excel template contains the following six sheets:
 Profit & Loss

 Quarters
 Balance Sheet
 Cash flows
 Customization and
 Data Sheet
The “Data Sheet” contains the base financial data of the company, which has been described in detail in the
above section of this article. It is not advised to make any change to this sheet otherwise all the data
calculations might become erroneous.
"Customization” sheet contains the steps to upload the customized sheet on the screener website in an
investor’s account. We will discuss these steps in details later in this article.
Rest of the sheets: Profit & Loss, Quarters, Balance Sheet and Cash Flows contain the default ratios along
with formulas etc. provided by the screener.in team for the investors.
An investor may change all the sheets except the Data Sheet in any manner she wishes. She may delete all
these sheets, change formulas of all the ratios, put in her own ratios, create entirely new sheets and create
her own preferred ratios and formulas in the new sheets by creating direct linkages for these new formulas
from the base data in the “Data Sheet”. The investor may do any amount of changes to the excel sheet until
she does not tinker with the Data Sheet.
Given below is the screenshot of the “Profit & Loss” sheet of the default “Export to Excel” template
provided by screener.in
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Given below are the changes that we have done to the “Export to Excel” template to customize it as per
our preferences by creating a new sheet: “Dr Vijay Malik Analysis”
(For large resolution image of this sheet: Click Here)
Further Reading: Stock Analysis Excel Template (Screener.in): Premium Service

The above-customized template helps us to do a very quick assessment of any company on the checklist of
parameters that we use for stock analysis. This is because this customized template provides us with our
preferred ratios etc. in one snapshot like a dashboard, which makes decision making very quick and easy.
Readers would be aware that we use a checklist of parameters, which contains factors from Financial
Analysis, Business Analysis, Valuation Analysis, Management Analysis and Margin of Safety calculations.
The customized template screenshot shared above allows us to analyse the following parameters out of the
checklist in a single view:
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Financial Analysis:
 Sales growth
 Profitability
 Tax payout
 Interest coverage
 Debt to Equity ratio
 Cash flow
 Cumulative PAT vs. CFO
Valuation Analysis:
 P/E ratio
 P/B ratio
 Dividend Yield (DY)
Business Analysis:
 Conversion of sales growth into profits

 Conversion of profits into cash
 Creation of value for shareholders from the profits retained: Increase in Mcap in last 10 yrs. >
Retained profits in last 10 yrs.
Management Analysis:
 Consistent increase in dividend payments
Margin of Safety:
 Self-Sustainable Growth Rate (SSGR): SSGR > Achieved Sales Growth Rate
 Free Cash Flow (FCF): FCF/CFO >> 0
Operating Efficiency Parameters:
 Net Fixed Asset Turnover Ratio (NFAT)

 Receivables Days
 Inventory Turnover Ratio
The ability to see the above multiple parameters in one snapshot for any company for which we download
the “Export to Excel” file, allows us to have a quick opinion about any company that we wish to analyse.
It saves a lot of time for the investors as she can easily determine, which companies have the requisite
strength that is worth spending more time on them.
We believe that to fully benefit from the great resources available to the investors today, it is essential that
investors should use screener.in to the fullest and therefore must customize their own “Export to Excel”
templates as per their preference and upload it to their accounts at the screener.in website.
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Uploading the Customized “Export to Excel” Sheet on Screener.in Website
The “Customization” sheet of the default “Export to Excel” template file provided by screener.in contains
the steps to upload the customized Excel file on the screener.in website. We have described these steps
along with the relevant screenshots below for the ease of understanding:
 Once the investors have customized the excel file as per their preference, then they should rename
it for further reference. The excel file that we have used for illustration below is our customized
excel template, which is named: “Dr Vijay Malik Screener Excel Template Version 1.6
(Unlocked)”
 Once the investor has saved her customized excel file with the desired name, then she should visit
the following link in the web-browser: http://www.screener.in/excel/. She would reach the
following screen:
 It is required that the investor is logged in the screener.in website before she visits the above
link. Otherwise, the browser will direct her to the login/registration page like below:
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o If the investor is directed to the above page to register and she does not have an account
on screener.in website, then she should create her new account by providing her details
on the above page and clicking “Register”
o However, if she already has an account on screener.in, then she should click on the
button “Login here”. In the next page, the investor would be asked to provide her
email and password to log in and after successfully logging in, the website will take
her to the Dashboard/home page of screener.in
o Now the investor would have to again visit the page: http://www.screener.in/excel/ to
upload the customized Excel. To avoid this duplication, it is advised that the investors
should visit the page: http://www.screener.in/excel/ after they have already logged in
the screener.in the website.
 Once the investor is at the Excel upload page, then she should click the button: “Choose File”
 Upon clicking on the button “Choose File”, a new pop-up window will open. In the newly opened
window, the investor should browse to the folder where she had saved her customized excel sheet
and select it:
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 Upon selecting the customized Excel file of the investor, in our case the file “Dr Vijay Malik
Screener Excel Template Version 1.6 (Unlocked)”, the investor should click on the button “Open”
in this pop-up window.
 Upon clicking the button “Open”, the pop-up window will close and the investor would see that
on the web page, there is a summary of the name of her customized excel file near the “Choose
File” button.
 The presence of the file name summary indicates that the correct file has been selected by the
investor for the upload.
 Now, click on the button “Upload” on the webpage.
 Clicking on the “Upload” button will upload the excel file customized by the investor in her
account on the screener.in website and take her to the homepage/dashboard of the screener.in
website.
From now on whenever the investor downloads the data of any company from screener.in by clicking the
button “Export to Excel”, then she would get the data in the format prepared by her in her customized Excel
file containing all her custom ratios and formulas, formatting and the layout as selected by her.
This concludes all the steps, which are to be taken by an investor while uploading her customized excel file
on the screener.in website.
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Updating/Changing the already uploaded customized sheet:
 In future, if the investor wishes to make more changes to the excel file, then she can simply do all
the changes in the Excel file without making any changes to the “Data Sheet’ and save it.
 She should then repeat the above steps to upload the new excel file in her account on the screener.in.
 Uploading the new file will overwrite the existing template and henceforth, screener.in will provide
her with the data in her new Excel file format upon clicking the “Export to Excel” button for any
company.
Removing the customizations:
 However, in future, if the investor wants to delete her customized excel file and go back to original
default excel template of screener, then she again would need to visit the following
link: http://www.screener.in/excel/ and click on the button “Reset Customization”
 Upon clicking the button “Reset Customization”, the web page will ask “Are you sure you want
to reset your Excel customizations?”
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 If the customer is sure about deleting her customized excel file, then she should click on the button
“Confirm Excel Reset” on the web page.
 Clicking the “Confirm Excel Reset” button will delete the customized Excel file from the
investor’s account and reset the excel file to the default Excel template file of screener described
above.
 From now onwards, whenever the investor downloads the data of any company from screener.in
by clicking the button “Export to Excel”, then she would get the data in the default Excel format of
screener.in.
There is no limit on the number of times an investor can upload her customized excel file or change it or
delete it by resetting the customization. Therefore, an investor may do as many changes and iterations as
she wants until she gets her preferred excel sheet prepared, which would help her a lot in her stock analysis.
With this, we have come to an end of this article, which focussed on the key feature of the screener.in
“Export to Excel”, the reconciliation of the financial data in the “Data Sheet” with the annual report,
quarterly results file etc. and the steps to customize the Excel file and upload the customized Excel file in
the investor’s account on screener.in.
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Premium Services
At www.drvijaymalik.com, we provide following premium services to our readers:
1. Follow Dr Vijay Malik's Portfolio with Latest Buy/Sell Transaction Updates

2. "Peaceful Investing" Workshop-on-Demand
3. Stock Analysis Excel Template (compatible with Screener.in)
4. E-book: “Peaceful Investing – A Simple Guide to Hassle-free Stock Investing”
5. E-books: “Company Analyses” : Live Examples using Peaceful Investing Approach
6. "Peaceful Investing" Workshops
The premium services may be availed by readers at the following dedicated section of our website:
http://premium.drvijaymalik.com/
Brief details of each of the premium services are provided below:
1) Follow Dr Vijay Malik's Portfolio with Latest Buy/Sell Transaction Updates
This premium service has been commenced as an information source for the investors who wish to know
about the stocks that we are buying currently or the stocks that we have sold recently. This is purely an
information source and services like advising individual clients on portfolio allocation etc. are not a part of
this service.
Our stock portfolio has its origins in August 2011, when we invested our initial savings from the first job
after MBA (2009-11). We have been able to invest in some of the fundamentally good stocks at the initial
stage of their growth phase, which were later on discovered by research/brokerage houses and witnessed
investments from institutional investors.
The recognition of stocks by key market players have helped to generate significant gains for the portfolio
as the underlying stocks got re-rated and increased in value. A few such examples are Ambika Cotton Mills
Limited, Vinati Organics Limited, and Mayur Uniquoters Limited etc.
We started investing in Ambika Cotton Mills Limited in September 2014, when it was trading at very low
valuation levels. The stock was later on identified by the well-known value investor Prof. Sanjay Bakshi,
who invested in it through his fund “ValueQuest India Moat Fund Ltd” in March 2015.
Similarly, other stocks like Vinati Organics Limited and Mayur Uniquoters witnessed increased FII buying
and thereby generated good returns by an increase in share price. The increased FII buying led to the P/E
ratio of Mayur Uniquoters increasing from 6.6 to above 30 and P/E ratio of Vinati Organics increasing from
7.7 to above 20. This increase in valuations led to significant increase in the contribution of these stocks in
the portfolio returns.
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Updates on portfolio performance as on March 31, 2017:
 During FY2017, the portfolio has generated returns of 173.55% against an increase in BSE Sensex
of 16.93%.
 I started building the portfolio on August 8, 2011, on joining my first job after MBA (2009-11).
Since then, the portfolio has generated an annualized return (CAGR) of 73.17%.
The below table contains the yearly performance history of the portfolio:
Readers/investors who wish to know about the details of our portfolio and the recent transactions with
regular updates may subscribe to this premium service for one year or two years at the following link:
The subscription service for “Follow My Portfolio” involves the following features:
1. Update by email about all the future transactions (buy as well as sell) in my portfolio at the end of
the day of the transaction (after market closing hours) during the period of the subscription. The
email update would contain the details of the stock bought/sold and the price at which the
transaction was done.
2. Access to the premium section containing updated details of my portfolio and the list of all the
transactions from the start of this service (July 30, 2016) until date during the subscription period,
at the following link: http://premium.drvijaymalik.com/portfolio/
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The information about the composition of the portfolio to be available in the following format:
% age of
portfolio Lowest Highest
Name of the (current Avg Cost First Buy Latest Buy Price Buy Price
S. No. Company price) Price (₹) Date Buy Date (₹) (₹)
1 ABC Limited xx% xx.xx dd-mm-yy dd-mm-yy xx.xx xx.xx
2 DEF Limited xx% xx.xx dd-mm-yy dd-mm-yy xx.xx xx.xx
3 XYZ Limited xx% xx.xx dd-mm-yy dd-mm-yy xx.xx xx.xx
The details of all the transactions from the start of this service (July 30, 2016) until date in my portfolio to
be available in the following format:
Name of the
S. No. Date Company Buy/Sell Share Price (₹)
1 dd-mm-yy XYZ Limited Buy xx.xx
3 dd-mm-yy ABC Limited Buy xx.xx
5 dd-mm-yy DEF Limited Buy xx.xx
Whenever I will do any buy/sell transaction in my portfolio, an email notification would be sent to
subscribers at the end of the day, which would contain the information in the following format:
Date | Name of the Company | Buy/Sell | Price (₹)
This premium service has been commenced as an information source for the investors who wish to know
about the stocks that I am buying currently or the stocks that I have sold recently.
However, there are certain key points of this service:
1. The intimation to investors would always be after the closing of the market hours on the day on
which I have done any buy/sell transaction.
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2. There is no provision of any research report/recommendation note to be published/made available

to investors as this service is to provide a glimpse to the investors into my personal portfolio
management and related actions. For more details, please read the answers to the frequently asked
question (FAQs) below.
3. This service has been designed to act as an information source to subscribers about the composition
of my portfolio and the stocks that I am buying/selling currently. This is purely an information
source and services like advising individual clients on portfolio allocation etc. is not a part of this
service.
4. I would not be able to provide responses to questions about specific stocks in the portfolio and
specific buy/sell decisions.
5. This service does not include intimating the subscribers in advance about the buy/sell decisions that
I would take about specific stocks.
Investors who wish to avail this service may subscribe by clicking on the following link:
Key instructions to subscribers:
1. This is a subscription service. The access to premium features of this service would lapse after
subscription period gets over unless the renewal is done.
2. Once this premium service is availed, then there is no provision of any refund of the fee or the
cancellation of the service during the period of subscription.
3. Please take note that "Follow My Portfolio" service is an information service and not an
investment/portfolio advisory service.
P.S: Please read the frequently asked questions (FAQs) on the following product details page to know about
the key aspects and clarifications about this service:
http://premium.drvijaymalik.com/product/follow-my-portfolio-with-latest-buysell-transactions-
updates/
2) "Peaceful Investing" Workshop-on-Demand
This service allows access to the page “Workshop on Demand” containing the videos of full-day
fundamental investing workshop elaborating our stock analysis approach “Peaceful Investing”.
The workshop covers all the aspects of stock investing like how to shortlist and analyse stocks in detail,
which stocks to buy, what price to pay, how many stocks to buy, how to monitor the stocks, when to
sell a stocketc. The workshop focuses on key concepts needed for stock analysis both for a beginner and
seasoned stock investor using live companies as examples.
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"Peaceful Investing" Workshop-on-Demand has been launched primarily with two objectives:
1. To allow the investors across the world to watch the complete full day “Peaceful Investing”
workshop ONLINE on their laptop/mobile phone at any time & place of their convenience at their
own pace, as many times as they can, during the period of subscription.
2. To allow an opportunity to past participants of “Peaceful Investing” workshops to revise the
workshop and refresh the learning.
You can watch FREE Sample Video (16 min) of the workshop where we have discussed the basics of
balance sheet along with fund flow analysis on the following link:
"Peaceful Investing" Workshop-on-Demand
Subscription to this service provides access to the premium page: "Workshop on Demand", which
contains the videos of the full-day workshop having a total duration of about 9hr:30m.
These videos are divided into following subsections for easy access and revision:
1. The Foundation:
 A) Introduction to Peaceful Investing (24m:31s)
 B) Demonstration to Screener.in website and its Export to Excel Feature (28m:56s)
 C) Using Credit Rating Reports for Stock Analysis (38m:11s)
2. Financial Analysis:
 A) Analysis of Profit & Loss Statement (1h:12m:37s)
 B) Analysis of Balance Sheet (27m:14s)
 C) Analysis of Cash Flow Statement (27m:24s)
 D) Combining Different Financial Statements (22m:40s)
3. Business & Industry Analysis (21m:55s)
4. Valuation Analysis (20m:17s)
5. Margin of Safety Assessment: Deciding what price to pay for a stock (1h:08m:03s)
6. Management Analysis (1h:15m:07s)
7. Portfolio Management: (How to monitor the stocks, How many stocks to own, When to sell, Stocks
which are ideal for Part Time investors) (51m:54s)
8. Q&A (1h:24m:38s)
We believe that a person does not need to have an educational background in finance to be a good stock
investor and the workshop has been designed keeping this in mind. The workshop explains the financial
concepts in simple manner, which are easily understood by investors from non-finance background.
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3) Stock Analysis Excel Template (compatible with Screener.in)
We use a customized excel template to analyse stocks as per our preferred parameters by using the data
downloaded from screener.in website. The template acts as a dashboard of key analysis parameters, which
help us in making an opinion about any stock within a short amount of time (sometimes within a few
minutes). We have used this excel template and the analysis output in many stock analysis articles published
on this website.
You may read about various stock analysis articles written by analyzing companies using the excel template
in the "Author's Response" segments on the following link: Stock Analysis Articles
In the past, many readers/investors have asked us to provide the copy of this excel file. However, until now,
we have not put the excel template in the public domain for download. We have always advised investors
to customize the standard screener excel template as per their own preferences and their learning about
stock analysis from different sources. Customization of excel template on her own can be a very good
learning exercise for any investor.
However, due to repeated requests for sharing the excel template, we have decided to make the customized
excel stock analysis template, which is compatible with screener.in and provides stock data as a dashboard,
as a paid download feature.
Investors who wish to get the customized excel stock analysis template may download it from the following
link:
The structure and sample screenshots of the stock analysis excel template file are as below:
1) Analysis sheet:
This sheet presents values of more than 40 key parameters in the form of a dashboard. These parameters
cover analysis of profitability, capital structure, valuation, margin of safety, cash flow, creation of wealth,
sources of funds, growth rates, return ratios, operating efficiency etc.
Having a quick look at these parameters in the form of the dashboard helps in quick assessment about the
company, its historical performance and its current state of affairs.
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Screenshot of large resolution output of the Analysis Sheet: Click Here
2) Description sheet:
This sheet contains details about description and interpretation of about each of the more than 40
parameters. It is advised that investors should read this sheet in detail before starting with the analysis of
companies by using this template.
Screenshot of the Description Sheet: Click Here
3) Instructions sheet:
This sheet contains details about the steps by step approach to getting started with this sheet on the
screener.in website, change in settings for Microsoft Excel to resolve common issues and other instructions
for the buyers.
Screenshot of the Instructions Sheet: Click Here
See the step by step guide for uploading the excel sheet on Screener.in with screenshots: How to Use
Screener.in Export to Excel tool
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4) Version history:
This sheet contains details about the changes/updates made in each of the new versions of the sheet.
You may read about various stock analysis articles and see the screenshots of the excel template in the
"Author's Response" segments on the following link: Stock Analysis Articles
Users'/Investors' Feedback about this Stock Analysis Excel Template:
The stock analysis excel template was initially made available for download on July 11, 2016. Hundreds of
investors have downloaded the same and quite a few of them have provided their inputs about the excel
template. Here are some of the responses sent by the users of this template:
“This is a great tool for getting down to the heart of a company's financials.
When I was doing my MBA at NYU I had a valuation professor who encouraged everyone in the class of
60 to make their own customized sheet similar to what you've made. I was a fan of Buffett so I remember
keeping some of his metrics in view and creating a sheet! Of course, yours is head and shoulders above
anything else I've seen - kudos!”
- Uday (via email)
The excel template is quite useful. It makes things easy for us in not doing the hard labour and calculating
all vital data for each company separately.
- Ashish
“Thank you Dr. Malik. The tool is indeed very useful and super-fast to use. God bless you for creating it!
Please use this as part of your training to perform financial analyses of different types of companies in
different performance contexts across industries. I am sure others will also love it.”
- Harsh (via email)
"Dear Sir, I have downloaded the excel. It's simply AMAZING, EFFORTLESS and AWESOME. Kudos
to you and your team for wonderful creation.”
- Vikram (via email)
“Very good tool created for Stock analysis. Very helpful. Thank you sir”
- Jiten (via email)
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For further details please read this article:
http://premium.drvijaymalik.com/product/stock-analysis-excel-template-screener-in/
P.S: Please read all the instructions on the payment page, carefully before making the purchase of the excel
template.
4) e-book: “Peaceful Investing – A Simple Guide to Hassle-free Stock Investing"
www.drvijaymalik.com has a huge collection of articles, which are focused on simplifying the stock market
investing for common investors. These articles cover different aspects of stock investing like:
1. Deciding the suitable approach to stock market investing

2. Shortlisting companies for analysis
3. Detailed guidelines for conducting in-depth stock analysis covering: financial analysis, valuation
analysis, business & industry analysis, management analysis, operating efficiency analysis etc.
4. Ready checklists as a ready reference while doing stock selection
5. Deciding about the price to pay for any stock
6. Deciding when to sell the stocks in the portfolio
7. Methods to check accounting juggleries by companies
8. Guidelines for creation a portfolio of stocks with ideal number of stocks
9. Guidelines for monitoring stocks in the portfolio
and many more.
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All these articles are separate write-ups, which are available to all the readers at www.drvijaymalik.com.
A lot of readers have asked whether there exists an e-book compiling all these articles, which could be
downloaded by the readers so that the articles could be read in a sequence even when the reader is offline.
The key stock investing articles were collected as a book and offered as a key study material guide to each
of the participants of all the “Peaceful Investing” workshops being conducted by us.
The feedback from the workshop participants about the book has been very good. The readers have found
the book very useful to learn stock analysis.
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Many other readers of www.drvijaymalik.com have asked for this book to be made available even for the
members who have not be able to attend the “Peaceful Investing” workshop.
As a result, the book “Peaceful Investing – A Simple Guide to Hassle-free Stock Investing” has been made
available as a premium download to the investors. Investors who wish to get the book may download it from
the following link:
For details of all the articles contained in the book, please read this article.
5) E-books: “Company Analyses”: Live Examples using Peaceful Investing Approach
www.drvijaymalik.com has a huge collection of stock analysis articles, where we have provided our views
about different companies as inputs to queries asked by readers. As on date, the number of such articles is
nearing a hundred.
Each of these articles contains learning arrived after conducting the in-depth analysis of companies:
 their financial performance
 detailed study of historical annual reports
 credit rating reports
 corporate communications
 peer comparison
These articles contain analysis of the companies on parameters like financial, business, operating efficiency
analysis. The articles have a special focus on the in-depth management analysis along with assessing margin
of safety in the business model of companies.
A lot of readers have provided very good feedback about these analysis articles. Readers have appreciated
the help, which these articles have provided the investors in understanding the analysis process that can be
replicated by them while conducting their own stock analysis.
All these stock analysis articles are separate write-ups, which are available to all the readers
at www.drvijaymalik.com.
A lot of readers have asked whether there exists an e-book compiling all these articles, which could be
downloaded by the readers so that the articles could be read in a sequence even when the reader is offline.
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As a result, we have created the books (PDF) for these analyses articles, which occupy multiple volumes
and have made it available as a premium download to the investors. Investors who wish to get the books
may download it from the following link:
Feedback received from readers of these books is mentioned below:
6) “Peaceful Investing” Workshops
“Peaceful Stock Investing” workshops are full day workshops (9 AM to 6 PM) held on selected Sundays.
The workshops are focused on stock selection and analysis skills, which would make us much more
confident about our stock decisions. It ensures that our faith would not shake with day to day market price
fluctuations and we would be able to reap true benefits of stock markets to fulfil our dream of financial
independence.
The workshops focus on the fundamental stock analysis of stocks with a detailed analysis of various sources
of information available to investors like annual reports, quarterly results, credit rating reports and online
financial resources.
You may learn more about the workshops, pre-register/express interest for a workshop in your city by
providing your details on the following page:
Pre-Register & Express Interest for a Stock Investing Workshop in Your City
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Disclaimer & Disclosures
Registration Status with SEBI:
I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013
Details of Financial Interest in the Subject Company:
Currently, on the date of publishing of this book, August 19, 2017, I do not own stocks of any of the
companies discussed in the detailed articles in this book except Ambika Cotton Mills Limited.
This book contains our viewpoint about different companies arrived at by studying them using our stock
investing approach “Peaceful Investing”.
The opinions expressed in the articles are formed using the data available at the date of the analysis from
public sources. As the data of the company changes in future, our opinion also keeps on changing to factor
in the new developments.
Therefore, the opinions expressed in the articles remain valid only on their respective publishing dates and
would undergo changes in future as the companies keep evolving while moving ahead in their business life.
These analysis articles are written as a one off opinion snapshots at the date of the article. We do not plan
to have a continuous coverage of these companies by updating the articles or the book after future quarterly
or annual results.
Therefore, we would not update the articles or the book based on the future results declared by the
companies.
Therefore, we recommend that the book and the articles should be taken as an illustration of practical
application of our stock analysis approach “Peaceful Investing” and NOT as a research report on the
companies mentioned here.
The articles and the book should be used by the readers to improve their understanding of our stock analysis
approach “Peaceful Investing” and NOT as an investment recommendation to buy or sell stocks of these
companies.
All the best for your investing journey!
Regards,
Dr Vijay Malik
Regd. with SEBI as an Investment Adviser
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DrVijayMalik Company Analyses Vol 2

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www.drvijaymalik.

Company Analyses (Vol. 2)

Copyright © Dr Vijay Malik.

All rights reserved.

This e-book is a part of premium/paid services of www.drvijaymalik.com

Printed in the Republic of India

Important: About the book

All the best for your investing journey!

Regd. with SEBI as an Investment Adviser

Important: About The Book .......................................................................................................................... 2

1) Granules India Limited

Granules India Limited is a Hyderabad-based Indian integrated pharmaceutical manufacturer, which

Company website: Click Here

Financial data on Screener: Click Here

Let us analyse the past financial performance of Granules India Limited.

Self-Sustainable Growth Rate (SSGR):

1) High Promoter’s Salaries:

3) Non-Current Investments for Trade:

2) Srikalahasthi Pipes Limited

Company website: Click Here

Financial data on Screener: Click Here

1) Promoter managers’ remuneration:

2) Issues with the promoter group:

3) New Ferro Alloy project:

4) Trading of goods (Coal):

5) Related party transactions:

3) Indo Count Industries Limited

Company website: Click Here

Financial data on Screener: Click Here

An investor would notice two things from the above chart:

USA is not remitting the funds to India.

1) Allotment of warrants to promoters:

This is an example of someone having her cake and eating it too.

2) Revaluation of certain company assets:

Alternatively, it can also be interpreted as a situation where:

 damage to goods during sea & port transport,

Arvind Limited (FY2016 annual report)

Trident Limited (FY2016 annual report)

5) High commission in Promoters’ Salary:

4) Ruchira Papers Limited

Company website: Click Here

Financial data on Screener: Click Here

1) Salary of MD & whole time directors exceeds the statutory ceiling:

As per the act:

4) Related party transactions:

5) TVS Srichakra Limited

Company website: Click Here

Financial data on Screener: Click Here

Self-Sustainable Growth Rate (SSGR):

6) Poddar Pigments Limited

Company website: Click Here

Financial data on Screener: Click Here

Also Read: Q&A Analysis: Ahmednagar Forgings Limited

Also Read: Q&A Analysis: Amtek India Limited

Lets’ address other specific queries raised by the readers:

2) No final dividend for FY2016

3) The increase in the unpaid dividends:

4) Deferred Tax Liabilities:

5) Investment in shares of other companies:

6) Increase in capital advances

7) MBL Infrastructure Limited

Company website: Click Here

Financial data on Screener: Click Here