DrVijayMalik Company Analyses Vol 1

www.drvijaymalik.
com
1|Page
Copyright © Dr Vijay Malik. All Rights Reserved.
www.drvijaymalik.com
Company Analyses (Vol. 1)

Live Examples of Company Analysis using “Peaceful Investing”
Approach
By
Dr Vijay Malik
2|Page
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
3|Page
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 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
4|Page
Table of Contents
Important: About the book .......................................................................................................... 2
1) Omkar Speciality Chemicals Limited ................................................................................... 6
2) MRF Limited ......................................................................................................................29
3) Wonderla Holidays Limited ................................................................................................46
4) Divi’s Laboratories Limited .................................................................................................56
5) Caplin Point Laboratories Limited ......................................................................................70
6) Nandan Denim Limited.......................................................................................................91
7) Kovai Medical Center and Hospital Limited ......................................................................117
8) Nile Limited ......................................................................................................................128
9) Bhageria Industries Limited ..............................................................................................145
10) Ishan Dyes & Chemicals Limited.......................................................................................164
11) AksharChem (India) Limited ..............................................................................................179
12) Machino Plastics Limited...................................................................................................194
How to Use Screener.in "Export to Excel" Tool .......................................................................207
Premium Services ...................................................................................................................229
Disclaimer & Disclosures ........................................................................................................241
5|Page
1) Omkar Speciality Chemicals Limited
Omkar Speciality Chemicals Limited is an Indian manufacturer dealing in specialty chemicals and pharma
intermediates ranging from organic, inorganic and organo-inorganic intermediates products.
Its products include derivatives of Molybdenum, Selenium, Iodine, Cobalt, Bismuth, Tungsten, Tartaric
acid etc. The products are used in various industries like pharmaceutical, chemicals, glass, cosmetics,
ceramic pigments and cattle & poultry feeds and are exported to Europe, Canada, Asia, South America and
Australia.
Company website: Click Here
Financial data on Screener: Click Here
Omkar Speciality Chemicals Limited used to report only standalone financials until FY2010 when it made
its first acquisition and purchased Rishichem Research Limited. Therefore, from FY2011, the company
started reporting both standalone and consolidated financials.
We believe that while analysing any company, the investor should always look at the company as a whole
and focus on financials which represent the business picture of the entire group. Therefore, while analysing
Omkar Speciality Chemicals Limited, we have analysed standalone financials until FY2010 and
consolidated financials from FY2011 until FY2016.
It might be noted that during FY2017, the company has undergone a merger and demerger scheme in which
the speciality chemicals business of the company and its subsidiaries has been consolidated in Omkar
Speciality Chemicals Limited whereas the veterinary active pharmaceutical ingredients (API) business of
the group has been transferred to Lasa Supergenerics Limited. Therefore, from FY2017 onwards, the
reported financial numbers would not be comparable with the reported financials of FY2016 and before.
However, we will briefly analyse FY2017 results in the later part of this article.
Initially, we would focus on the financial performance of Omkar Speciality Chemicals Limited for the last
10 years (FY2007-16) to understand the key business practices and the impact of management decisions on
the business and their efficiency.
6|Page
Omkar Speciality Chemicals Limited has been growing its sales since last 10 years (FY2007-16) at a brisk
pace of about 30-35% year on year. It has witnessed its sales revenue grow from ₹37 cr. to ₹413 cr. in
FY2016, which is a significant growth. The investor would also notice that this growth has been achieved
by Omkar Speciality Chemicals Limited while maintaining its profitability.
7|Page
Over the years, the operating profitability margins of Omkar Speciality Chemicals Limited have been
constant at 19-20%. It is a good feature as the company has been facing fluctuations in the raw material
prices during this whole period. Stable operating profitability margins over the years indicate that the
company is able to pass on the changes in the raw material costs to its customers/end users and able to
protect its margins. It is advised that an investor should always try to find out the reasons for stable
profitability margins so that she might be comfortable with the level of sustainable profitability margins
going ahead.
While analysing the publically available information about the company, an investor comes across the
comments of the management (Mr. Pravin Herlekar) in the conference call held on April 12, 2016, where
it has clarified the reasons for sustained profitability margins:
The management clarifies that Omkar Speciality Chemicals Limited does not have long-term contract with
its customers and all the sale transactions are on spot sales basis where the company charges its customers
on a formula (cost plus) basis and therefore, it is able to pass on any changes in the raw materials to its end
customers and is able to maintain its profitability margins.
The lack of long-term contracts though has benefited the company in terms of maintained profitability.
However, the lack of long-term contracts also exposes the company to the potential risk of its customers
shifting to competitors at a very short notice.
Until now, Omkar Speciality Chemicals Limited has maintained that it has a competitive advantage over
its competitors in terms of its research and development ability of consistently producing newer chemicals
to meet the need of customers as well being among the top producers in the world for its key products.
However, it remains to be seen whether, in light of fiercely competitive business environment, the company
is able to maintain its strong position going ahead.
Omkar Speciality Chemicals Limited has been investing in expanding its operating capacity since last few
years and as per the management has created a lot of spare capacity, which would help it maintain the
business growth in the coming years.
An investor would notice that though Omkar Speciality Chemicals Limited has been able to maintain stable
operating profitability margins, it has witnessed a decline in its net profitability margins (NPM) over the
years. NPM has reduced from 10% in FY2013 to 7% in FY2016. The key reason for the decline in the NPM
8|Page
has been the consistent increase in the interest expense, which has increased from ₹8 cr. in FY2013 to ₹20
cr. in FY2016.
The interest expense has increased primarily on account of the debt taken by the company to fund the
increase in the operating capacity discussed above. We would discuss more about the operating capacity
and its funding in the later part of this article.
Omkar Speciality Chemicals Limited has been paying taxes, which have been in line with the standard
corporate tax rate over the years except in the FY2015 and FY2016 where the company accounted for taxes
at 14% and 42% respectively. The company has clarified about the difference in the tax rates in these two
years, which is on account of the treatment of R&D expenses and creation of related deferred tax items, in
its annual report for FY2016, page 47:
“Pursuant to the provisions of Section 35(2AB) of the Income Tax Act, 1961, the Company’s
R&D facilities are duly approved by DSIR and the Company is entitled to claim additional
deduction on account of expenses incurred on R&D. During the last year, while making the
provision for tax, the said entitlement certificate was still awaited hence the provision was
made without considering the said benefit and the same was adjusted while making provisions
for tax for FY2014-15. However, the necessary benefit of the additional deduction was claimed
by the Company while fi ling the Income tax return for FY 2014-15. Due to this, the provision
entry for Deferred Tax was not made while finalizing the accounts for FY 2014-15. Impact of
this was taken during the current year, resulting in the higher tax provision during the year.”
An investor would notice that the net fixed asset turnover ratio (NFAT) of Omkar Speciality Chemicals
Limited, which has declined over the years. NFAT has reduced from 5.97 in FY2009 to 2.21 in FY2015.
The key reason for such decline in NFAT over the years is primarily the investments in increasing
manufacturing capacity, which has taken a few years to get completed.
The operating capacities have started to become operational in recent years and therefore, the NFAT has
increased from 2.21 in FY2015 to 2.67 in FY2016.
As per the publically available data, Omkar Speciality Chemicals Limited has faced a lot of delays in the
commencement of its Unit 5 at Chiplun, Ratnagiri. Though nearly complete in structure, the unit was
initially stuck for the lack of environment approval. As per the management, Omkar Speciality Chemicals
Limited has received the environment approval in January 2016 and is currently working on making
additional effluent treatment facilities at Unit 5, which is suggested by the authorities as part of the
environmental approvals.
If Omkar Speciality Chemicals Limited is able to complete the construction of additional facilities and start
the operations at Unit 5 soon, then it might witness an improvement in the NFAT going ahead in near future.
When an investor analyses the inventory turnover ratio (ITR) of Omkar Speciality Chemicals Limited, then
she would observe that the ITR has been declining over the years from 5.1 in FY2008 to 3.1 in FY2015. At
the same time, the receivables days of Omkar Speciality Chemicals Limited have also witnessed sharp
increase from 57 days in FY2008 to 122 days in FY2014.
9|Page
The management has also realized that its working capital management has left a lot to be desired and as a
result, it has communicated to the stakeholders that it has now made improving its working capital position
is one of the key focus areas. Probably, as a result of management’s efforts, the inventory turnover ratio has
improved to 4.4 and the receivables days have improved to 91 days in FY2016. As a result, the working
capital days have reduced to 175 days in FY2016 from the high of 241 days in FY2014.
An investor should notice that while calculating working capital (WC) days, we take into account only the
inventory turnover and receivables days and do not factor in payable days i.e. (WC = Inventory days +
Receivables days) instead of (WC = Inventory days + Receivables days – Payable days). This is because
when a company is in liquidity stress, the first counterparty to which is delays payments is its vendors,
which in turn leads to increase in payable days. An investor would appreciate that increase in payable days
would lead to a decline in WC days if it is factored in the WC days formula and a parameter that is indicating
the supposedly deteriorating position of the company might end up leading the investor to conclude that the
WC days are improving.
An investor would notice that in FY2016, out of the total cash flow from operations of ₹67 cr. reported by
Omkar Speciality Chemicals Limited, about ₹37 cr. is only on account of increase in payables as witnessed
from the annual report for FY2016, page 102:
Therefore, an investor should keep a close watch on the working capital position including the inventory
turnover and receivables days to monitor the performance of the company going ahead.
The deterioration in the working capital position has been a significant development for Omkar Speciality
Chemicals Limited as it has led to a lot of funds/liquidity of the company being stuck in the working capital
during a period, which has coincided with the period when it was doing significant capital expenditure to
increase its operating capacity. As a result, the company has faced a liquidity crunch in the recent years and
has to take some drastic steps to handle the liquidity issues. We will discuss more about these issues in the
later part of this article.
Self-Sustainable Growth Rate (SSGR):
The investor would notice that Omkar Speciality Chemicals Limited has an SSGR of about 10-15% in the
years whereas it has been growing its sales revenue at a growth rate of 25-30% in last 5-7 years.
Upon reading the SSGR article, an investor would appreciate that if a company attempts to grow at a sales
growth rate, which is higher than the SSGR, which it can afford from its internal sources, then will have to
rely on the funds infusion from outside in terms of debt or equity. The same has happened in the case of
Omkar Speciality Chemicals Limited.
10 | P a g e
This assessment of SSGR gets substantiated when the investor analyses the free cash flow (FCF) position
of Omkar Speciality Chemicals Limited.
Over FY2007-16, Omkar Speciality Chemicals Limited has witnessed its sales increase from ₹37 cr. in
FY2007 to ₹413 cr. in FY2016. For achieving this sales growth the company has done an additional capital
expenditure (capex) of ₹356 cr. However, the investor would notice that Omkar Speciality Chemicals
Limited has generated a cash flow from operations (CFO) of only ₹175 cr. over FY2007-16 resulting in a
negative free cash flow (FCF) of ₹ (181) cr.
SSGR and FCF are two of the main pillars of assessing the margin of safety in the business model of any
company.
It is not surprising that to meet its funds requirement during FY2007-16, Omkar Speciality Chemicals
Limited has to rely on additional sources of funds like:
 Incremental debt of ₹217 cr. as the total debt level of the company has increased from ₹11 cr. in
FY2007 to ₹228 cr. in FY2016,
 Net equity infusion of ₹68.51 cr. by way of the initial public offer (IPO) in 2011. An investor would
notice that Omkar Speciality Chemicals Limited has raised a total of about ₹79.38 cr (8.1 + 71.28)
from the IPO as witnessed in the FY2011 annual report as ₹8.1 cr. increase in paid up share capital
and ₹71.28 cr. increase in share premium account. However, the company paid a whopping ₹10.87
cr. as public issue expenses, which is a cost of about 14% (10.87/79.38) on the IPO proceeds. The
investor would appreciate that paying an upfront fee of 14% to raise funds from any source is very
high and many times shows desperation on part of the borrower/fund raiser to get access to such
high-cost funds.
 ₹14.25 cr. infused by promoters in the form of subscription to warrants
The urgency/desperation on part of the company to raise funds has been witnessed from a lot of other
aspects, which an investor notices when she reads different publically available documents about Omkar
Speciality Chemicals Limited. An excerpt from the conference call held by the company on July 19, 2016,
is relevant:
11 | P a g e
The above comment from the management indicates that in addition to raising high-cost IPO funds in
FY2011 at a cost of about 14%, the company was not able to meet its entire funds requirement and tried to
do additional equity dilution by qualified institutional placement (QIP) and attempted to source funding
from private equity players, however, it could not find any institutional investor willing to put its money
into the company.
It is not surprising that when the company has been attempting to do investments at a pace, which is not
supported by its internal resources as indicated by SSGR being lower than achieved sales growth, the
company will have to keep infusing funds from additional outside sources.
It seems that the inability of Omkar Speciality Chemicals Limited to generate sufficient cash from
operations to match its spending on capital expenditure, inability to keep the working capital under control,
inability to raise funds from equity sources etc. and in turn reliance on more and more debt to meet the
capex requirements was seen as a risky business strategy by the credit rating agencies.
As a result, its credit rating agency CRISIL downgraded the credit rating of Omkar Speciality Chemicals
Limited by 3 notches from BBB+ to BB+ in one step in December 2015. CRISIL highlighted the following
reasons for its downgrade of credit ratings of Omkar Speciality Chemicals Limited:
“The downgrade reflects deterioration in the Omkar group's liquidity because of larger
than expected, capital expenditure (capex) of over Rs.900 million undertaken in 201415
(refers to financial year, April 1 to March 31); the capex was largely funded through short
term resources, leading to mismatch in cash flows and tightening of liquidity. Furthermore,
commencement of operations of Unit 5 (organic manufacturing facility, with a total capital
outlay of around Rs.750 million) has been delayed significantly on account of
environmental clearance issues. Delays in expected accrual from this unit have further
constrained the group's liquidity. The bank limit utilisation levels were high, averaging over
95 per cent for the 12 months through September 2015. The current ratio also deteriorated to
0.84 time as of March 2015, from 1.08 times as on March 2014.” (Emphasis mine)
An investor would note that BB+ is a rating, which classifies the debt of a company as non-investment
grade or junk.
It seems that as a result, Omkar Speciality Chemicals Limited has stopped getting itself rated from CRISIL
and has changed its credit rating agency to Brickwork, which has assigned it a credit rating of BBB. It might
12 | P a g e
be a case of credit rating shopping where a company when poorly rated by one credit rating agency finds
another rating agency in the market, which can assign it a better credit rating.
CRISIL in its review has cited lack of information from the company as the reason for not being able to
carry out a credit rating:
“CRISIL is yet to receive adequate information from Omkar Speciality Chemicals Ltd (OSCL)
to enable it to undertake a rating review. CRISIL is taking all possible efforts to get to
cooperate with its rating process for enabling it to carry out the rating review.”
No wonder that Omkar Speciality Chemicals Limited found it difficult to raise additional debt from its
bankers and has to resort to lending from various NBFCs against the shares held by promoters. These
NBFCs extracted their share of benefits from the company by charging a high rate of 18-19% on the loan
against shares taken by the company by pledging the shares held by the founder promoter, Pravin Herlekar.
When an investor reads through the transcript of the conference call held by the company in July 2016, then
the investor realizes the urgent/desperate stage the company had found itself for the lack of funds:
An investor can appreciate the urgency of the funds to avoid the liquidity crisis and the disinterest of the
existing lenders to give any more funds quickly to the company in the above comment by the promoters of
the company.
It is not difficult to understand for an investor that hardly any lender would wish to give more loans to a
company, which:
 is consuming far more cash than it produces by way of operations

 already seems to have exhausted its key sources of equity infusion by way of high-cost IPO and
other equity investors (institutional investors) are not willing to bet their money on the company
 has been rated non-investment grade (junk) by credit rating agency and
 whose hunger for cash is not yet satiated.
13 | P a g e
No wonder that initially, the promoters had to resort to loans against shares from NBFCs by pledging their
own shares in the name of the company and now promoters are compelled to sell their shares in the company
to repay those loans.
This is a typical case of someone (be it a company or an individual) taking much more on its plate than it
can chew. Such situations lead entities to a debt trap.
An investor would appreciate from the above discussion that the companies, which have their Self-
Sustainable Growth Rate (SSGR) higher than their sales growth meaning that they are able to fund their
growth through internal resources and generate positive free cash flows depict greater strength in their
business model (margin of safety) than the companies, which have lower SSGR and negative free cash
flow.
Moreover, an investor would also appreciate from the above discussion that the for companies, which have
negative free cash flows i.e. companies, which are investing more as capex than what they are producing
by cash flow from operations, their dividends are primarily funded by debt. Omkar Speciality Chemicals
Limited has been facing a similar situation where the dividends of about ₹17 cr. declared by the company
over the years are primarily funded from debt and therefore, she should not take any comfort of the dividend
yield of such companies.
Until now, it seems apparent that the management of Omkar Speciality Chemicals Limited has embarked
upon a capacity expansion plan, which required resources much in excess of what it could generate
comfortably. As a result, the company has landed up in a situation where the company has been running
pillar to post to arrange funds be it high-cost IPO funds, exhausting the limits of comfortable exposure
levels of existing lenders, infusing funds by warrants, reaching institutional investors for QIP, going to
NBFCs for high-cost loan against shares and recently selling promoters’ stake in the company.
All these actions raise questions on the financial prudence of the management in commencing a large
capacity expansion plan without proper financing plan being in place.
Moreover, upon further analysis of Omkar Speciality Chemicals Limited and reading other publically
available documents, an investor notices multiple aspects, which deserve attention:
1) Management not able to meet its stated commitment to shareholders:
The promoters/management of the company has made numerous commitments to stakeholders about the
timelines for getting the pledge on promoters’ stake released from the NBFCs:
 First, in July 2016, during a conference call, the management assured the stakeholders that they
would be able to release entire pledge within 4-5 months.
14 | P a g e
 Second time in August 2016, the management said that it will get the pledge on its shares released
by October 2016.
 Third time in November 2016, during another conference call, when the management could not
meet the earlier stated timeline, it stated that it would release entire pledge by end of FY2017:
15 | P a g e
However, the management could not meet even this deadline as at March 31, 2017, more than 21 lakh
shares of promoters were still pledged with lenders.
When an investor reads through the reasons cited by the management for its inability to meet the stated
deadlines for the release of the pledge, then she finds the explanation that the loans against shares have a
prepayment penalty. Therefore, repaying these loans ahead of schedule would lead to additional cost for
the company in the form of the prepayment penalty
Now, an investor is left confused about:
 whether the management had read the loan agreements that it had signed with the lenders before
taking loans against shares
 if the management knew that these loans against shares had a prepayment penalty, then whether it
took the concurrence of lenders about waiving the prepayment penalty before it started assuring the
stakeholders that it would soon get the pledge on the shares released.
Whatever be the reason about the prepayment penalty being the road block for the pledged shares to be
released, it shows that the management needs to do a bit more homework before it prepares its strategies
and communicating it to stakeholders.
2) Management not able to meet its stated commitment to shareholders again:
As mentioned above, we believe that the management of Omkar Speciality Chemicals Limited has led the
company into a liquidity crunch situation by commencing a capital expenditure program, which needed
funds far in excess of what the company could produce from operations. Moreover, the deteriorating
working capital position further complicated the tight liquidity position of the company.
As a result, the promoters of the company had to resort to selling their personal stake in the company to
raise funds to ease out the liquidity position of the company.
However, like in previous cases of assessing the funds requirement for the started capital expansion plan
and assessing the feasibility of getting the pledge of shares released, the management has again erred while
assessing the exact amount of stake that it might need to sell before the liquidity situation is brought under
control.
 In July 2016, when promoters had a conference call about their stake sale, they communicated to
stakeholders that they would not sell any further stake. The promoter stake was at 58% at that time:
16 | P a g e
 The promoter reiterated their resolve of not needing to sell a further stake in the company during
the conference all in August 2016:
 However, the promoters sold more shares later on and then during the conference call on November
8, 2016, the promoters said that their stake will not go down below the majority mark:
17 | P a g e
The promoters have resorted to further sale of shares and as per the shareholding pattern of Omkar
Speciality Chemicals Limited at March 31, 2017, available on BSE website, the promoter’s shareholding
stands at 41.01%.
The company has been mentioning in its shareholding pattern disclosures that certain shares which are
encumbered are not shown by depositories in the name of promoters and these shares though owned by
promoters and pledged by the company to lenders, are reflected in the name of the financiers/lenders in the
disclosed shareholding patterns.
Such a manner of disclosing shareholding patterns makes it difficult to assess the exact amount of shares,
which the promoters own at any point in time, which is not a desirable practice to be followed. For ease of
understanding by investors, the disclosures should state clearly about the total number of shares, which are
owned by the promoters and out of which the stated number of shares are pledged with lenders so that the
interpretations and conclusion are straightforward for the investors.
At March 31, 2017, the BSE website shows that promoters own 84.4 lakh shares out of total 205.8 lakh
total shares of the company, which is 41.01% stake. It also mentions that 21 lakh shares of the promoters
are pledged, which is 10.2% stake in the company. So if we assume that the disclosed 41.01% stake of the
promoters does not include any pledged share, then the total promoter shareholding might get shored up to
51.21% (41.01+10.2).
It is to be noted that this is a mere guess given that the company is not providing the total number of shares
actually owned by promoters in its shareholding filings. Therefore, if the stated promoter stake of 41.01%
stake includes the pledged shares as well, then it might have happened that the promoter’s stake has already
gone below majority mark.
3) Large established companies not paying up the sales consideration on time:
An investor would notice that the receivables days of Omkar Speciality Chemicals Limited increased from
72 days in FY2012 to 122 days in FY2014. This has been cited as one of the key factors by the management
as the reason for deteriorating working capital position.
However, if one notices the list of clients that Omkar Speciality Chemicals Limited has displayed to
investors as part of its April 11, 2016, presentation to investors, then the investor would find that they are
all the names of large established companies in pharmaceuticals and chemicals industry in India and across
the world.
18 | P a g e
The investor would appreciate that these companies are a few of the best credit rated companies across the
world and we find it difficult to believe that such companies would have delayed payments to their vendors
in recent years.
The investor might expect that the Eurozone crisis in last few years might have led the customers based out
of Europe to delay the payments to some extent. However, Omkar Speciality Chemicals Limited is
primarily a domestic focused company with sales in India constituting more than 75-80% of its sales and
more so Europe is only about 4-5% of its total sales revenue. Therefore, it seems difficult that the delay in
payment that too from large well-known customers based out of Europe would have led to such
deterioration of receivables.
Therefore, we believe that an investor should explore further the reasons for such significant deterioration
of receivables days of the company before she commits her hard earned money to investment.
Moreover, we have always believed that the trinity of “Rising Sales, Rising Receivables and Rising Debt”
when grows out of proportion, then it many times indicates cases of aggressive accounting practices.
In the case of Omkar Speciality Chemicals Limited, the receivables and debt have definitely gone out of
proportion of normally expected business levels.
19 | P a g e
The investor should also explore further about the sudden remarkable improvement of receivables days for
the company.
4) Declining freight charges despite increasing sales in FY2016:
An investor would notice that the consolidated sales of Omkar Speciality Chemicals Limited have increased
from ₹265 cr. in FY2015 to ₹413 cr. in FY2016. However, surprisingly, the freight and transportation
expenses at the consolidated level have declined from ₹1.71 cr. in FY2015 to ₹1.70 cr. in FY2016.
Annual report FY2016, page 116:
It is advised that the investor should get clarifications from the company in this matter before committing
her hard earned money.
5) Increased sales of Iodine and Selenium derivatives, but decreased consumption of Crude
Iodine and Selenium metal in FY2016:
In FY2016, the consolidated level sales of Iodine and Selenium derivatives by Omkar Speciality Chemicals
Limited witnessed a significant increase in line with overall sales growth. As per the annual report for
FY2016, page 118, the sales of Iodine compounds increased from ₹88 cr. in FY2015 to ₹118 cr. in FY2016.
The sales of Selenium compounds increased from ₹16 cr. in FY2015 to ₹22 cr. in FY2016:
20 | P a g e
However, on the same page in the annual report, the investor finds that the consumption of crude Iodine
and Selenium metal powder has declined in FY2016 against FY2015. The consumption of crude Iodine by
Omkar Speciality Chemicals Limited at consolidated level declined sharply from ₹82 cr. in FY2015 to ₹4
cr. in FY2016. The consumption of Selenium metal powder declined from ₹7 cr. in FY2015 to ₹5 cr. in
FY2016
It is advised that the investors should take clarifications about it from the company before investing.
6) Long delays in commissioning of the largest capex by the company: Unit 5:
As per Omkar Speciality Chemicals Limited, the commissioning of its largest capacity addition at Unit 5
in Chiplun, Ratnagiri was delayed despite the construction being complete (as the company said that no
major capex is pending) due to lack of environment approval.
As per the annual report for FY2016, page 47, the company received the environmental approval for the
unit in January 2016, in which the authorities asked the company to create some additional facilities of
effluent treatment:
21 | P a g e
However, currently, despite the receipt of clear directions/steps to be taken by the company to meet the
compliance requirements, the commencement of unit 5 seems to be getting further delayed with the assessed
timeline of the management of starting the unit in phases in FY2017 seems to be getting missed.
7) The operating capacity data of the company:
Omkar Speciality Chemicals Limited has disclosed its operating capacity data of different units under two
different labels: Volumetric Capacity and Rated Capacity. The difference between the two figures in terms
of currently operational capacity is significant.
As per the annual report of FY2016, page 49, the volumetric capacity at March 31, 2016, stands at 5,400
TPA whereas the rated capacity at the same date stands at 2,315 TPA
The company has tried to explain the difference between the two capacity figures as below:
“The volumetric capacities indicate the aggregate volumes of all the reactors installed in the
respective Unit. The rated capacity signifies the expected production in tonnage for a given
product mix which is commonly being manufactured in the respective Unit.”
From the above, it seems that the volumetric capacity, which is the most highlighted number in all the
communications by the company and in the discussions with the stakeholders, is more of a theoretical
22 | P a g e
number and for all practical purposes, it is the rated capacity of the most commonly produced product mix
is the actual capacity available.
8) The responsibilities of Mr. Omkar Herlekar:
On May 2, 2017, five directors of Omkar Speciality Chemicals Limited including Mr. Omkar Herlekar, son
of founder promoter Mr. Pravin Herlekar, resigned from their board positions.
As this event has happened post approval of the merger & demerger arrangement from National Company
Law Tribunal (NCLT), therefore, we believe that it might be under the arrangement where Omkar would
look after the API business of the group in Lasa Supergenerics Limited.
Omkar has stated the same during the April 2016 presentation by Omkar Speciality Chemicals Limited to
the stakeholders:
23 | P a g e
It seems great that the said arrangement of focused responsibilities might help the management in creating
better value for the shareholders.
However, as per publically available information, Omkar also has interests in a brokerage firm, Amarnath
Securities Limited, which is a BSE listed entity.
As per the information available on the website of Indiainfoline.com, Omkar has made an open offer to
buy 26% shares of Amarnath Securities Limited (7,80,052 shares) at ₹16/-, payable in cash. This would
entail a cash outflow of about ₹1.25 cr.
When the founder promoter of Omkar Speciality Chemicals Limited, Mr. Pravin Herlekar, was asked about
this business interest of Omkar, then Pravin avoided the questions saying that it is an independent business
interest of Omkar and has nothing to do with Omkar Speciality Chemicals Limited.
There are a few things, which come to an investor’s mind upon analsing these developments:
24 | P a g e
 An interest in an entirely different business line when the company has just completed the major
capex after suffering a lot of liquidity stress/tough time. One line of prudent thinking would expect
that the management should now focus completely on realizing the full capacity utilization of the
capacity that has been created by getting additional sales orders, expand the business to new
customers, geographies, create new teams etc. Such activities would need heightened focus from
the management especially the people responsible for Lasa Supergenerics Limited, where the
maximum capacity has been added.
 A cash outflow in terms of the open offer for a brokerage firm at a time when the founder promoter
is selling his personal stake in the business to get the pledged shares released from high-cost lenders
indicates that this might not be the most opportune time to go for such diversifications.
 Omkar has not attended any of the conference calls in last 12 months after the conference call in
April 2016. Even the announced panel of the conference call to be held by the company on May
24, 2017, to discuss the Q4-FY2017 results does not include the name of Omkar.
It is advised that the investor should be comfortable with the above issues and explore them further if she
wants before she decides to make her final investment decision.
9) Q4-FY2017 results: the fair value of transfer of assets from Omkar Speciality Chemicals
Limited to Lasa Supergenerics Limited:
Omkar Speciality Chemicals Limited declared its Q4-FY2017 results on May 20, 2017. The company has
reported a loss of ₹44 cr. in the quarter primarily on account of an exceptional loss item of ₹63 cr.
As per the company’s result filing, the loss is on account of the difference between the fair value and the
book value of the assets transferred from Omkar Speciality Chemicals Limited to Lasa Supergenerics
Limited
It effectively means that the assets, which were represented on the balance sheet of Omkar Speciality
Chemicals Limited at a certain value (book value) have now been transferred to Lasa Supergenerics Limited
at a lesser value (fair value). And as the fair value/the value realized by Omkar Speciality Chemicals
Limited shareholders is lower than book value by about ₹63 cr., therefore, it is recognized as a loss in the
P&L statement of Omkar Speciality Chemicals Limited.
A few things should come to the investor’s mind on this transaction:
 If the fair/realizable value of these assets was less than the book value, then the company (Omkar
Speciality Chemicals Limited) should not have waited for the demerger to revalue these assets at a
lower value. It should have been done at the time the management came to know that the fair value
of the assets is lower than the book value. Equivalent loss as exceptional item should have been
realized at that point instead of waiting until demerger.
 However, if the assets are fully functional in terms of operability, then the new company Lasa
Supergenerics Limited, which has got these assets at a lower value would be able to show very
25 | P a g e
good asset turnover ratios, lower depreciation and thereby higher accounting profits (PAT) and
might be a higher valuation when the company gets listed on exchanges.
In the light of the current merger-demerger scheme of arrangement, which is under process and the annual
reports with the restated positions yet being awaited, we are not able to put forward any view on the
valuation of the shares of Omkar Speciality Chemicals Limited.
Overall, Omkar Speciality Chemicals Limited seems to be a company, which has been growing at a fast
pace of 30-35% year on year for last 10 years (FY2007-16). The company has been able to achieve this fast
paced growth with sustainable operating margins, which as per the company, it is able to achieve as it enters
into only short term contracts with customers and therefore, is able to pass on the changes in the raw material
costs to them.
The company has embarked upon a significantly large capacity expansion program, which has involved
large capital expenditure. As a result, the company has to rely on equity funding (IPO) at very high costs,
high debt burden, promoters funds infusion by way of warrants etc. As the company has attempted to take
on expansion, which is far in excess of what can be supported by internal resources (SSGR), these sources
of funds have not turned out sufficient to meet the overall funds requirement and the company has
approached institutional investors for QIP, private equity for stake dilution. However, the institutional
investors seem to have decided against putting in their money in the company.
Moreover, the company has not been able to manage its working capital well with funds getting stuck in
receivables despite having customers of high repute. As a result, the company has faced a liquidity crunch
with even some delays in depositing the undisputed statutory dues like income tax with the authorities
beyond 6 months from which they became payable in FY2016.
No wonder that the credit rating agency, CRISIL, took note of this deteriorating liquidity position of Omkar
Speciality Chemicals Limited and downgraded it by 3 notches to non-investment grade in December 2015.
As a result, the existing lenders of the company have shown a lack of interest in quickly providing the
additional funds needed by the company. As a result, Omkar Speciality Chemicals Limited has to rely on
highly costly debt (18-19% per annum) in the form of loan against shares from different NBFCs.
Now, the promoters have realized the high cost of debt of the loan against shares and have finally resorted
to selling their personal stake in the company to raise funds to get the pledge of the shares released, which
is a desperate situation.
It seems that the company has found itself in such stressed situation as a result of much larger capex plan
being started by the management without proper visibility of the associated costs and the sources of required
funds. The financial prudence of the management leaves a lot to be desired.
Similarly, the assessment done by the management of the company before making different commitments
to stakeholders needs improvement be it about the conditions of prepayment penalty on the pledge or the
assessment of quantum of the sale of promoter’s stake.
26 | P a g e
The management is expected to perform better on its project execution skills and liaising skills so as to
complete the projects in time as the continued delays in commissioning of Unit 5 is one of the key factors
leading to the financial stress in the company.
There are certain aspects about the reported financials, which demand further analysis by the investor like
declining freight & transportation cost while increasing overall sales and declining consumption of crude
Iodine and Selenium metal powder while increasing sales of Iodine and Selenium compounds.
In light of the recent completion of significant capacity addition, it is expected that the management would
be fully focused on achieving the full capacity utilization as soon as possible and reduce the liquidity stress
along with the debt burden. However, we notice that Mr. Omkar Herlekar, part of the promoters, is focusing
on the unrelated business of financial services.
Such unrelated diversification along with the stated management assumption in the conference call of July
19, 2016, that they would keep getting business on their own from the customers without much effort might
not be the best approach to the business in a very competitive world.
We do not focus on macro-economic factors while analysing stocks, therefore, we do not have any views
on the impact of the election of Mr. Donald Trump as the president of the USA on the investing rationale
for Omkar Speciality Chemicals Limited.
We believe that the investors should keep a close watch on the movement of promoter’s stake in the
company along with the pledging level, overall debt level, receivables days and commencement of Unit 5
as part of their monitoring exercise.
These are our views about Omkar Speciality Chemicals Limited. However, readers should do their own
analysis before taking any investment related decision about Omkar Speciality Chemicals Limited.
P.S:
 To know about the stocks in my portfolio, their relative composition, cost price, details of all our
buy/sell transactions since July 30, 2017 as well as to get updates about any future buy/sell
transaction in my portfolio, you may subscribe to the premium service: Follow My Portfolio with
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
27 | P a g e
 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
 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.
28 | P a g e
2) MRF Limited
MRF Limited is the market leader in the Indian tyre industry having one of the most recognized brands in
the industry.
We prefer to analyse consolidated financials while doing an analysis of the company. This is because
consolidated financials represent the position of the complete business operations of any company
irrespective of it having multiple subsidiaries, joint ventures, lines of business etc. The consolidated
financials represent the whole pie whose stake every single share held by the investor represents. Therefore,
while providing our inputs, we have analysed the consolidated financials of MRF Limited.
While analysing the annual report for FY2016 (18 months: Oct 2014 - March 2016), page 112, an investor
would notice that in the case of MRF Limited, the share of the business in the standalone entity (MRF
Limited) is very large in overall operations. MRF Limited (standalone) has 99% of total group assets and
contributes to 98.08% of total group profits.
Therefore, even while analysing the standalone financials an investor might not be way off the mark while
understanding the group position. However, it is always advised that investors give more importance to
consolidated financials over standalone financials during the assessment of any company. Even in the case
29 | P a g e
of MRF Limited, at March 31, 2016, the standalone entity has a total debt of ₹2,065 cr. whereas at the
consolidated level the group has a total debt of ₹2,463 cr. Therefore, while analysing only the standalone
financials, an investor may miss out on about ₹400 cr. debt, which is taken by the subsidiaries of MRF
Limited. Missing out on such critical information would impair the parameters like debt to equity, interest
coverage etc. and may present potential negative surprises for the investor in future.
Investors need to focus on another key aspect while analysing the financial performance of MRF Limited.
This is related to the duration of the period, which is reported by MRF Limited in 2016.
Up to Sept 2014, MRF Limited used to report its financial performance from October to September every
year. Therefore, when the Companies Act 2013 mandated that all the companies should align their financial
year to April to March, MRF Limited had to change its reporting month from September earlier to March
presently.
As a result, the financial performance reported by MRF Limited in 2016 is the business performance during
the 18 months from October 2014 to March 2016. This presents a peculiar issue while comparing the
business performance of the MRF Limited year on year from its past reported performance. This is because
the previous sales/profit numbers are for 12 months whereas the 2016 numbers are for 18 months.
If this fact is ignored by the investors, then it is highly probable that investors would make the following
errors:
1. The sales and profit growth would seem higher as sales/profits in 18 months period would be
comparatively higher
2. Turnover ratios like fixed asset turnover ratio, inventory turnover ratio etc. would seem higher as
the assets/inventory figures at the year-end are to compare with sales of 12 months instead of 18
months, which is the case of MRF Limited 2016.
3. Receivables days would seem lower as in the case of MRF Limited 2016, the account receivables
at the year-end are being compared with 18 months of sales instead of 12 months of sales in normal
practice.
4. Higher fixed asset turnover ratio as explained above would give a picture of better asset utilization
by the company than the reality.
5. Higher turnover ratio and lower receivables days, as explained above, would give a picture of better
working capital utilization by the company than the reality.
Therefore, it is essential that while analysing the performance of MRF Limited and comparing it with
previous years, an investor adjusts the reported numbers of 2016 to reflect 12 months performance instead
of 18 months presented by the company.
While analysing the standalone financial performance, this exercise is relatively simple as the investors
have the standalone financial results of last 4 quarters available in the public domain and the revenue/profits
etc. for the 12 months period can easily be deduced from them. However, as the company does not disclose
its consolidated financial results in its quarterly updates, therefore, it becomes essential for investors to use
some approximations to arrive at the comparable consolidated performance for 12 months period.
30 | P a g e
We have used the simple approximation of reducing the 18 months of reported consolidated performance
to 12 months by multiplying it with (2/3). The resultant consolidated sales figure is ₹13,695 cr, which is
slightly higher than the reported standalone sales of ₹13,400 cr. by MRF Limited during April 2015 – March
2016 as taken from the quarterly results. This is in-line with the fact that MRF Limited has about 99% of
the business within its parent standalone entity.
With this background, we would start to analyse the past financial performance of MRF Limited over last
10 years.
31 | P a g e
MRF Limited has been growing its sales since last 10 years (FY2006-16) at a moderate pace of about 15%
year on year. This growth rate has been associated with a consistent increase in the production capacity of
the company over the years.
As per the credit rating agency ICRA’s credit rationales for MRF Limited, the production capacity has
increased from 31.7 million tyres per year in 2011 to 53.4 million tyres in 2016. Such growth in sales along
with consistent growth in volumes is essential for sustained business performance. This is because any
growth, which is resultant of only price increase without an increase in sales volumes is bound to witness
competition from substitute products.
Moreover, as per ICRA 2016 credit rating rationale, the production capacities are currently nearly fully
utilized.
Full utilization of existing capacities necessitates that the company would have to do additional capex for
generating incremental production capacity to support future growth.
An analysis of the 2016 annual report, page 85, reflects that MRF Limited has additional land in Gujarat,
which it has provided as a security/mortgage for the debentures raised by it.
This can be one of the many land parcels that the company might have in its possession. However, it reflects
that the company might have spare land with it, which can be used for future expansion. An investor may
get clarification from the company about whether this land parcel is industrial/commercial or residential in
nature so that further clarity on its usage can be ascertained.
At March 31, 2016, the company had in its possession cash & investment of about ₹2,904 cr at the
consolidated level. At September 30, 2016, MRF Limited in its standalone half year results declared a cash
& investments position of ₹3,880 cr.
32 | P a g e
The presence of spare land along with cash at hand presents a strong combination for the company that it
has resources ready at its hand to go for further capex and support its growth in future.
An investor would appreciate that the availability of resources needs a competent management, which is
able to execute and complete projects. MRF Limited has a history of executing projects. It currently has 9
plants out of which it has completed 3 plants in 2011 [7th Plant at Ankanpally (A.P), 8th plant in Trichy
(TN)] and 2012 [9th plant in Trichy (TN)], (as per the company website>Who We Are>Milestones).
A combination of land, cash and experienced management bodes well for the company that it can execute
future capacity additions with success.
The growth rate achieved by MRF Limited in the past has been associated with fluctuating profitability
margins. The operating profitability margin (OPM) of the company has been varying 8% to 10% in a
cyclical manner from 2007 to 2012 and has been increasing since then. Currently, the OPM has increased
from 11% in 2012 to 21% in 2016. Such improvement in the operating margins is a commendable
performance for any company and it deserves further analysis.
The key raw materials for MRF Limited are rubber and crude derivatives (various chemicals). It would be
very helpful for the investor to see the operating margins of MRF Limited in association with the prices of
natural rubber and crude oil prices.
The below charts captures the movement of natural rubber prices, crude oil prices and the OPM of MRF
Limited over last 10 years (2007- now):
33 | P a g e
34 | P a g e
An investor would notice the following phases of the prices movement in the natural rubber, crude oil and
their association with the OPM of MRF Limited:
Natural Rubber OPM of MRF Limited

Period Crude Oil Prices
Prices (Consolidated)
2007-2008 Increased Increased Decreased from 10% to 8%
2008-2009 Decreased Decreased Increased from 8% to 12%
2009-2011 Increased Increased Decreased from 12% to 8%
2011-2014: Stable
2011-2016 Decreased Increased from 8% to 21%
2014-2016: Decreased
OPM (standalone) has declined from

2016-2017 Increased Increased 24% in June 2016 quarter to 18% in
Dec 2016 quarter (see below)
Operating profitability margin for MRF Limited (standalone) for recent quarters:
35 | P a g e
The above tables clearly reflect that the operating margins of MRF Limited are vulnerable to the movement
in the raw material prices. This is the pattern, which is reflective of any commodity business, which finds
it difficult to pass on the fluctuations in the raw material prices to its end consumers.
While reading the credit rating reports and the annual report of MRF Limited, at multiple places we found
references to the ability of MRF Limited to pass on the prices of an increase in raw material to its end
consumers. For example:
ICRA Credit Rating Rationale (May 2011):
ICRA Credit Rating Rationale (June 2012):
Annual report 2016, page 15, Board’s Report:
36 | P a g e
The above statements might give an impression to the reader that MRF Limited has been working in a
business environment where it can pass on the increase as well as a decrease in raw material cost to its
customers and thereby maintain its profitability margins. However, as reflected by the above comparative
analysis of the OPM of MRF Limited with natural rubber and the crude oil prices, it clearly comes out that
the OPM is highly susceptible to the changes in the raw material prices.
The fluctuating OPM should indicate to the investor that the recent increase in the OPM to 21% (2016)
might not be sustainable in future. This fact is established by observing the recent decline in the standalone
OPM of MRF Limited from 24% in June 2016 quarter to 18% in Dec 2016 quarter. This period has been
associated with an increase in prices of both the key raw materials viz: natural rubber and crude oil
derivatives.
Fluctuating OPM is a characteristic of commodity businesses, which have products that are not much
differentiated from their competitors. Tyres are such a product, where unless and until a customer has very
specific requirements of usage, the tyres from any of the competitors might also serve the purpose with
acceptable performance.
Similar to the fluctuating pattern of the operating profitability margin, the net profit margin (NPM) of MRF
Limited has also witnessed similar cyclical fluctuations over the years with NPM varying from 2% to 6%
during 2006-2012 and then increasing to 12% in 2016. In the FY2017, the net standalone NPM has declined
from 14% in June 2016 quarter to 9% in Dec 2016 quarter.
Therefore, we believe that all the marketing expense that MRF Limited is incurring (₹358 cr. standalone in
18 months ended March 2016), is leading to more awareness of the brand and higher volume sales but is
not resulting in the pricing power in the hand of the company. Its margins are still susceptible to the
fluctuating raw material prices due to competitive pressures.
The company has acknowledged the intense competitive environment in which it operates and has
communicated the same to the shareholders in the communication from the Chairman (2016 annual report,
page 3):
37 | P a g e
Significant capacity addition by existing domestic players, dedicated capacities for Indian market by MNC
players and the cheap imports of tyres (90% from China) are some of the key factors, which will always
put pressure on the profitability margins of MRF Limited and the high OPM enjoyed by the company might
not be sustained in future years. Therefore, it is advised that investor should keep a close watch on the
movement of the operating profitability margins of MRF Limited in future.
Over the years, MRF Limited has been paying its taxes at a rate, which is near the standard corporate tax
rate applicable in India, which is a good sign.
While assessing the sales/profit growth performance, an investor had to keep in mind that the reported
performance by MRF Limited in 2016 is for 18 month period and had to adjust it to 12 months period to
compare it with previous years. In a similar manner, the investor needs to adjust the data to arrive at the
operating efficiency parameters for MRF Limited for 2016 as well.
After adjustment, an investor would notice that the net fixed asset turnover ratio (NFAT) of MRF Limited
has been declining since 2010 from 6.58 to 3.40 in 2016. The decline in the initial years up to 2012 can be
assigned to the newly added capacities of 7th, 8th and 9th plant commissioned in 2011 and 2012, which would
take some time to generate sales at full capacity to lead to improved turnover. However, the consistent
decline in the NFAT in the recent years from 4.16 in 2014 to 3.40 to 2016 (adjusted for 12 months) needs
proper attention by the investor.
It is to be noted by the investor that in recent years (from 2012 when the 9 th plant was commissioned), the
company does not seem to have constructed any new plant. Therefore, apparently, the capex since 2012
including ₹2,341 cr. in 2016 (18 months) and ₹240 cr. in H1-FY2017 seems to be going in the existing
plants.
Such large capital investment leading to lower NFAT indicate that with time the operations of the company
are becoming more & more capital intensive, where the company has to consistently invest to develop new
products, invest in plants to improve technology and at the same time cannot enjoy stable profitability
margin due to more of a commodity product and cheaper imports.
The credit rating report of ICRA for March 2015 highlight the capital-intensive nature of the business of
MRF Limited and other limited parameters:
38 | P a g e
An investor needs to keep a close watch on the net fixed asset turnover of MRF Limited. The company has
enjoyed high profitability margins over last 5 years (2011-16) on account of declining natural rubber prices
and crude oil prices. These profitability margins may not be sustainable in the long term. The impact of
increasing rubber and crude oil prices in FY2017 is already visible in the declining profitability margins of
the company in the current financial year.
The high profitability margins in the recent years have helped the company to fund most of its capex through
the cash generated from operations and thereby keep its debt levels in check and at the same time build up
significant cash reserves. During 2012-2016, MRF Limited generated cash from operations (CFO) of
₹7,276 cr. whereas it spent ₹4,489 cr in capital expenditure, which has helped the company to generated
cash reserves of about ₹2,900 cr at March 31, 2016.
As a result, in 2016, the company has witnessed improvement in its credit rating by ICRA from AA+ to
AAA, which is the best credit rating possible for any corporate.
However, it seems that the business of MRF Limited will require significant investments going ahead in
terms of new capacity additions to support growth, investment in existing plants to maintain/improve their
production processes, R&D and branding. Whereas the times of high margins might not sustain for long,
which would lead to the company using more cash than what it generates like in the past during 2006-2011.
39 | P a g e
During 2007-2011, MRF Limited did a capital expenditure of ₹3,379 cr. whereas it generated a CFO of
₹2,215 cr. during the same period. As a result, the company has to rely on debt to fund its capex needs. The
debt of MRF Limited increased from ₹729 cr. in 2006 to ₹1,600 cr in 2011.
The major reason for discussing the period-wise CFO and capex data is to highlight to the investors that in
cyclical industries, which have commodity type products, an investor should not become very optimistic
based on recent good performance in terms of higher profitability and increasing cash reserves. As the cycle
of raw material prices turns against the company, the consistent high capex requirements along with
declining profitability margins would eat into the cash reserves of the company.
That’s why it becomes essential for investors to analyse the past financial performance data of companies
for preferably last 10 years to understand the business dynamics of the company.
When an investor analyses the inventory turnover ratio (ITR) of MRF Limited, then she would observe that
the ITR has been stable at levels of 7-8 over the years. Stable ITR indicates an acceptable level of inventory
management during the growth phase without letting inventory eat up into the funds.
However, the receivables days of MRF Limited have increased from 34 days in 2010 to 47 days in 2016
(adjusted for 12 months). Such deterioration in the receivables days indicates that MRF Limited has to give
attractive credit periods to its dealers/customers etc. in order to compete against other players and cheaper
imports.
Overall, the working capital management of MRF Limited has been at a sustained level of about 90-95 days
over the years indicating that the company has been able to keep its working capital under control despite
witnessing significant growth over recent years.
The same observation also gets established when an investor compares cumulative profit after tax (PAT)
of MRF Limited over 2006-2016 with the cumulative cash from operations (CFO) during the same period.
Over FY2006-16, MRF Limited reported a cumulative PAT of ₹6,282 cr. whereas over the same period,
the company had the cumulative CFO of ₹9,765 cr. It indicates that MRF Limited has been able to manage
its working capital over the years.
However, as mentioned above, the intense competition in the sector may also have an impact on the working
capital position of the company in terms of obsolete inventory, the requirement to have higher stock/SKUs
(stock keeping units) of a larger variety of tyres, higher credit period to customers/dealers etc. Therefore, it
is advised that investors should keep a close watch on the working capital performance of MRF Limited
going ahead.
The investor would notice that MRF Limited has an SSGR of about 15-20% over the years, which is
matching the sales growth rate of 15-17% 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.
40 | P a g e
Over 2006-16, MRF Limited has witnessed its sales increase from ₹3,724 cr. in 2006 to ₹13,695 cr. (2016,
12 months adjusted). To achieve this sales growth, though a look at the debt numbers would indicate that
the company has to raise debt as the total debt figure has gone up from ₹729 cr. in 2006 to ₹2,463 cr in
2016, a net increase of ₹1,734 cr. However, when an investor looks at the cash & investments available
with the company, then she notices that the cash and investments of MRF Limited have increased by ₹2,785
cr. from ₹119 cr. in 2006 to ₹2,904 cr. in 2016.
The above analysis indicates that MRF Limited has been able to meet all its operational and capital
expenditure requirements from its internal sources and that all the incremental debt raised by the company
is effectively available as cash & investment balance with the company.
This assessment of SSGR gets substantiated when the investor analyses the free cash flow (FCF) position
of MRF Limited.
An investor would notice that MRF Limited has generated ₹9,765 cr. from cash flow from operations (CFO)
over 2006-16 whereas it has spent ₹7,868 cr as capital expenditure over the same period resulting in a free
cash flow (FCF) of ₹1,897 cr. Moreover, the company has utilized the free cash to pay dividends to
shareholders of about ₹155 cr.
company.
Such performance has 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 ₹23,821 cr. over 2006-16 versus
the earnings retained and not distributed to shareholders of about ₹6,128 cr. indicating that a market value
of about ₹3.89 has been created by the company for its shareholders for each ₹1 of earnings retained by it
over the years.
Upon analysis of MRF Limited, the investor notices multiple other aspects, which deserve attention:
1) Errors in the Annual Report:
While analysing the 2016 annual report, an investor would notice that the calculations of the figures
provided by MRF Limited in the section “Indebtedness” at page 35, do not tally.
41 | P a g e
The debt data provided for the start of the period and the net change during the period do not sum up to the
debt data provided for the end of the year.
The annual report of the largest and reputed player of a key industry is not expected to have such errors.
Therefore, it is advised that the investors may ask for clarity from the company about the data presented in
this section of the annual report to rule out whether it is a genuine human error, which the company might
want to rectify.
If the numbers presented in the “Indebtedness” table are not erroneous, then further clarity may be sought
from the company about their correct interpretation.
2) In-House Registrar & Transfer Agent:
As per the 2016 annual report, MRF Limited has an in-house department, which acts as the registrar &
transfer agent (RTA) to perform various shareholders related activities like share transfer,
dematerialization, re-materialization, dividend distribution etc.
It is expected that as per the best governance practices, the RTA should be an independent outside agency,
which can perform all the above-mentioned activities related to shareholders. This is because many times
corporates have been accused of indulging in questionable practices when the RTA has been an in-house
42 | P a g e
department. In the past, even large corporate like Reliance have been questioned by SEBI when it had in-
house RTA agency: “Reliance Consultancy Services”: Read Here (India Today, 1996)
Therefore, we believe that as part of best practices, companies should have independent third party agencies
as RTAs.
3) Related Party Transactions (Purchases from promoters’ entities):
2016 annual report of MRF Limited indicates that the company has purchased material worth about ₹240
cr. from companies/entities where the directors of the company are interested parties.
Such transactions with promoters’ entities are key areas which carry the potential of helping smart
promoters benefit themselves at the cost of public shareholders.
An investor may analyse these transactions further to assess whether the same are at market prices and also
to assess the need for MRF Limited to deal with promoters’ entities rather than purchasing these products
directly from independent vendors.
4) Labour/wage issues:
Moreover, as the business of MRF Limited is highly labour driven, it is essential that the company maintain
good relationships with its workers. As per the 2016 annual report, the wage settlement with the workers’
union at one of their largest plants in Chennai at Thiruvottiyur is pending since long.
The wage issue at Thiruvottiyur unit is a long drawn issue as there are news articles dating back to early
2000’s covering the wage issues at this unit.
An investor should keep a close watch on the developments on the labour aspects of the company as any
adverse development on this front can impact the company’s operations and future growth.
43 | P a g e
5) Promoters' Shareholding:
The promoters' shareholding in the company is low at 27.52% at Dec 31, 2016. However, if we notice that
the promoter's shareholding has been increasing slowly over the years from 25.31% at June 30, 2001. In
the Dec 2016 quarter as well, the promoters' shareholding has increased from 27.49% to 27.52%, which is
a positive factor.
However, an investor would notice that despite low promoters' shareholding, the promoters are well in the
control of the company and are running the company's business without any apparent dispute with other
large shareholders.
MRF Limited is currently (April 18, 2017) available at a P/E ratio of about 17, which does not offer a
margin of safety in the purchase price as described by Benjamin Graham in his book The Intelligent
Investor.
However, as seen by the analysis of self-sustainable growth rate (SSGR) and the free cash flow (FCF),
MRF Limited has shown that it has a margin of safety in the business model.
Overall, MRF Limited seems to be a company which has been able to grow well during the past decade and
has been able to capitalize on the declining trend in its key raw materials. As a result, the company has been
able to improve its profitability margins and generate significant cash surplus in the last few years.
However, with the raw material prices on an uptrend since about last one year, it remains to be seen whether
MRF Limited is able to sustain its profitability margins.
The company operates in an industry, which is capital intensive and highly competitive necessitating
continuous capital expenditure by the company without the ability to maintain its profitability margins. In
the past, the company has benefited from the industry tailwinds of lower commodity prices. However, it
remains to be seen whether the company is able to retain its balance sheet strength in light of significant
capex being done by competitors and cheap import of tyres esp. from China.
The management of the company is experienced in the field and has created a well-known brand in a
seemingly commoditized product. The management has grown the company over the years and has brought
it to the leading position in the industry by successfully executing the expansion projects in the past. With
the apparent availability of land as well as cash at hand, it should not be difficult for the management to
execute such project in future as well.
However, the key monitoring factor for any investor in MRF Limited would be to assess the performance
of the company when the past tailwinds of favourable raw material prices turn against the company as the
commodity cycle turns. Such times would require MRF Limited to continuously do capex when the
profitability margins would be falling.
The ability of the management to maintain the balance sheet strength during such times would be the
differentiating factor from other players if it is able to do so.
These are our views about MRF Limited. However, readers should do their own analysis before taking any
investment related decision about MRF Limited.
44 | P a g e
P.S:
45 | P a g e
3) Wonderla Holidays Limited
Wonderla Holidays Limited is a leading player in the Indian amusement park industry with operational
parks in the cities of Bangalore, Hyderabad and Cochin.
Wonderla Holidays Limited came out with its IPO in FY2015, therefore, the publicly available data contains
financial details of last 9 years (FY2008-16). Let us analyse the performance of Wonderla Holidays Limited
over last 9 years.
46 | P a g e
Wonderla Holidays Limited has been growing its sales at a good pace of 20-25% year on year for last 9
years (FY2008-16). The growth rate has been very good until now.
Wonderla Holidays Limited has operationalized a new amusement park at Hyderabad in March 2016, which
the company expects to help it in maintaining the growth momentum for next few years. Moreover, the
company has plans to start work on a new amusement park in Chennai, which would show visibility of
growth once the revenues from Hyderabad reach towards maturity/optimal levels.
The revenue growth of Wonderla Holidays Limited comes from operationalization of new parks, adding
new rides in existing parks, annual price hikes, and focus on change in revenue mix from predominantly
47 | P a g e
entry fees to food & beverages (F&B) etc. However, the most prominent factor, which is expected to
contribute to the bulk of the growth going ahead would be new park additions.
The current plans for the next park at Chennai seem to have faced some hurdles. As per the management
conference call with analysts in February 2017, Wonderla Holidays Limited disclosed that it is facing land
acquisition problems due to legal challenges. An investor should monitor the developments related to the
development of new parks closely to understand future growth prospects of the company.
Wonderla Holidays Limited has been able to maintain its profitability at a good level over the years. An
investor would notice that it has been reporting operating profitability margins (OPM) exceeding 40% for
the almost entire reported period (FY2008-16), barring FY2008.
The operating profitability margins of Wonderla Holidays Limited are the highest among the industry.
When we compare the OPM of the company with its listed peers: Adlabs Entertainment Limited and Nicco
Park and Resorts Limited, then we notice that the OPM of Wonderla Holidays Limited is much higher than
the profitability of both the listed peers.
48 | P a g e
Having an operating profitability margin higher than peers in a business, which is based on branding and
customer service is one of the evidence of the competitive advantage of the company.
However, the investor would also notice that the OPM of Wonderla Holidays Limited has been witnessing
steady decline over the years and have reduced from 51% in FY2011 to 41% in FY2016. The trend in the
decline in OPM has been accentuated in the current financial year (FY2017), when the company has
reported OPM of 20% and 19% in Sept 2016 and December 2016 quarters respectively.
The company has clarified that the reduction in OPM is on account of higher employee costs due to the
operationalization of new park at Hyderabad, provisioning for disputed taxes and most importantly on
account of higher marketing spend especially in Hyderabad.
While reading through the conference call transcript of February 2017, the investor would realize that
Wonderla Holidays Limited has done mistakes about its pricing strategy related to opening months of
Hyderabad Park by giving higher discounts, which spoiled the customer experience as it resulted in
overcrowding of the park. The poor customer experience has impacted the company reputation in
Hyderabad, which the company has acknowledged to the stakeholders.
49 | P a g e
As a result, now Wonderla Holidays Limited has to do significantly higher marketing spends in Hyderabad
including video mode of advertising, which is very costly and was not being done by the company in the
past. In the past, the company has stuck to print/still mode of advertising.
The footfalls in the Hyderabad seem to have improved, however, as highlighted in the above sections of
the conference call, the company seems to have toned down its footfall expectations in Hyderabad in
FY2017 from earlier 7 lac to now 6 lac.
Moreover, the higher advertising spend along with other factors has led to the operating profitability
margins falling drastically to 19% in December 2016 quarter, which is more in line with the OPM of its
peers (Nicco and Adlabs).
An investor should keep a close watch on the operating margins of the company going ahead to monitor
whether the company is able to recover to its previously high OPM levels or the current levels would
become the new normal.
An investor would appreciate that Wonderla Holidays Limited operates in a business, where the existence
of an amusement park in a locality gives the existing owner huge competitive advantage. Other players
usually do not come up with competing parks within the catchment area of an existing park. In such an
insulated business scenario, more often than not, it is the existing player on its own who is primarily
responsible for its poor performance if any.
50 | P a g e
Therefore, an investor would need to track the company’s actions and their impacts as it is most probable
that the fault would lie within the decisions of the company itself. While going through the conference call
of February 2017, the investor would notice that the company has got its pricing wrong in Bangalore Park
as well.
The customer would notice that in Hyderabad Park, the low pricing of tickets has impacted the customer
experience whereas, in the Bangalore park, it is the higher pricing of water park costumes, which is
impacting the customer experience.
It is a good sign that the company has identified and acknowledged its issues on both the locations and has
taken/plans to take remedial steps to improve the customers’ experience.
Nevertheless, an investor should keep it in mind that for such insulated businesses, the origination of the
problems mostly starts from within the company and its decisions and less from outside. Even if the
companies in such businesses are not able to expand in terms of new parks, they can always show a decent
growth only from incremental additions in the existing parks and inflation-linked price hikes provided they
keep on managing their operations efficiently.
As with the OPM, the net profit margin (NPM) of Wonderla Holidays Limited is also at a good level of 25-
29% over the years and has witnessed a decline to 6% in Sept 2016 and Dec 2016 quarters.
We advise that the investors keep monitoring the profitability margins of Wonderla Holidays Limited going
ahead.
Over the years, Wonderla Holidays Limited has a tax payout ratio of over 30%, which is in line with the
corporate tax rate prevailing in India.
While assessing the operating efficiency parameters, an investor would notice that Wonderla Holidays
Limited has a very low net fixed asset turnover (NFAT) over the years. NFAT used to be less than one until
FY2011 and has since improved to 1.41 in FY2016 as it used its existing parks at Bangalore and Cochin
more efficiently and produced higher revenues from these assets.
51 | P a g e
However, with the operationalization of Hyderabad park the NFAT at Sept 30, 2016, has again fallen less
than one as the assets of Hyderabad park, which were shown as part of capital work in progress (CWIP) on
March 31, 2016, are now part of fixed assets at Sept 30, 2016.
At Sept 30, 2016, the fixed assets stand at ₹318 cr. whereas the revenue of last 12 months (Oct 2015 – Sept
2016) is ₹234 cr.
NFAT of less than one is a very precarious situation for any company as it indicates that for generating
additional sales growth of ₹1, the company needs to invest more than ₹1 in new fixed assets.
The same has been true for its established parks e.g. at Bangalore as well as the newly launched park at
Hyderabad.
Q3-FY2017 results presentation of Wonderla Holidays Limited reflects that the Bangalore park is
generating a revenue of about ₹30 cr. per quarter, which is about ₹120 cr. per annum. As mentioned by the
company every new park costs about ₹250-300 cr. of investment including land.
Such heavy capital investment for generating every rupee of incremental sales puts companies in the very
precarious situation. It is essential that such companies earn high profitability on every rupee of revenue
generated by the heavy capital investment done by it. Otherwise, it is very likely that the companies would
either have to leverage themselves (or resort to equity dilution) to meet the future growth requirements (new
parks) or they would have to remain content without doing additional capex to maintain the balance sheet
strength.
An investor would notice that Wonderla Holidays Limited is generating an average CFO of about ₹55 cr
over last 5 years (FY2012-16) when its two mature parks (Bangalore and Cochin) have been functioning.
Assuming ₹8-10 cr. of maintenance capex of each park, Wonderla Holidays Limited would have to spend
about ₹20 cr on maintenance capex of Bangalore and Cochin parks and it would have saved about ₹35 cr.
each year for new capex (Hyderabad park) for last 5 years.
A rough calculation shows us that Wonderla Holidays Limited would have funded the ₹250 cr. for the
Hyderabad park by way of ₹175 cr. of internal accruals (₹35 cr * 5) and the balance ₹75 cr. from the IPO
proceeds of ₹180 cr. (IPO in FY2015). This leaves the company with about 105 cr. of IPO proceeds, which
it may use for Chennai park.
52 | P a g e
An investor would notice that the funding through the IPO proceeds helped Wonderla Holidays Limited
maintain its near debt-free position, otherwise, the company would have to bridge the gap between the cost
of the Hyderabad park and the internal accruals through debt.
Moreover, it is not that the IPO did not have any cost for the company. As per the FY2015 annual report,
the company paid ₹11.25 cr. as IPO charges to various parties like merchant bankers, which is about 6.25%
of the total IPO size (= 11.25/180). 6.25% as fee/charges is a significant amount of commission to be paid
for raising money.
Such a situation of raising high-cost IPO funds arose during the times the company was generating very
good OPM of about 45% consistently during FY2012-16.
The proposed park at Chennai, as per management, is expected to cost about ₹300 cr. At Sept 30, 2016,
Wonderla Holidays Limited had a cash + current investment balance of about ₹82 cr.
So the company needs to generate the balance about ₹220 cr. from internal accrual over next 3 years, if the
company is to complete the park by Sept 2019.
We have noticed above that two mature parks (Bangalore and Cochin) are generating about ₹35 cr. of total
FCF (i.e. about ₹17 cr. per park) per year. Assuming early optimal utilization of Hyderabad park and same
45% OPM, the company might generate about ₹50 cr. of FCF (post maintenance capex of all the parks)
each year, which would have generated about ₹150 cr. the worth of internal accruals (assuming 45% OPM)
over next 3 years to fund the development of Chennai park. The balance ₹70 cr needs to be raised by
additional debt/equity dilution.
The gap of ₹70 cr. in the financial closure from remaining IPO proceeds and internal accruals is assuming
OPM of 45% for each park. However, as we have noticed that since last 2 quarters, the OPM of Wonderla
53 | P a g e
Holidays Limited has drastically come down to about 20%, therefore, it becomes essential that the company
recover its profitability in a timely manner otherwise, the financial gap would increase significantly and the
current strength of the balance sheet would not remain at the same levels.
Investors also need to keep in mind that the Chennai project is currently facing land acquisition related
challenges and any delay might add to the cost of the project and as a result, the funding gap.
(Please note that these are rough calculation and do not factor in various outflows like dividend payments,
interest cost on existing small debt etc. and also do not take into account any expense already done for land
acquisition of Chennai park, as there is CWIP of about ₹46 cr. at Sept 30, 2016)
The above analysis would indicate to investors that it is essential for companies with low NFAT to earn
high profitability, otherwise, maintaining the balance sheet strength becomes a challenge and we might see
companies falling into a debt trap in order to chase non-profitable debt-funded capital intensive growth.
Examples of two companies with low NFAT and low profitability, which fell into debt trap while chasing
the non-profitable debt-funded capital intensive growth are Amtek India Limited (Castex Technologies
Limited) and Ahmednagar Forgings Limited (Metalyst Forgings Limited).
Investors should read these cases to understand the stress a capital intensive business with low NFAT can
put on the balance sheet of the company if such a business is not associated with high profitability margins.
Read: Analysis: Amtek India Limited (Castex Technologies Limited)
Read: Analysis: Ahmednagar Forgings Limited (Metalyst Forgings Limited)
It is also essential that companies operating in capital intensive business manage their working capital very
efficiently. This is because even if the company reports high profitability numbers but if these profits are
not converted into cash and are stuck in inventory and receivables, then the company would be facing a
cash crunch and would again fall into debt seeking environment.
In the case of Wonderla Holidays Limited, it is a good characteristic of the business that the sales of the
company are on advance/cash payment basis and do not involve credit sales. This is the reason that the
company reports the very low level of receivables (₹1 cr.) when compared to sales of ₹205 cr. in FY2016.
Similarly, the company does not need to keep a lot of inventory on its books as most of its business
operation/services are the rides, which are fixed assets.
Such business characteristics put the company in an advantageous position from the perspective of cash
flow management.
We can see that over last 9 years (FY2008-16), the company has reported cumulative cash from operations
(cCFO) of about ₹372 cr. against cumulative net profit after tax (cPAT) of ₹263 cr. over the same period
indicating that entire profits have been converted into cash.
With working capital situation under control, Wonderla Holidays Limited only needs to keep operating its
fixed assets (parks) operating efficiently and with high profitability margins.
54 | P a g e
Wonderla Holidays Limited is currently available at a P/E ratio of about 56 (based on TTM EPS), which
does not offer any margin of safety in the purchase price as described by Benjamin Graham in his book The
Intelligent Investor.
If we look at the prevailing P/E ratio (56) of Wonderla Holidays Limited (February 27, 2017), from the
approach to valuation that we follow while assessing the investable P/E ratio of stocks, then we realize that
the P/E of 56 is at a very high level than what we would have been willing to pay for the company.
Overall, Wonderla Holidays Limited seems to be a company growing at a decent pace despite being in a
capital intensive business as its growth had been associated with high profitability margins and healthy cash
collections from business operations. The company could maintain a strong balance sheet as it funded the
gap in the capex for Hyderabad park through IPO proceeds rather than going for debt funding.
The above analysis indicates that going ahead in all probability, the remaining cash from the IPO proceeds
and the internal accruals from existing park operations would not suffice for meeting the financial closure
requirement of Chennai park and the company might have to resort to debt/further equity dilution in future.
The current healthy balance sheet of the company along with good credit rating of AA- (ICRA, August
2016), would ensure that the company might not face any challenge in raising the debt to achieve the
financial closure for the Chennai park.
In light of such a situation maintaining a high profitability, margin is mandatory for the company to keep
the strength of the balance sheet intact. Therefore, the declining profitability margins of recent quarters are
a cause of concern and need to be tracked closely by investors.
These are our views about Wonderla Holidays Limited. However, readers should do their own analysis
before taking any investment related decision about Wonderla Holidays Limited.
P.S:
55 | P a g e
4) Divi’s Laboratories Limited
Divi’s Laboratories Limited is a Hyderabad-based Indian pharmaceutical manufacturer, which focuses on

making active pharmaceutical ingredients (API) and intermediates as primary business activities.
Divi’s Laboratories Limited has two subsidiaries that are based out of the USA and Europe, which currently
have a minor scale of operations as compared to the main entity Divi’s Laboratories Limited. Therefore,
standalone financials form the bulk of the overall financial position of the company.
However, 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, we always advise that investors should focus on the consolidated financial
position of the company.
Therefore, while analysing the performance of last 10 years for Divi’s Laboratories Limited, we have
analysed the consolidated financial performance of the company.
56 | P a g e
Divi’s Laboratories Limited has been growing its sales at a good pace of 18-20% year on year for last 10
years (FY2007-16). The growth rate has been very good until now. The company seems to have been
57 | P a g e
increasing its manufacturing capacity continuously, which is evident from the consistent year on year
capital expenditure (Capex) of about ₹250-300 cr. being done by Divi’s Laboratories Limited for last 5
financial years (FY2011-16)
Even for the current financial year (FY2017), as per the press release dated February 4, 2017, by Divi’s
Laboratories Limited for December 2016 quarterly results, the company has stated that it has done about
₹180 cr. of capex in 9M-FY2017. It has also communicated that at December 31, 2016, about ₹400 cr.
worth of capital work in progress has been incurred, which is expected to lead to the growth in coming
years.
The company has been expanding its capacity on a continuous basis and in such a scenario, the project
execution skill of the management to complete the ongoing projects within reasonable time & costs
becomes a key differentiating factor between the companies. Completing the projects on time as projected,
is essential as otherwise, there is a risk of the company losing out on the customer orders as well as an
increase in costs due to increasing labour costs, increasing raw material costs in inflationary scenarios etc.
While communicating with the shareholders, in the FY2016 annual report, Divi’s Laboratories Limited has
informed the stakeholders that its ongoing capital expansion should get completed and the plant gets
operational within FY2017.
As per the above-mentioned press release, the plant is yet to get completed for about 2 months in the
financial year to spare. It is advised that the investor should focus on the communications from the company
as well as other reports like management interviews, equity research reports from brokerages and try to
track the progress of ongoing capital expansion projects.
58 | P a g e
The credit rating agency CARE Limited, in its report for Divi’s Laboratories Limited in October 2016, has
highlighted the timely project completion as one of the key rating sensitivities.
An investor would notice that CARE Limited has highlighted that Divi’s Laboratories Limited has a product
concentration risk with top few products constituting the bulk of the sales.
When an investor analyses the annual report of Divi’s Laboratories Limited for FY2016, then she gets to
know that the top 5 products constitute about 43% of the total revenue. We believe that product
concentration might not be a challenge if the company is a market leader in the products and the
management has been dealing in those products since long and has built in formidable expertise in the
products.
On the face of it, the sole parameter of the revenue share of 43% from top 5 products does not seem too
high a risk if the company is able to handle the associated factors well.
As on date, the company seems to be doing well in protecting its profitability as it has been able to maintain
healthy profitability margins.
An investor would notice that over the years, the operating profit margins (OPM) of Divi’s Laboratories
Limited, have been continuously in the range of 37-40%, which is higher than the profitability margins
shown by other similar sized (by market capitalization) Indian pharmaceutical players: like Torrent
Pharmaceuticals Limited (Mcap: ₹21,330 cr), GlaxoSmithKline Pharmaceuticals Limited (Mcap: ₹22,600
cr), Ajanta Pharma Limited (Mcap: ₹15,350 cr), Natco Pharma Limited (Mcap: ₹13,300 cr) and Biocon
Limited (Mcap: ₹22,500 cr) etc.
The chart below compares the operating profit margins of the above-mentioned companies for past 10 years
(FY2007-16):
59 | P a g e
The above chart shows that the OPM of Divi’s Laboratories Limited is substantially higher than its similarly
sized peers (by market capitalization). OPM of most of other players is within the range of 20-25%, whereas
the OPM of Divi’s Laboratories Limited is about 37-40%.
On the face of it, such profitability margins are very good and it indicates that the company might be
enjoying very good relationships with its buyers, which are primarily large global pharmaceutical players,
which use the API and intermediaries supplied by Divi’s Laboratories Limited into branded generics.
An investor would notice that Divi’s Laboratories Limited is primarily an active pharmaceuticals
ingredients (API) and intermediaries manufacturer, which for pharmaceutical industry can be compared to
the outsourced auto-ancillaries business in the automobiles industry. It is a common perception that in the
supply chain, usually the OEM retains the highest margins and squeezes out the profitability margins out
of the vendors.
In the case of pharmaceutical space, the analogy can be thought as the case of players like Divi’s being the
vendors and the players selling branded generics as the OEM players.
However, the investor would notice that the OPM of Divi’s Laboratories Limited is also significantly higher
than the players, which are into branded generics.
The following chart compares the OPM of Divi’s Laboratories Limited with key branded generic players
like Cadila Healthcare, Cipla Limited, Aurobindo Pharma Limited and FDC Limited:
60 | P a g e
The investor would notice that the OPM of most of the players in the branded generics space like Cadila,
Cipla, Aurobindo, FDC etc. is in the range of 20-25%, which is significantly lower than the profitability
margin enjoyed by Divi’s Laboratories Limited.
It is advised that the investor should dig deeper into advantages that Divi’s Laboratories Limited has as
compared to its peers, which are allowing it to have superior margins over the peers. It is expected that
higher margins attract higher competition, which in turn leads to lowering of profitability margins for the
players going ahead.
Divi’s Laboratories Limited has been enjoying a net profit margin of about 27-30% over the years, which
seems very good. In fact, the NPM of Divi’s Laboratories Limited is higher than the OPM of many of its
peers.
Such performance warrants deeps study into the sources of competitive advantages by the investor.
The tax payout ratio of Divi’s Laboratories Limited is slightly lower than the corporate tax rate in India,
which as rightly mentioned by you, seems to be due to the SEZ units and export nature of the business of
the company, which enjoys concessional tax rates by the Govt.
Operating efficiency parameters of Divi’s Laboratories Limited reflect that the net fixed assets turnover
(NFAT) has been within the range of 2.4 to 2.8 over the years. It indicates that the company has been able
61 | P a g e
to improve the utilization levels of its previously done capital expenditure as it has continued to invest in
fresh capacity on an ongoing basis.
Working capital efficiency parameters of Divi’s Laboratories Limited and its comparison with similar sized
(by market capitalization) pharma peers reflect that Divi’s Laboratories Limited has lower inventory
turnover when compared to its peers.
The below chart compares the inventory turnover ratio (ITR) of Divi’s Laboratories Limited with Torrent
Pharmaceuticals Limited (Mcap: ₹21,330 cr), GlaxoSmithKline Pharmaceuticals Limited (Mcap: ₹22,600
cr), Ajanta Pharma Limited (Mcap: ₹15,350 cr), Natco Pharma Limited (Mcap: ₹13,300 cr) and Biocon
Limited (Mcap: ₹22,500 cr).
We notice that the inventory turnover ratio (ITR) of Divi’s Laboratories Limited has been consistently
lower than its above-stated peers.
Similarly, when we measure the working capital cycle of Divi’s Laboratories Limited in a number of days
and compare it with its above-stated peers, then the investor notices that its working capital days are higher
than the peers.
62 | P a g e
(Working capital days have been calculated as receivables day + inventory days. We exclude payables days
in our analysis as long payable days might be due to liquidity crunch with the company rather than its
negotiating power with vendors). Inventory Days = 365/inventory turnover ratio.
The above analysis indicates that the working capital management of Divi’s Laboratories Limited can be
improved when compared to the performance of its peers. The same concern has been highlighted by CARE
Limited in its credit rating rationale for the company in October 2016:
The working capital assessment of the company over the years indicates that the funds have been stuck in
the receivables and inventory over the years, which has resulted in the cumulative CFO being less than
cumulative PAT over last 10 years (FY2007-16).
Over FY2007-16, Divi’s Laboratories Limited reported a cumulative PAT of ₹5,592 cr. whereas over the
same period, the company had the cumulative CFO of ₹4,711 cr.
An investor should keep a watch on the operating efficiency parameters especially inventory utilization
going ahead to ascertain whether the company is able to improve its working capital utilization going ahead.
It is advised that the investor should do her own analysis in arriving at conclusions in such cases and not
63 | P a g e
rely on management statements as managements are known to defend their decision irrespective of the final
outcome.
The investor would notice that Divi’s Laboratories Limited has an SSGR of about 40-43% over the years,
which is significantly higher than the sales growth rate of 18-20% being achieved by the company in the
past.
Even after adjusting for the factor of funds being consumed in the working capital (cCFO/cPAT) = 0.84
(4711/5592), it becomes evident that the company should be able to support a growth of about 30-32%
(SSGR 40-43% * 0.84) without the requirement of additional funds for growth.
The analysis of debt levels of Divi’s Laboratories Limited over last 10 years (FY2007-16) indicates that the
debt of Divi’s Laboratories Limited has decreased from ₹154 cr. in FY2007 to ₹42 cr. in FY2016.
The reduction in debt over the years with sustained sales growth indicates that the company is able to
generate surplus funds over and above the requirements of the company. This assessment of SSGR gets
substantiated when the investor analyses the free cash flow (FCF) position of Divi’s Laboratories Limited.
An investor would notice that Divi’s Laboratories Limited has generated ₹4,711 cr. from cash flow from
operations (CFO) over last 10 years (FY2007-16) whereas it has spent ₹1,957 cr as capital expenditure over
the same period resulting in a free cash flow (FCF) of ₹2,754 cr.
The presence of significant amount of FCF has ensured that the company has been able to reduce its debt
levels despite stretched working capital cycle and ongoing capex. Moreover, the company has utilized the
free cash to pay dividends to shareholders of about ₹1,458 cr and it still has about ₹874 cr. with itself as
cash and investments.
company.
This strong cash flow position with optimal utilization of fixed assets has ensured that the company could
increase its dividend payouts to shareholders with increasing profits.
Such performance has 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 ₹16,500 cr. over FY2007-16
versus the earnings retained and not distributed to shareholders of about ₹4,100 cr. indicating that a market
value of about ₹4 has been created by the company for its shareholders for each ₹1 of earnings retained by
it over the years.
The salaries of three of the key management personnel:
 Mr. Murali Divi (₹45 cr),
64 | P a g e
 Mr. N.V. Ramana (₹23 cr) and

 Mr. Kiran Divi (₹15.5 cr)
sums up to about ₹83.5 cr. per annum, which is about 7.5% of the PAT of Divi’s Laboratories Limited for
FY2016 (₹1,112 cr).
We have noticed that the salary of promoters being about 2-5% over the years is an average across
industries, which includes a fixed salary component and about 2% of commission on the profits generated
by the company.
The above remunerations though not exorbitant from the perspective of the percentage of net profits, seem
high from absolute level perspective.
We suggest that the investor should look the management assessment of Divi’s Laboratories Limited both
from the aspect of remuneration as well as an interesting observation, which gets highlighted when the
investor analyses various exchange filings done by Divi’s Laboratories Limited over last year.
On August 31, 2016, Divi’s Laboratories Limited wrote to stock exchanges while denying that there has
been any import alert against its facilities:
In the letter, Divi’s Laboratories Limited explained that the apparent import ban by USFDA resulting due
to the company refusing to let the regulators inspect the facility, which is being highlighted in the media
does not pertain to it but to some other company by the name of “M/s Divi’s Pharmaceuticals Private
Limited”
However, when the investor analyses the annual report of Divi’s Laboratories Limited for FY2016, then
she notices that M/s Divi’s Pharmaceuticals Private Limited is an associate company of Divi’s Laboratories
Limited where the key management personnel have significant influence.
65 | P a g e
This is further evidenced when the investor tries to search for the directors of Divi’s Pharmaceuticals Private
Limited. As per the corporate database Zaubacorp, the directors of Divi’s Pharmaceuticals Private Limited
include Mr. Murali Divi and Mr. N.V. Ramana.
Two things become evident from this observation:
1. The promoters might have other businesses in their personal capacity, which might be competing
with Divi’s Laboratories Limited in the same markets as the facility owned by Divi’s
Pharmaceuticals Private Limited controlled by Mr. Divi and Mr. Ramana is being assessed by
USFDA, indicating that Divi’s Pharmaceuticals Private Limited might also either be already
exporting drugs/pharmaceutical products to US markets or is planning to do the same.
2. Despite payment of significant salaries of ₹45 cr. to Mr. Divi and ₹23 cr. to Mr. Ramana, the
promoters are not devoting their 100% professional caliber to Divi’s Laboratories Limited and
might be running personal competing businesses on the parallel.
An investor should also be cautious about the recent issues faced by the company related to observations
highlighted by brokerage Emkay Global in the USFDA inspection of its facilities in recent months. As per
media reports, USFDA has among other things highlighted the inaccuracy/falsification of data by the
company. The following extract from the BSE website indicates the clarifications sought by it from the
company in this regard:
66 | P a g e
Divi’s Laboratories Limited has given general responses to BSE without detailing the actual
observations/alerts highlighted by USFDA.
The observation of falsification of data, if true, assumes very high significance as it directly questions the
integrity of the management and the corporate governance structure and practices at the company.
In the past, there have been many cases where Indian companies in the pharmaceutical field have been
found guilty of data manipulation to get the regulatory approvals.
Among such cases, the investors would remember recent cases of GVK Biosciences being accused of
manipulating clinical trials data in September 2014, which resulted in the suspension of approvals of
multiple drugs in Europe, which were based on the clinical data of research/studies done by GVK
Biosciences.
Another such case, which has been consistently highlighted is of Ranbaxy, which has also been accused of
and pleaded guilty to similar charges by USFDA.
It is advised that the investors should be cautious and keep the above issue in mind while making any
investment decision about Divi’s Laboratories Limited.
Let us now address certain other aspects related to the company & the queries asked by readers:
1) NCF is lower than cash at end of year also a lot of cash inflow is happening from financing activity–
what does that signify?
Net cash flow (NCF) is the net change in the cash experienced by the company during a year. NCF is the
sum of CFO, CFI and CFF.
Cash at the end of the year is the sum of cash at the start of the year (which is same as the cash at the end
of previous year) and the NCF during the year.
The cash flow data indicates that in all the years during FY2007-16, Divi’s Laboratories Limited has
witnessed positive CFO and negative CFI and negative CFF. This means that the company received funds
from operations (CFO) and used these funds to make investments in plant & machinery, mutual funds etc.
(CFI) and to pay dividends to shareholders, repayment of debt etc. (CFF).
2) A lot of MF have reduced their holding in the company though not very significantly in FY 15-16,
FII already hold 19.5%, is there upside left in this stock?
67 | P a g e
We do not recommend taking investment decisions based on actions of Mutual Funds and other institutional
investors as many times such institutions have to sell stocks to meet redemption requests from their
subscribers. Their sell decisions might not be based on changing fundamentals of the investee company.
We do not have any view about the future stock price movement of Divi’s Laboratories Limited
3) One promoter Nilima Motaparti holds 20.34% shares, couldn’t find out about her.
In case the details about any promoter are not available in the public domain, then the investor may approach
the company related to her queries if she has any.
4) OPM% is dropping year on year, it could be linked to company's pricing power. How do we find
out the reasons for this?
The decline in OPM might be a result of declining power of any company over its suppliers. The analysis
of the company above deals the comparative aspects of the OPM of the company with its peers. We suggest
that the investor should look deeper into it by getting in touch with the company, its vendors, suppliers,
competitors etc. by doing primary research.
5) The tax rate is less than the corporate rate which could be because 2 of the plants are in SEZ, how
can this be confirmed?
An investor may get the confirmation from the company by contacting the investor relationship officer
assigned by the company.
6) Debt is negligible but on the rise for last 2 years. Should that be a cause for concern?
As mentioned by you, the debt levels are low when compared to the overall cash position of the company
and should be a cause of grave concern if the provided information by the company in its financial
statements is correct.
Divi’s Laboratories Limited is currently (February 21, 2017) available at a P/E ratio of about 17-18, which
does not offer any margin of safety in the purchase price as described by Benjamin Graham in his book The
However, as discussed above, the reported financial numbers of Divi’s Laboratories Limited seems to have
a good margin of safety in terms of its business as reflected by good SSGR and FCF position.
Overall, Divi’s Laboratories Limited seems to be a company growing at a descent pace of 18-20%, with
good profitability margins. However, the profitability margins of the company seem significantly higher
when compared with its peers. The company seems to have been managing its cash positions well with
optimal utilization of its capital investments and has been able to meet its entire capex requirement from its
internal accruals.
68 | P a g e
The company has been facing higher working capital cycle than its peers and it remains to be seen whether
the company is able to improve the same in future. However, good cash flow position of the company has
ensured that the despite higher working capital cycle, the company has been able to avoid debt burden.
The company management seems to be taking high salaries but might not be devoting full attention to
company’s business. It might be that the promoters are running parallel competing businesses in their
personal capacity.
The recent news about the probability of USFDA detecting falsification of data by the company are
significant and the investor should dig deeper and monitor the developments around it as it questions the
integrity and corporate governance levels at the company and promoter level.
These are our views about Divi’s Laboratories Limited. However, readers should do their own analysis
before taking any investment related decision about Divi’s Laboratories Limited.
P.S:
69 | P a g e
5) Caplin Point Laboratories Limited
Caplin Point Laboratories Limited is an Indian pharmaceutical generics player focusing on Latin America,
Sub-Saharan Africa markets.
We suggest that investors should analyse the standalone financials of the company until the time it did not
have any subsidiary (June 2010) and analyse consolidated financials post that. This is because while
analysing any company, the investors should always look at the company as a whole and focus on financials
which represent the business picture of the entire group.
The company used to follow the financial year from July to June until FY2015 and in FY2016, to comply
with the Companies Act 2013, the company declared results for 9 months containing performance from
July 2015 to March 2016.
Therefore, it helps if the investors analyse the 12-month numbers preceding March 2016 (i.e. from April
2015 to March 2016) as looking at 12 monthly numbers helps in better understanding of the trend of the
company’s performance over a long period of time.
However, in the case of this adjustment, the quarter of June 2015 gets double counted, first, in the period
July 2014 to June 2015 and then again during the period April 2015 to March 2016. Therefore, while doing
an analysis of the data of performance over 10 years i.e. from FY2007-16, it is advised that one adjusts for
this double counting of June 2015 quarter data.
Let us analyse the performance of Caplin Point Laboratories Limited over last 10 years.
70 | P a g e
Caplin Point Laboratories Limited has been growing its sales since last 10 years (FY2007-17) at a brisk
pace of about 20-25% year on year, which has increased to about 30% year on year in the last 5-7 years.
The sales revenue grow by about 9 times from ₹44 cr. in FY2007 to ₹405 cr. in FY2017.
The company has realized this growth by way of creating additional capacity in the form of its own
manufacturing plants as well as increasing higher outsourcing of manufacturing of a lot of products to
China. (Annual Report FY2016, page 21):
71 | P a g e
Going ahead, Caplin Point Laboratories Limited seems to be looking for using the capacity in the 4 th unit
(CP-IV) near Chennai and the outsourcing channel from China to generate the supply needed future growth.
Usage of outsourcing would help it bypass the capacity constraints if any.
While analysing the growth of the company in the last decade, an investor would notice that Caplin Point
Laboratories Limited has achieved the growth rate of 25-30% year on year with significant improvement
in its profitability margins. The operating profitability margin (OPM) has improved from 4% in FY2010 to
32% in FY2017. This is a very good performance by the company.
This performance starkly stands out when we compare the OPM of Caplin Point Laboratories Limited with
some of the other Indian small pharmaceutical players having FY2017 annual sales of less than ₹1,000 cr.
viz: Lincoln Pharmaceuticals Limited (₹360 cr), Anuh Pharma Limited (₹206 cr), Bliss GVS Pharma
Limited (₹799 cr) and Venus Remedies Limited (₹418 cr).
72 | P a g e
An investor would notice that the OPM for Caplin Point Laboratories Limited has defied the industry trend
over the years. For most of the other peers, identified above, OPM has either remained stagnant, improved
marginally or declined over the years. However, the OPM for Caplin Point Laboratories Limited has
increased sharply from FY2010 to FY2017.
Such standout improvement in the operating margins of any company indicates that the improvement in
OPM is not a result of only the industry tailwinds e.g. fall in raw material prices e.g. crude derivatives. Such
comparative outperformance results from company specific factors, which need to be analysed further.
In the annual report for FY2016, page 24, the management of Caplin Point Laboratories Limited has
outlined the key reasons for the margins improvement:
The company has communicated that the increase in margins is on the account of multiple factors including:
 The improved supply chain, logistics and distribution, which involved selling the products directly
to retailers,
 Change in product mix to include more of high margin products and
 The decline in raw material costs, which are in turn linked to the price of crude oil.
An investor would notice that out of the three reasons for improvement in the margins highlighted by the
management, improving supply chain & distribution and product mix are the company specific factors,
which indicate that the management of Caplin Point Laboratories Limited has been able to add value to the
business by way of timely decisions and outperform its peers.
73 | P a g e
As Caplin Point Laboratories Limited is an almost debt-free company, therefore, the net profit margin
(NPM) has followed the trend of its operating profitability margins due to the absence of the impact of
interest expense. Otherwise, for debt-laden companies, interest expenses eat up the improvements in OPM
and do not allow the benefits of business to reach the equity shareholders.
NPM of Caplin Point Laboratories Limited has improved from 2% in FY2008 to 24% in FY2017.
The tax payout ratio of Caplin Point Laboratories Limited has been consistently below the standard
corporate tax rate. One of the reasons for the same, as rightly pointed out by you, is the tax benefits available
to the company’s manufacturing unit (CP-III) at Baddi, Himachal Pradesh. Caplin Point Laboratories
Limited has disclosed the same in its FY2016 annual report, page: 100:
However, it is important to note that Caplin Point Laboratories Limited has decided to shut down this
manufacturing unit (CP-III) as the company plans to continue manufacture these products from Pondicherry
unit and by way of outsourcing. FY2016 annual report, page 15:
One of the reasons for this decision might be the upcoming end of the tax exemptions for this unit, which
might lead to increase in tax payout ratios going ahead. An investor may take further clarity from the
company about the various tax exemptions, which Caplin Point Laboratories Limited is enjoying currently
and the time period for which these exemptions would be available.
Operating efficiency performance:
While assessing Caplin Point Laboratories Limited an investor would note that the company has stressed
on outsourcing the manufacturing of a lot of its products. As a result, the share of the sale of outsourced
74 | P a g e
products has increased from 25% of sales in FY2011 to 60% of sales in FY2016. FY2016 Annual Report,
page 17:
Moreover, the management has also stressed its focus on being an asset-light business. FY2016 Annual
Report, page 9:
Looking at the above parameters, an investor would assume that Caplin Point Laboratories Limited would
have a net fixed asset turnover (NFAT) level, which would be high both on absolute levels as well as on
comparative levels than the peers.
However, an investor notices that the NFAT level of Caplin Point Laboratories Limited has been declining
over the years. NFAT has declined from 4.14 in FY2008 to 2.34 in FY2015. There has been a significant
75 | P a g e
decline in NFAT after reaching the level of 4.22 in FY2013. As rightly pointed out by you, the key reason
for the decline in NFAT of Caplin Point Laboratories Limited seems to be commissioning of CP-IV unit in
Tamil Nadu in FY2014.
The increasing utilization levels of CP-IV over recent years have seen the NFAT improve from the lows of
2.34 in FY2015 to 2.74 in FY2017.
Moreover, when an investor compares the NFAT level of Caplin Point Laboratories Limited with the above-
mentioned peers to check the comparative asset-light nature of the business, then she notices that the
performance of Caplin Point Laboratories Limited is nothing remarkable:
The investor would note that the peers of Caplin Point Laboratories Limited have better NFAT ratio and
thereby more advantageous asset-light business model. Caplin Point Laboratories Limited has NFAT,
which is much lower than the NFAT of some of its peers. Therefore, it does not look like that Caplin Point
Laboratories Limited is doing something out of the box by doing outsourcing of its product manufacturing,
which other peers are not doing.
76 | P a g e
The above graph indicates that Anuh Pharma Limited has a significantly higher NFAT when compared to
any of the other compared companies.
In fact, an investor would notice that outsourcing of manufacturing of products is fairly common in the
pharmaceutical industry as the key players prefer to focus mainly on marketing and distribution.
However, disregarding the comparative standing of Caplin Point Laboratories Limited, an investor would
appreciate that the management of the company has been able to steer the company by way of a mix of in-
house manufacturing and outsourcing that it has been able to achieve remarkable sales growth of about 30%
over the years without leveraging its balance sheet. We will discuss it more in the later part of this article.
Caplin Point Laboratories Limited has managed to reduce its receivables days from the high of 69 days in
FY2008 to 18 days in FY2017. This is a significant improvement in the credit terms being offered by the
company to its customers and subsequent collection practices. The company has managed to achieve a level
of receivables days being 1 day in FY2014.
Such reduction in the receivables days is a good performance by Caplin Point Laboratories Limited when
we compare the performance of the company with the above-mentioned peers:
77 | P a g e
An investor would notice in the above comparative chart that the receivables days of Caplin Point
Laboratories Limited has defied the industry trend where receivables days of most other peers over FY2008-
16 have either increased or stayed within the same range. However, Caplin Point Laboratories Limited has
witnessed a significant reduction in its receivables days.
This observation gains further significance in the light that the key markets serviced by Caplin Point
Laboratories Limited are Latin American, Sub-Sahara African etc., which are known to face a lot of issues
in relation to law and order. So on the face of it, it would seem that it would be extremely hard for any
company to enforce contracts and collect the money from these geographies.
However, as mentioned by the company in its communication to stakeholders, the difficult law and order
situation in these countries has ensured that many companies hesitate to serve these markets. This, in turn,
reduces the options available to the customers in these countries to source pharmaceutical products. As a
result, the customers in these countries are willing to accept the strict payment terms offered by those
companies who wish to supply to these markets.
No wonder that Caplin Point Laboratories Limited has been able to sell its products in these markets on
advance payment basis. The company has acknowledged in its FY2016 annual report (page 24) that the
dealers pay it in advance for their orders and in fact, the ability to get advance payments has helped the
company to stay debt free.
Moreover, while analysing the balance sheet, the investor would notice that at March 31, 2016, Caplin Point
Laboratories Limited had received an advance of about ₹57 cr. from its customers for which it needed to
supply products.
Caplin Point Laboratories Limited seems to have used the weak law and order situation of its markets in its
favour by gaining the trust of its customers and making them pay in advance for the goods.
The inventory levels also seem to be managed efficiently by Caplin Point Laboratories Limited as the
inventory turnover ratio (ITR) has improved from 8.6 in FY2009 to 19.7 in FY2017.
78 | P a g e
It seems that as a result of efficient working capital management by Caplin Point Laboratories Limited, it
has been able to fund its entire working capital needs of inventory and receivables from its trade payables.
At March 31, 2017, Caplin Point Laboratories Limited had an inventory of ₹22 cr. and trade receivables of
₹33 cr. This working capital requirement of ₹55 cr. (22+33) has been sufficiently funded by the outstanding
trade payables of ₹78 cr. at March 31, 2017. Effectively, the suppliers are funding a lot of business
operations of Caplin Point Laboratories Limited.
An investor should not forget the significant amount of advances that Caplin Point Laboratories Limited
receives from its customers, which in the above table is part of “other current liabilities” of ₹33 cr.
Therefore, an investor would notice that Caplin Point Laboratories Limited has been able to manage its
working capital well to generate funds and use it for other aspects of the business.
The investor would notice that Caplin Point Laboratories Limited has an SSGR of about 26-28% over the
years whereas it has been growing its sales revenue at a growth rate of about 30% in the recent years.
rely on the fund infusion from outside in terms of debt or equity.
However, as rightly pointed out by you, in case a company is able to efficiently manage its working capital
and in turn have a higher cash flow from operations (CFO) than its PAT, then the excess CFO helps to fund
79 | P a g e
its business expansion attempts over and above the SSGR levels. In such cases, the companies are able to
grow at a rate higher than SSGR and still stay debt-free.
An investor would notice that during FY2007-16, Caplin Point Laboratories Limited had a total net profit
of ₹149 cr. and during the same period, it had reported a total cash flow from operations (CFO) of ₹242 cr.
The higher CFO levels than PAT have helped Caplin Point Laboratories Limited to fund its growth of 30%
year on year from its internal resources, which is more than its SSGR (26-28%) and stay almost debt free
over the years.
This assessment gets substantiated when the investor analyses the free cash flow position of Caplin Point
Laboratories Limited.
Over FY2007-16, Caplin Point Laboratories Limited has witnessed its sales increase from ₹44 cr. in
FY2007 to ₹309 cr. in FY2016 (12 months). For achieving this sales growth the company has done an
additional capital expenditure (capex) of ₹162 cr. However, Caplin Point Laboratories Limited has
generated a cash flow from operations (CFO) of ₹242 cr. over FY2007-16 leading to a surplus of ₹80 cr. as
free cash flow (FCF) to its shareholders. SSGR and FCF are two of the main pillars of assessing the margin
of safety in the business model of any company.
Caplin Point Laboratories Limited seems to have utilized the resulting free cash flow (FCF) to consistently
pay dividends to the equity shareholders since FY2010. Since then Caplin Point Laboratories Limited has
paid a total dividend (excluding dividend distribution tax) of about ₹33 cr. to its equity shareholders.
While studying about Caplin Point Laboratories Limited, an investor comes across certain other aspects,
which are important for analysis and subsequent final investment decision by investors:
1) Innovative and risk taking promoters/management:
In the annual report, the promoter chairman has disclosed the manner in which the company took the risk
and decided to establish business operations in a war-ridden country, Angola.
The promoters decided to open a restaurant offering Indian cuisine to get business networks to establish
their pharmaceutical business in the country. The food was offered free on the first day to gain the visibility
and the idea worked. FY2016 annual report, page 21:
80 | P a g e
However, running the business was not easy. In fact, staying in the country itself was not free of risks. The
chairman shares an incident where he was robbed at the gunpoint in Angola. FY2016 annual report, page
21:
Such events and incidences indicate that the promoters of Caplin Point Laboratories Limited are able to
think out of the box and are willing to take a lot of risks to put their vision into action.
81 | P a g e
2) Management succession planning:
As rightly highlighted by you, the son of the founder promoter, Mr. Vivek Siddarth, who has completed his
education from Harvard Business School in 2016 (LinkedIn), has joined the company as chief operating
officer.
The presence of the next generation of promoter’s family in the company management offers a visibility of
smooth management succession in the company.
3) No salary being taken by founder promoter:
As per the disclosures by Caplin Point Laboratories Limited, its founder promoter, Mr. C Paarthipan, who
is currently the chairman of the company is not taking any salary/remuneration from the company. Annual
report FY2016, page 58:
As per our experience of analysing multiple companies, the analysis of many of such companies is present
on our website (click here), it is not a common occurrence that the founder promoter, who helped the
business of the company take shape is not taking any salary/remuneration from the company.
4) Nominal salary to the son of the founder promoter:
The related party section of FY2016 annual report of Caplin Point Laboratories Limited, page 99 indicates
that the son of the founder promoter, Mr. Vivek Siddharth is being paid a salary of about ₹1.50 lac per
month. (₹18 lac in 12 months in FY2015 and ₹13 lac in 9 months in FY2016).
82 | P a g e
This salary level is equal to average starting salary levels for corporate jobs for tier A business schools in
India. It is to be noted that Mr. Vivek Siddharth has completed his education from Harvard Business School
(LinkedIn) and might get a job at a remuneration higher than ₹1.50 lac per month in other corporates.
Moreover, this is in stark contrast to some other corporates where the salaries to relatives of founder
promoters do not seem to be in line with the value being added by them to the company.
The case of Ruchira Papers Limited is an apt example for such case where 8 relative of the promoters with
vastly different experience levels (8 years to 23 years), different educational qualifications and age (29
years to 69 years) were being paid exactly same remuneration by the company (₹36.2 lac each in FY2016
and ₹29.3 lac each in FY2015).
Further Reading: Analysis: Ruchira Papers Limited
No remuneration to the founder-promoter-chairman and nominal salary to the son of founder promoter is
the key reason that the remuneration of key management personnel (KMP) is low for Caplin Point
Laboratories Limited when compared to other corporates.
5) Avenues of future growth:
As per the company disclosures to stock exchanges, Caplin Point Laboratories Limited has received the
approval from USFDA in May 2017. The ability to supply products in a new market offers the opportunity
to achieve further growth in future.
6) Most of the products of the company are for short term treatment durations:
As per the product segment mix provided by the company in its FY2016 annual report, page 17, Caplin
Point Laboratories Limited has only 5% of its sales from long-term treatment segments like cardiovascular
drugs.
83 | P a g e
The above chart shows that 95% of the products being sold by the company are antibiotics, painkillers, skin
ointments and anti-ulcer drugs. These pharmaceutical products have a shorter duration treatment cycle of
5-20 days and therefore require continuous selling efforts by the manufacturer/distributors where new sales
have to be generated by consistently being in visibility to the doctors prescribing these medications to new
patients.
This is unlike the drugs used in the treatment of chronic illnesses like hypertension where many times,
patients have to take drug throughout their remaining life and they usually stick to one brand of medicine.
The product mix of Caplin Point Laboratories Limited might require it to continuously keep investing in
marketing and distribution.
7) An error in the annual report FY2016:
The FY2016 annual report of Caplin Point Laboratories Limited has an error in the shareholding details
section, page 42:
84 | P a g e
The shareholding of public institutions has increased from 1.82% at July 1, 2015, to 4.88% at March 31,
2016, which is an increase of 2.66%. However, the company seems to have erroneously mentioned the
change as a decrease of 0.01% in the annual report.
8) The impact of trade payables, current liabilities & provisions in the calculation of CFO:
In the consolidated cash flow statement in the annual report for FY2016, page 108, Caplin Point
Laboratories Limited has disclosed an impact of the increase of about ₹20.5 cr in the CFO on account of
trade payables, current liabilities & provisions:
However, when we look at the consolidated balance sheet of Caplin Point Laboratories Limited for FY2016
(page 106), then we are not able to decipher this change of ₹20.5 cr from the current liabilities section of
the balance sheet or from the related notes to the financial statements.
85 | P a g e
It is advised that an investor may contact the company and get clarification about the details of the impact
of current liabilities calculation in the CFO estimation.
Let us now address the specific queries raised by readers:
1) So, it can be assumed that eventually, Caplin Point Laboratories Limited’s topline growth
will come below SSGR.
As mentioned earlier in the article, a company might be able to grow at a rate higher than its self-sustainable
growth rate (SSGR) in case it is able to keep it working capital management efficient and continues to
report a CFO, which is higher than the net profit (PAT).
Moreover, if a company needs to grow more than its SSGR, then it would have to infuse outside funds into
its business operations e.g. additional debt or equity dilution.
As, currently, Caplin Point Laboratories Limited is a nearly debt-free company, it can easily raise some
debt to fund its growth plans. Therefore, we might be very conservative in concluding that the looking at
its SSGR, the company would necessarily have to slow down its growth rate.
The growth rate of Caplin Point Laboratories Limited may slow down in future. However, it might be due
to increasing size of the company, lack of attractive business opportunities or future weak management
decisions. It would be difficult to comment on future growth rate by looking solely at SSGR in the current
situation of the company.
2) Why was Argus formed as LLP instead of a company? What are the advantages in such
case?
There are many articles present on the internet, which delve deeper into the pros and cons of establishing a
business entity in the form of limited liability partnership (LLP) or a company. Delving upon all these
aspects is beyond the scope of this website. An investor may refer to those articles and take the opinion of
any legal counsel to get further insights into the LLP vs Company question.
86 | P a g e
On the face of it, the biggest benefits of LLP over the company are fewer compliance requirements and
non-applicability of minimum alternate tax (MAT) and dividend distribution tax (DDT) on LLPs.
(However, LLPs are subject to Alternate Minimum Tax (AMT), which is applicable at a rate of 18.5%).
3) Why is Caplin Point Laboratories Limited adding Argus profit in standalone numbers?
The share of profits from the subsidiaries and investments is added in the standalone financials just like the
dividend income/interest income from other investments.
In consolidated financials, entire revenue and profit are added in the profit and loss statement of the holding
company. Therefore, the separate entry of profit share from subsidiary is removed in consolidated
financials.
4) Please help us to understand the merit/demerit of these related party transactions.
In the case of Caplin Point Laboratories Limited and Argus Salud Pharma LLP, at the current levels, the
related party transactions need to be looked after considering following aspects:
 Argus Salud Pharma LLP is nearly 100% owned by Caplin Point Laboratories Limited. Therefore,
any economic benefit occurring to Argus Salud Pharma LLP would eventually flow back to the
shareholders of Caplin Point Laboratories Limited. The concern of investors should increase if the
counterparty involved in such transactions has a significant third party/promoters stake. This is
because then a significant share of economic benefits passed by the holding company to the
subsidiary would be claimed by the third party.
 The size of transactions (₹2 cr - ₹7 cr) is small when compared to the overall size of Caplin Point
Laboratories Limited of about ₹400 cr. of sales.
About the Hong Kong subsidiary: Caplin Point Far East Limited
5) What should an investor interpret from these high receivable days?
We believe that an investor should wait for the annual report for the company for FY2017 to assess the
days for which these receivables are due for receipt. The conclusion for an investor would change whether
these receivables in the Hong Kong subsidiary are due for less than or for more than 6 months.
An investor would appreciate that reported financial position would be the same even if these receivables
are due for 1 day meaning that if the company would have supplied the goods on March 31, 2017, and the
money is due on April 1, 2017, even then the reported financial position would be the same as present in
the March 2017 results.
Moreover, an investor would appreciate that the company is able to sell goods on advance payment basis
to customers in Latin America and Sub-Saharan Africa because of perceived low credit quality and other
law & order/security position of these countries, which makes the customers agree for advance payment if
87 | P a g e
they wish to receive the goods. The lack of competition/options for customers to purchase goods in these
markets also acts in favour of Caplin Point Laboratories Limited.
However, the situation in the Hong Kong market would be entirely different. In Hong Kong & China
overall, the customers would be spoilt for choices among the suppliers. Investors would appreciate that
Caplin Point Laboratories Limited itself sources a lot of its products from China.
Therefore, it is reasonable that Caplin Point Laboratories Limited might not be able to force the advance
payment terms on the customers in Hong Kong. However, the exact receivables can only be assessed when
the annual report for FY2017 is published or directly asking the company/management about it.
6) Caplin Point Far East Limited was established on 13 May 2014. But Caplin Point
Laboratories Limited declared it as subsidiary only in 2017. Moreover, there is no filing
regarding this incorporation in BSE/NSE. Isn’t it compulsory to notify this information to
the stock exchange in such case?
The company details at HKGBusiness website (click here) show that Caplin Point Far East Limited was
incorporated on May 13, 2014. Moreover, the company has not taken any explicit approval from
shareholders that it is going ahead and establishing subsidiaries in overseas locations as per FY2014,
FY2015 or FY2016 AGM notices.
Our experience has been that the companies usually take shareholders’ approvals when they establish
subsidiaries overseas. However, we are not certain whether the companies are expected to follow the same
guidelines when they are subscribing to shares of/making investments in any existing company in overseas
location to make it a subsidiary.
Therefore, if the current situation involved a scenario where the Hong Kong subsidiary Caplin Point Far
East Limited was established in 2014 by promoters or any other acquaintance, then the company might not
have made any disclosure as the company did not have any stake in Hong Kong subsidiary. And now when
the company has made the Hong Kong entity a subsidiary by making investments, then it has made the
disclosure.
However, all these are conjectures/guesses. An investor should take clarity from the management/company
about the incorporation of the subsidiaries and the reasons/guidelines under which it did not make the
disclosure or is it that it made any separate disclosure to the stock exchanges and did not include the details
in the annual reports of FY2014, FY2015 and FY2016.
7) What are other things an investor can monitor to judge whether Caplin Point
Laboratories Limited is on the right track for its new venture?
Monitoring is an ongoing process, where an investor needs to monitor whether the venture has taken off
within expected timelines, the amount of sales being generated, the kind of margins being produced and the
impact of new sales on both asset and inventory turnover ratios as well as working capital etc. She should
also assess whether the new venture is leading to free cash generation for the company or eating up cash
continuously.
88 | P a g e
Currently (June 7, 2017), Caplin Point Laboratories Limited is available at a price to earnings (P/E) ratio
of about 54 (based on FY2017 consolidated earnings), which does not offer any margin of safety in the
purchase price as described by Benjamin Graham in his book The Intelligent Investor.
Overall, Caplin Point Laboratories Limited seems to be a company run by an innovative and risk-taking
management, which has depicted out of the box thinking to establish and grow the business. The company
has been able to grow its sales at a decent pace of about 30% year on year in recent past with improving
profitability. The company has managed to fund its growth requirements from its own resources and
therefore has managed to stay almost debt-free on its growth path.
Caplin Point Laboratories Limited has taken the risk of focusing on business on supposedly risky countries
(Latin America and Sub-Saharan Africa) and has used it to its advantage by benefiting from lower
competition and better credit terms with customers. The company has been able to get an advance from its
customers and a credit period from its suppliers, thereby, enjoying a negative working capital position.
The management has disclosed conservative remunerative practices with the founder-promoter-chairman
not taking any remuneration from the company and the son of the promoter taking a nominal salary for his
contributions to the company. Management succession planning seems to be in place for Caplin Point
Laboratories Limited.
There are certain aspects related to the annual report and the business, which an investor may get clarified
from the company. These aspects relate to the disclosures related to the establishment of overseas
subsidiaries, the impact of current liabilities on the cash flow from operations etc.
An investor should monitor the execution of the future growth plans of the company by way of using the
opportunity to supply to US and other markets.
These are our views about Caplin Point Laboratories Limited. However, readers should do their own
analysis before taking any investment related decision about Caplin Point Laboratories Limited.
P.S:
89 | P a g e
90 | P a g e
6) Nandan Denim Limited
Nandan Denim Limited, one of the world’s leading manufacturers of denim cloth with the largest
manufacturing capacity in India.
Let us analyse the performance of Nandan Denim Limited over last 10 years (FY2007-16) and for FY2017
91 | P a g e
Nandan Denim Limited has been growing its sales since last 10 years (FY2007-16) at a brisk pace of about
18-20% year on year. It has witnessed its sales revenue grow from ₹222 cr. in FY2007 to ₹1,157 cr. in
FY2016, which has further grown to ₹1,220 cr. in the FY2017.
As per the data shared by Nandan Denim Limited, it has achieved this growth by both unit price increase
as well as by selling a higher volume of denim cloth.
As per the May 2017 presentation of Nandan Denim Limited, the realization of the company per meter of
denim cloth has increased from ₹111.7 per meter in FY2013 to ₹131.6 per meter in FY2017.
92 | P a g e
Over last 10 years, the denim manufacturing capacity of Nandan Denim Limited has increased from 32
million meters per annum (MMPA) in FY2007 to 110 MMPA in FY2017.
The management plans to achieve the future growth in its revenue by realizing higher realization per meter
of denim cloth as well as selling a higher volume of denim cloth by optimally utilizing the newly installed
capacity of denim manufacturing.
As per the management of Nandan Denim Limited, it plans to increase the realization per meter of denim
cloth by making denim, which is more aligned to latest fashion trends (value added products) and focusing
more on exports business.
It remains to be seen whether the management of Nandan Denim Limited is able to achieve these targets in
future. An investor should keep a close watch on the realization levels of denim per meter achieved by
Nandan Denim Limited in future.
An investor would notice that the above-mentioned sales growth has been achieved by Nandan Denim
Limited by improving its profitability margins.
The operating profitability margins (OPM) have improved from 13% in FY2011 to 17% in FY2016. Upon
analysing the reasons for such improvement in the OPM, when an investor looks at the raw material costs
of Nandan Denim Limited, then she comes across a few facts, which seem to underlie the increase in OPM:
93 | P a g e
1. Declining cotton prices during this period:
The above chart shows that the cotton prices in globally have witnessed steep decline from the highs of
FY2011 to current levels of FY2017.
The above chart despite representing global cotton prices seems to work well to indicate the input costs of
Indian manufacturers as well because the Indian cotton market seems to be globally integrated without any
import restriction put in by the Government of India.
The response from the management of Nandan Denim Limited in the analyst conference call held on May
30, 2017 (page 6) clarifies this aspect of Indian cotton market:
94 | P a g e
There is no wonder that the raw material costs of Nandan Denim Limited have declined from 78% of sales
in FY2011 when the cotton prices were at the peak to 68% in FY2016 when the cotton prices have reduced
substantially.
Moreover, apart from the reduced cotton prices, the efforts done by Nandan Denim Limited to achieve
backward integration by expanding the in-house manufacturing capacity of yarn to reduce the cost of yarn
seem to have also contributed to reducing raw material costs and thereby improving operating profitability
margins.
2. Backward integration:
Over last few year, Nandan Denim Limited has been consistently increasing the in-house yarn
manufacturing capacity. As per the presentation of the company for May 2017, it has increased the yarn
manufacturing capacity in a step-wise manner from 54 tonnes per day (TPD) in FY2013 to 141 TPD in
FY2017:
The increase in in-house production of yarn seems to have a dual benefit for the company:
 The cost of in-house yarn production is about 10% lower than the yarn sourced from the open
market. The company has intimated this aspect of yarn sourcing in the May 2017 presentation:
 The in-house yarn manufacturing provides more control on the quality of the yarn production.
95 | P a g e
As a result, with increasing utilization of in-house produced yarn, the cost of yarn being used in denim
production seems to have reduced over the years, which is another factor leading to improvement of
operating profitability margins of Nandan Denim Limited.
3. Passing on the cost of raw material increase to customers:
The company has been giving mixed messages about its ability to pass on the increase in cotton prices to
its customers:
 In the conference call held on Feb 12, 2016, Nandan Denim Limited conveyed that the cotton prices
are a pass through for denim manufacturing:
 Again in the conference call on May 31, 2016, the company reiterated the same stance about the
cotton prices being a pass through.
 The company maintained the same stance in its FY2016 annual report (page 33):
96 | P a g e
 When cotton prices started increasing from the start of FY2017, then in the conference call held on
August 11, 2016, the company seemed concerned about the impact of increasing cotton prices on
its margins:
Nandan Denim Limited acknowledged that the cotton prices increase will hit its margins in next quarters.
The cotton prices kept on increasing until May 2017 and we noticed that the operating margin of Nandan
Denim Limited declined to 15.6% in FY2017 despite continuous increase in the in-house yarn production.
97 | P a g e
Therefore, it seems that even though Nandan Denim Limited might have the ability to pass on the increase
in raw material costs to its customers, it might be able to do only for the products, which are high value-
add (i.e. in line with latest/upcoming fashion trends) and not for the mass commodity denim products. A
discussion from the May 2016 conference call gains significance in this aspect:
98 | P a g e
As per the management (Feb 2016 conference call), the composition of value added denim product in its
overall denim revenue is about 10%, which means that most of the denim (about 90%) produced by Nandan
Denim Limited is the commodity product. Moreover, as communicated by the company, a denim product,
which is value added today remain so only for a few months before the competing manufacturers replicate
the same product and it becomes a commodity product.
Therefore, it seems that for a denim manufacturer to promptly keep passing on the cotton price hikes to its
customers, it needs to be very innovative and keep on introducing new denim variants in the market in
quick succession so that the customers are willing to pay a premium pricing for its products and in turn the
manufacturer can enjoy good margins.
Going ahead, an investor should keep a close watch on the operating profitability margins of Nandan Denim
Limited to assess the impact of increased in-house yarn manufacturing capacity commissioned in FY2017
and to assess whether the company is able to continuously produce value added products in the market.
The net profitability margins (NPM) of Nandan Denim Limited have tracked the trend of operating
profitability margins and as a result, NPM has improved from net losses in FY2009 to 5% in FY2016.
The tax payouts of Nandan Denim Limited over the years are less than the standard corporate tax rate
applicable to companies in India. It might be due to the tax incentives available to the company in light of
textile being one of the focus areas of central and state governments. However, it is advised that the investor
seek clarification from the company about the tax incentives available to the company or any other factors,
which are leading to lower tax payout ratios.
An investor would notice that over the years the net fixed asset turnover (NFAT) of Nandan Denim Limited
has been improving. NFAT has improved from the low of 1.54 in FY2009 and has increased to 2.52 in
FY2016. An investor would notice that the NFAT has been increasing during a period in which Nandan
Denim Limited has done substantial capital expenditure to increase the manufacturing capacity.
The rise in NFAT during periods of high capex is possible when the companies quickly make a new capacity
functional and then reach optimal utilization levels in a very short time. Otherwise, we notice that
companies usually take about 1-2 years to reach optimal capacity utilization once the new manufacturing
capacities are commissioned. Therefore, most of the times, investors notice that the NFAT initially
witnesses a decline when a company does the capex and then the NFAT gradually rises when the new
capacities get commissioned and their utilization reaches optimal levels.
99 | P a g e
While analysing the information presented by Nandan Denim Limited in various communications to
stakeholders, an investor comes across a few important aspects, which might have a bearing on the pattern
of increasing NFAT achieved by Nandan Denim Limited during the periods of high capital expenditure.
1) The capex seems to have been planned in phases:
A look at the year-wise capacity levels of Nandan Denim Limited indicates that the company has increased
its manufacturing capacity in phases, where it completed initial phases of expansion and started production
in these phases and simultaneously worked on additional phases of capacity expansion.
Using the phase-wise expansion strategy seems to have led to better utilization of the incurred capital
expenditure as compared to the situation where a company embarks upon a large capex and waits for
starting production until the entire new planned capacity is complete and functional.
2) Cross-utilization of the new capacity:
As per the conference call in February 2016, Nandan Denim Limited communicated to stakeholders that
when it realized that the denim segment is witnessing better demand than the shirting segment, then it used
part of the newly installed shirting facility to manufacture denim.
100 | P a g e
This seems a good strategy by Nandan Denim Limited to optimally utilize the available manufacturing
capacity. It might also be one of the reasons, which has led to increasing net fixed asset turnover during the
period when the company has been incurring large capital expenditure.
3) Capacity utilization levels:
Nandan Denim Limited disclosed its capacity utilization data in its presentation of May 2017:
As per the information shared by Nandan Denim Limited, it has achieved a capacity utilization of 84% in
FY2017 on the total installed capacity of 110 MMPA of denim manufacturing.
As per the communication from the company to its stakeholders in May 2016 conference call, 84-85% is
the maximum capacity utilization level, which can be achieved in a denim manufacturing plant and if a
company has to grow beyond then it would need to install additional capacities.
An investor would note that Nandan Denim Limited had 99 MMPA of installed and functional capacity at
the end of FY2016 and the additional capacity of 11 MMPA was commissioned in the December 2016
101 | P a g e
quarter. Therefore, the reported data achieving 84% capacity utilization level on the overall installed and
functional capacity of 110 MMPA, seems to be a good performance by Nandan Denim Limited as it
indicates that manufacturing facility, which was commissioned in the Dec-2016 quarter also achieved the
optimal capacity utilization at the end of FY2017.
The fact of quickly reaching the optimal capacity utilization levels (84%) within one-quarter leads to two
conclusions for investors:
 Nandan Denim Limited had a lot of latent demand for its products and as a result, it could optimally
utilize the newly installed capacities within a short period and thereby could achieve improvement
in the net fixed asset turnover (NFAT) during the periods in which it has incurred large capital
expenditure.
 At the end of FY2017, the entire installed denim capacity is almost optimally utilized and therefore,
Nandan Denim Limited has achieved the near maximum volumes of denim production, which it
could by commissioning the new denim manufacturing capacity at March 31, 2017. Therefore, any
further revenue growth for Nandan Denim Limited would be possible only after it immediately
starts another capital expenditure program.
In light of the above analysis, we suggest that an investor takes the clarification from the company whether
the data of capacity utilization of 84% level of the entire commissioned denim manufacturing capacity of
110 MMPA at the end of FY2017 is right?
 If the reported utilization level is for entire 110 MMPA, then whether by any means, Nandan Denim
Limited would be able to achieve higher capacity utilization levels than 84% in its plants to meet
the volume growth requirement in coming future so that it can grow its sales?
 Increasing the capacity utilizations further to sell higher volumes becomes significant to achieve
revenue growth in the light of the fact that Nandan Denim Limited has witnessed decline in its
realization per meter of denim in FY2017 and also that it has not been able to increase exports (high
realization and margin segment) in line with its previous guidance of attaining almost one-third of
revenue from exports
 However, if by any possibility, the data on capacity utilization shared in the presentation reflects
only the utilization levels of previously commissioned capacity of 99 MMPA, then there seem to
be a scope of additional denim volumes being produced from newly commissioned facilities of
December 2016 quarter and in turn, achieve revenue growth in future.
The above analysis seems to indicate that the recent large capacity expansion achieved by Nandan Denim
Limited by raising a significant amount of debt, does not seem to show visibility of volume growth for
long-term future as the capacities are already nearing optimal capacity utilization.
In light of this observation, it does not look surprising to an investor that Nandan Denim Limited has now
resorted to equity dilution by way of issuing convertible warrants to foreign portfolio investors (FPIs) so
that it may reduce its leverage and meet the cash requirements to fund another round of capacity expansion,
which it might need to commence to achieve volumes growth in future.
102 | P a g e
The issuance of shares to Polus Global Fund by way of conversion of warrants in May 2016 and recent
developments about the issuance of convertible warrants to 2 new FPIs: LTS Investment Fund Limited and
LGOF Global Opportunities Limited seem to be part of such related developments. (Annual Report
FY2016, page: 37):
We would discuss more about high funds requirements to achieve revenue growth by Nandan Denim
Limited in more detail in later part of this article. Let us now look at the performance of Nandan Denim
Limited on other parameters of operating efficiency.
The company has managed to reduce its receivables days from the high of 113 days in FY2010 to 43 days
in FY2016. This is a significant improvement in the credit terms being offered by the company to its
customers and subsequent collection practices. The current receivables days seem to be in line with the
usual practice of 45 days of credit period to domestic customers and further lower credit period for export
orders backed by letters of credit (LC).
The inventory levels seem to be managed efficiently by Nandan Denim Limited as the inventory turnover
ratio (ITR) has improved from 5.2 in FY2012 to 6.9 in FY2016. Overall, the ITR has been mostly consistent
within the range of 6-7.
It seems that as a result of efficient working capital management by the company, it has been able to reduce
its working capital days (receivables days + inventory days) from 169 days in FY2010 to 96 days in
FY2016.
The investor would notice that Nandan Denim Limited has a negative SSGR of about 3-4% over the years
whereas it has been growing its sales revenue at a growth rate of 18-20% in over the years.
Nandan Denim Limited.
As a result, Nandan Denim Limited has witnessed its debt levels increase from ₹201 cr. in FY2007 to ₹530
cr. in FY2016. The debt has increased further in FY2017, however, we would get to know the exact level
of debt at March 31, 2017, only when the annual report for FY2017 is published, which would provide the
detailed notes to financial statements.
103 | P a g e
The detailed notes to financial statements are essential to know the complete debt levels of Nandan Denim
Limited as a part of debt known as current maturity of long-term debt (CMLTD) is shown as part of “other
current liabilities” under the section “current liabilities”. The details of CMLTD are not provided by
companies in the summary balance sheet, which is disclosed with September and March quarter results.
This assessment of SSGR gets substantiated when the investor analyses the cash flow position of Nandan
Denim Limited.
Over FY2007-16, Nandan Denim Limited has witnessed its sales increase from ₹222 cr. in FY2007 to
₹1,157 cr. in FY2016. For achieving this sales growth the company has done an additional capital
expenditure (capex) of ₹746 cr. In addition, the company had an interest expense of ₹261 cr. over FY2007-
16 to service the ever-present debt on its books. Therefore, Nandan Denim Limited had to do meet a cash
outflow of about ₹1,000 cr. to meet the capital requirements to expand its manufacturing capacities and
achieve the 18-20% annual growth rate in last 10 years (FY2007-16).
However, the investor would notice that Nandan Denim Limited has generated a cash flow from operations
(CFO) of ₹637 cr. over FY2007-16 resulting in a shortfall of about ₹370 cr, which has been met by the
company by raising incremental debt of about ₹330 cr. over FY2007-16 (₹530 cr. – ₹201 cr.).
company.
Apart from the above assessment of SSGR and FCF, there are two additional aspects, which deserve the
attention of investors regarding the liquidity position of Nandan Denim Limited and arrangement of funds
to meet its cash requirements:
1) Pledging of shares by promoters:
The pledging of shares by promoters should be a cause for concern as many times, it is an indicator of tight
liquidity situation being faced by the company.
The example of another company, Omkar Speciality Chemicals Limited is pertinent to assess the impact of
pledging:
Further Reading: Analysis: Omkar Speciality Chemicals Limited
In the case of pledging, it is advised that the investors take clarification from the company about the reasons
for the pledging and the end use of the funds raised through pledging of promoter’s stake. It might be any
one of the following scenarios:
 The shares might be pledged with lenders by promoters as part of additional security to lenders of
Nandan Denim Limited for the loans given by these lenders to the company. In such cases, the
pledge gets released as the company repays the debt.
 The shares might be pledged by the promoters to raise funds in their personal capacity to meet their
personal expenses or to fund their other capital commitments. In such cases, the minority investors
carry the risk. This is because if the promoters are not able to repay their debt, then the lenders
104 | P a g e
would sell the shares held by promoters in the market, which would lead to a decline in stock prices
and the wealth of all the shareholders including retail minority shareholders will get eroded.
Currently, the pledge levels are significantly reduced at March 31, 2017, when compared to previous years.
However, we believe that the investors should be aware of the reasons for which the promoters have pledged
up to 75-80% of their shareholding in the past.
2) The increase in trade payables:
Trade payables represent the amount to be paid by a company to its suppliers/vendors. As per September
2016 quarterly results, Nandan Denim Limited had trade payables of about ₹67 cr. at September 30, 2016,
whereas at March 31, 2017, the trade payables increased to ₹135 cr., effectively indicating a shift of ₹70
cr. of cash from vendors to the company.
Even though at the face of it, it might seem that increasing trade payables means that the company is able
to extract better credit period from its suppliers and thereby fund its working capital at the cost of its
suppliers/vendors. This, in turn, leads to lower financing costs to the company. However, it is common
finding that vendors/suppliers are the first counterparties to whom payments are delayed in times of
liquidity stress. Therefore, many times, increasing payable days is the first indication of developing stress
in any company.
Therefore, we believe that an investor should delve deeper into the assessment of trade payables.
The continuous need of external capital (debt or additional equity) for sustaining the growth of Nandan
Denim Limited is evident from the fact that the newly added capacities for which the significantly debt
funded capex has just been completed already seem to be running at optimal capacity. It indicates that there
is low visibility of the newly installed capacities sufficing for the volume growth for long-term future as
the data provided by the company shows that only marginal additional volumes can be generated in future
from recently commissioned capacities.
As discussed earlier, the Nandan Denim Limited has to face its own challenges in achieving higher
realizations per meter of denim, which is witnessed by declining realizations in denim. An investor would
note that the decline in denim realization in FY2017 has come during a period when the cotton prices have
increased during FY2017. Therefore, it seems that the stated benefit of a pass through of increased cotton
price to end customers is somehow not being realized by Nandan Denim Limited.
As a result, the obvious choice for future growth in front of the company seems that:
1. Nandan Denim Limited should focus on achieving higher realizations per meter of denim by
continuously innovating and making more value added products (which remain value added only
for a short period of 2-6 months before the competing players copy them and the product becomes
a commodity). The company has stated in its communications that it is in continuous efforts to
achieve high share of value added products but the declining realization per meter of denim in
FY2017 indicate that the efforts of the company are not yielding results now and it needs to
continue its efforts so that the results in terms of better realizations are visible in future
105 | P a g e
2. If Nandan Denim Limited is not able to achieve higher volumes from currently available capacities
(as these seem to have reached optimal utilization levels at March 31, 2017) and it finds it difficult
to increase the realizations per meter of denim, then to grow in future, it would have to start another
round of capacity expansion.
However, an investor would notice that Nandan Denim Limited has already leveraged itself significantly
by funding the recently completed capex primarily with debt. Therefore, the company might find it difficult
to raise additional debt in quick succession for a new round of capex.
The company seems to realize that its leverage position is high and it might be one of the reasons for the
company to raise additional equity from Polus Global Fund by way of convertible warrants, which got
converted into equity shares in FY2017. This seems a step to reduce the leverage when measured in terms
of debt to equity ratio.
In case, Nandan Denim Limited finds it difficult to raise additional debt to fund new capex to grow volumes
of denim sales, then it would either have to wait until it repays the existing debt by using the cash generated
from existing manufacturing capacities and let go of volume growth in the interim. Only then the lenders
would feel comfortable taking any higher exposure on the company. Or the company would have to raise
further equity to reduce its leverage as well as to meet funds requirement for any additional capacity
addition. The recent talks to issue convertible warrants to FPIs might be a result of such developments.
Running capital intensive businesses with low profitability margins is always tough. Many times, the
growth in such businesses turns out to be cash guzzling, which such businesses are not able to meet from
internal sources. Investors should be aware of the continuous need of additional capital by such businesses
to achieve growth before making the final investment decision.
Examples of two companies with low NFAT and low profitability, which fell into debt trap while chasing
the non-profitable debt-funded capital intensive growth are Amtek India Limited (Castex Technologies
Limited) and Ahmednagar Forgings Limited (Metalyst Forgings Limited).
Investors should read these cases to understand the stress a capital intensive business with low NFAT can
put on the balance sheet of the company if such a business is not associated with high profitability margins.
Read: Analysis: Amtek India Limited (Castex Technologies Limited)
Read: Analysis: Ahmednagar Forgings Limited (Metalyst Forgings Limited)
It is advised that going ahead an investor should continuously monitor the debt levels and additional equity
infusion into the company.
While studying about Nandan Denim Limited, an investor comes across certain other aspects, which are
important for analysis and subsequent final investment decision by investors:
1) Project execution skills:
106 | P a g e
Nandan Denim Limited was initially a trading company and it started denim manufacturing facilities in
FY2004 with a capacity of 6 MMPA. The management has shown good project execution skills since then
and within next 13 years, the company has a commissioned denim manufacturing capacity of 110 MMPA,
which is apparently largest in India and fourth largest in the world.
Nandan Denim Limited was incorporated by Mr. Vedprakash D. Chiripal and Mr. Brijmohan Chiripal in
1994. Currently, the next generation of the promoter family seems to be taking business responsibilities,
which is evident by Mr. Deepak Chiripal taking over the responsibilities of CEO of the company.
It remains to be seen whether the new generation of the promoters is able to contribute and grow the
company to next phase and more importantly, whether they are able to convert the company into a source
of free cash flow to shareholders.
3) Long term customer orders with minimum sales commitment:
As per the May 2017 presentation of the company, about two-third of its orders are under long-term
agreements with customers, which have minimum yearly quantity commitments:
Such long terms agreements provide comfort to investors about the visibility of sales of the company.
4) Incentives of interest rate from central govt. and state govt.:
Nandan Denim Limited has been receiving incentives from both central govt. as well as from the state govt.
of Gujarat on the debt taken by it to funds its capex requirements. Such interest incentives are available for
a limited number of years within which the debt needs to be repaid.
If any company is not able to produce sufficient cash from operations to repay these loans on time and
therefore may have to resort to the refinancing of the loans, then the new loans would not have the
subsidized lower interest rate. Such new loans would be at market rate, which increases the interest burden
on companies, which are not able to generate sufficient cash to repay the loans taken.
107 | P a g e
Therefore, it is essential for an investor to keep a track of cash generation by Nandan Denim Limited in
future and monitor that the repayment of the loans is done within time and from internal resources.
5) Warrants issued at significantly higher price than prevalent market price:
In November 2015, Nandan Denim Limited issued warrants to Polus Global Fund at ₹200/- per share.
Previously, the share price of the company had been continuously at lower levels than the allotment price.
The share price has touched the levels of ₹100 for the first time in June 2015 and had reached the highest
levels of ₹158-160 during August 2015.
We believe that an investor should assess this aspect further as the allotment of warrants at a very high price
is counter-intuitive for any investor, be it institutional or retail. As very high initial allotment price reduces
the probability of future returns for the investors.
Moreover, the new FPIs, as per the FY2016 annual report, are also willing to subscribe to warrants at the
same valuation of ₹200 per share arrived in FY2015 despite significant changes in the company and its
capex execution in the interim.
6) Related party transactions:
As rightly mentioned by you, Nandan Denim Limited has been entering into significant amounts of
financial transactions with the promoter group companies. As per the annual report for FY2016, page 132,
the company has entered into a significant transaction involving sales and purchases with related parties:
108 | P a g e
Many times, if the related party transactions are not at market prices, then they offer an instance of taking
away the economic benefits of business activities from the shareholders of the company to members of the
promoters group. Therefore, it is advised that an investor should study these transactions further to assess
whether these transactions are at market prices.
7) Corporate guarantees are given on behalf of other companies:
As per the contingent liabilities section of the FY2016 annual report, page: 130, Nandan Denim Limited
has given guarantees to different banks (₹19.7 cr. and ₹16.3 cr.) on behalf of loans taken by Vraj Integrated
Textile Park Ltd.
A guarantee to the banks on behalf of other companies means that if the other company, who is the actual
borrower, is not able to repay the loan taken by it, then Nandan Denim Limited will have to repay the loan
to the lender.
This guarantee has the potential of increasing the debt obligations of Nandan Denim Limited by about ₹36
cr. (amount of both corporate guarantees) over and above the loans taken by Nandan Denim Limited of
₹530 cr. at March 31, 2016.
Moreover, the non-current investments section of the FY2016 annual report of the company, page 122,
states that Nandan Denim Limited has invested ₹5.8 cr. in equity shares of Vraj Integrated Textile Park Ltd.
109 | P a g e
We believe that an investor should study the relationship of Nandan Denim Limited and Vraj Integrated
Textile Park Limited further.
8) Debtors/trade receivables are subject to confirmation:
The auditor in the FY2016 annual report of the company, page 130, has stated that the debtors are subject
to confirmation.
Investors understand that it might not be possible for the auditor to take confirmation from each of the
debtors. However, it is expected that the auditor would take confirmation from at least key debtors i.e., for
example, largest 10 debtors/a sample of debtors on a random basis.
If the auditor has taken such confirmation on a sample of debtors, then it should be mentioned in the annual
report.
Non-confirmation from debtors raises the risk of the said receivables being under dispute where the
company might claim that the customer is liable to pay but the customer might say that the goods were
faulty or never received and therefore, it is not going to pay.
9) Investigation and order by SEBI in the matter of group company Nova Petrochemicals
Limited:
Amit, thanks for bringing to our notice the SEBI order in the case of a promoter group company of Nandan
Denim Limited named Nova Petrochemicals Limited. The order can be accessed at this link on SEBI
website: Click Here
The case involved allegations that Nova Petrochemicals Limited made a non-genuine announcement about
its expansion plans and also gave misleading financial results to shareholders. It was alleged that these
activities led to increase in share price of Nova Petrochemicals Limited and the relatives of the
promoters/management, then sold a significant stake in the company and got illegal benefit from it.
SEBI’s order finally exonerated the person accused of benefiting from such sales: Mr. Vishal Chiripal on
the ground that he had sold a major portion of his shareholding before the said non-genuine announcement
about the expansion plans was made.
However, the case highlights two important facts that:
 A non-genuine announcement about expansion plans by Nova Petrochemicals Limited was made:
110 | P a g e
 And that misleading financial results were published by Nova Petrochemicals Limited where the
sum total of all the quarterly financial results of the company showed profits but the final audited
results of the company showed a loss. As per SEBI, the company was not able to give a satisfactory
explanation for it.
These two findings become significant for the investors while analysing Nandan Denim Limited because
the chairman of Nova Petrochemicals Limited during the period under which these allegations are made by
SEBI was Mr. Ved Prakash Chiripal who is also the current chairman of Nandan Denim Limited.
111 | P a g e
We believe that an investor should be aware of this event while analysing Nandan Denim Limited and
therefore, thank Amit for bringing it to the notice of the author and the readers of our website.
10) Group company guilty of violating rules for maintaining books of accounts:
In the letter of offer for the rights issue by Nandan Denim Limited (then named Nandan Exim Limited) in
Dec 2007, the company disclosed that one of its group company: Vishal Fabrics Private Limited and its
directors had been found guilty of violating rules of Companies Act related to maintaining books of
accounts and have been fined by Additional Chief Metropolitan Magistrate, Ahmedabad in this regard.
11) Allegation about bogus degrees being issued by Shanti Business School run by Chiripal
Charitable Trust:
112 | P a g e
As per a news item in The Times of India dated December 9, 2016, a student has filed an FIR against
the Shanti Business School and in response, three members of Chiripal family: Ved Prakash Chiripal,
Brijmohan Chiripal and Vineeta Chiripal have approached Gujarat High Court for anticipatory bail.
It is advised that an investor should follow up and find out the updates about the said case to know the truth
behind the said allegations.
12) Media reports about irregularities in the property being developed by Chiripal group:
As per the link available YouTube (click here), which contains a coverage of a news item from Gujarati
news channel: Sandesh News, certain irregularities are alleged in a property being developed by Chiripal
group.
It is advised that an investor should look into this matter further to know the facts about the issue.
13) Error in the annual report:
In the FY2016 annual report of Nandan Denim Limited, in the management discussion and analysis (MDA)
section (page: 25), the company has mentioned that agriculture is the highest contributor to the Indian GDP:
Whereas, agriculture lost the status of highest contributor to Indian GDP in late 1970’s and since then it is
services sector, which is the highest contributor to Indian GDP.
113 | P a g e
Currently (June 22, 2017), Nandan Denim Limited is available at a price to earnings (P/E) ratio of about
11, which offers some margin of safety in the purchase price as described by Benjamin Graham in his
book The Intelligent Investor.
Overall, Nandan Denim Limited seems to be a company, which has shown good sales growth over last
decade, which is backed by demonstration of good project execution skills by the management as it has
reached the highest denim capacity in India and fourth highest capacity in the world of 110 MMPA within
13 years of starting denim manufacturing in 2007 with a capacity 6 MMPA.
The sales growth of Nandan Denim Limited has been associated with improving profitability, which seems
to be the result of the mixed impact of declining cotton prices over last 5-6 years and the backward
integration of operations by the company. Nandan Denim Limited primarily operates in the commodity
section of denim cloth as the value added product constitutes only about 10% of overall sales. As a result,
the company has found it difficult to pass on increases in the inputs cotton costs in FY2017 to the customer,
which seems to have led to decline in the denim realization per meter in FY2017. Nandan Denim Limited
has stated its strategy to focus more on value added products and exports to improve the denim realizations
and the profitability, however, whether the company is able to successfully achieve the same, remains to be
seen.
114 | P a g e
Nandan Denim Limited operates in a capital intensive business and as a result, the growth of the company
requires significant investments in the plant and machinery. The company has invested funds exceeding the
cash generation from operations over past decade and as a result, it has witnessed its debt levels rise
significantly along with equity dilution by way of issuance of shares to Polus Global Fund in 2016. The
capital intensive nature of business operations of the company is evident from the assessment of Self-
Sustainable Growth Rate (SSGR) and free cash flow (FCF) analysis of the company, both of which show
negative values in their outcomes.
In light of the above analysis, it is advised that an investor should monitor the debt levels and the leverage
position of the company closely.
Currently, Nandan Denim Limited does not seem to have any operating leverage benefit left as according
to the data presented by the company in May 2017 presentation, the company’s plants are running at 84%
capacity utilization levels. As per the company management, denim manufacturing units operate at best at
about 85% capacity utilization levels. Therefore, it seems that it the company plans to grow its sales
volumes beyond FY2017 levels, then it might have to start a new phase of capacity expansion.
Looking at the current high leverage levels, the company seems to be looking at raising equity by way to
convertible warrants to another set of Foreign Portfolio Investors (FPIs), which though would reduce the
debt to equity ratio, but would dilute the stake of existing shareholders.
The management seems to have put in a succession plan in place. However, there are some instances about
the management group’s actions in terms of related party transactions and other events of the past related
to some of the group companies, which have come under the scanner of media and law enforcement
agencies. It is advised that an investor analyse these issues in detail before they make final opinion about
the company and its management.
These are our views about Nandan Denim Limited. However, readers should do their own analysis before
taking any investment related decision about Nandan Denim Limited.
P.S:
115 | P a g e
116 | P a g e
7) Kovai Medical Center and Hospital Limited
Kovai Medical Center and Hospital Limited is a super-speciality, multi-disciplinary hospital based in
Coimbatore (aka Kovai), Tamil Nadu.
Let us analyse the performance of Kovai Medical Center and Hospital Limited over last 10 years (FY2007-
16). The company used to report only standalone financials until FY2007. From FY2011, the company
started reporting both standalone and consolidated financials.
We believe that while analysing any company, the investor should always look at the company as a whole
and focus on financials which represent the business picture of the entire group. Therefore, while analysing
Kovai Medical Center and Hospital Limited, we have analysed standalone financials for FY2007 and
consolidated financials from FY2007 until FY2016.
117 | P a g e
Kovai Medical Center and Hospital Limited has been growing its sales since last 10 years (FY2007-16) at
a brisk pace of about 22-23% year on year. It has witnessed its sales revenue grow from ₹73 cr. in FY2007
to ₹465 cr. in FY2016, which is a significant growth. Sales have further grown to ₹526 cr. in the FY2017
(standalone).
The investor would also notice that this growth has been achieved by Kovai Medical Center and Hospital
Limited while maintaining its operating profitability at respectable levels of 20%+
The operating profitability margin (OPM) of Kovai Medical Center and Hospital Limited has improved
from 17% in FY2008 to 24% in FY2013. In FY2014, the company reported a decline in OPM to 20%,
which as per the management (Annual Report FY2014, pg: 32), was due to increase in various inputs costs:
118 | P a g e
However, investors as well as we being the member of general public are aware that the health care inflation
in India prevails at high levels, therefore, it is not a surprise that Kovai Medical Center and Hospital Limited
has been able to pass on the above-mentioned increase in input costs to its customers (patients). As a result,
the OPM of the company recovered to 24% in FY2015.
Kovai Medical Center and Hospital Limited witnessed a decline in OPM in FY2016 as well to 20%, which
the management has attributed to expenses like silver jubilee celebration and renovation work carried out
at its centres (annual report FY2016, page: 15):
The company has again been able to recover its OPM margins to 23% in FY2017 (standalone).
Investors would appreciate that the as per different sources, the health care inflation in India is in the range
of about 15%. Therefore, it is not difficult for any well-run hospital to multiply its revenue by 3-4 times
over 10 years without any increase in a number of beds. [(1.15)^10 = 4.05].
The net profitability margins (NPM) of Kovai Medical Center and Hospital Limited has been moving in
line with its OPM except in certain years where the interest cost due to its debt levels has depressed NPM
in comparison to OPM.
Kovai Medical Center and Hospital Limited has been paying taxes at a rate of 33-35%, which have been in
line with the standard corporate tax rate over the years.
The hospital industry is a capital-intensive industry, which requires continuous investment on account of
new technology making way into medical treatment processes.
The management of Kovai Medical Center and Hospital Limited has also highlighted this aspect of hospital
business as one of the risks being faced by the company (annual report FY2016, page 50):
“Costs associated with replacing obsolete equipment:
The number of medical equipment we use as part of our business have limited life span and
may become obsolete, including by reason of advancement of technology. We may be required
to continually service our existing equipment and replace them whenever required, with new
equipment. Replacement of medical equipment may be costly and involve significant
capital expenditure, requiring that we plan for and fund such expenditure in advance. Our
119 | P a g e
cash flows and general financial condition may restrain us from replacing our medical
equipment as and when appropriate. Any constraints on our ability to replace and upgrade
our medical equipment may result in our inability to offer services that involve the use
of such equipment, thus adversely affecting our revenues.” (Emphasis mine)
Therefore, an investor would notice that hospitals are an expensive proposition to maintain in terms of
keeping them up to date with the latest advancement in the field of medical & surgical treatments.
This requirement of significant capex needing proper planning is not only limited to updating the medical
equipment at existing hospitals. Creating new hospitals/increasing the number of beds in existing hospitals
also involves significant capital expenditure.
The management of Kovai Medical Center and Hospital Limited has highlighted it as another of the threats
faced by the company while attempting to achieve the growth (annual report FY2016, page 51):
“Costs
In addition to the operating expenditure that hospitals incur, a key cost factor in a hospital is
the initial capital outlay required, particularly for land and building development and
equipment. The capital cost to build a hospital is typically Rs. 7-8 million per bed (for a typical
200-bed multispecialty hospital, excluding land costs) (Source: CRISIL Report). While costs
for secondary care hospitals are lower, high technology and equipment costs keep total capital
costs for super-speciality tertiary care hospitals at the higher end. The use of imported
equipment can further drive up equipment costs.”
The above analysis would indicate an investor that establishing and running a hospital by keeping it up to
date with medical advancements is a costly affair.
Therefore, it is no surprise that the net fixed asset turnover ratio (NFAT) of Kovai Medical Center and
Hospital Limited, which has been very low over the years, while being less than 1.50 for most of the years.
The NFAT declined to its minimum of 0.9 in FY2012 when it did a major expansion. The NFAT has since
improved to 1.49.
As per the management, it plans to do a major capex of about ₹300 cr. on a new hospital in Chennai, which
is again expected to push the NFAT to lower levels.
The working capital management of Kovai Medical Center and Hospital Limited has been very good with
high inventory turnover ratio (ITR) and low receivables days over the years, which is due to the nature of
the business of healthcare service providers.
Most of the billing is done by the hospitals as an advance or over the counter in outpatient department
(OPD) and in the case of indoor patients (IPD), the admissions are granted only after deposit of significant
advance amount, which needs to be topped up by patients on regular interval during the stay at the hospital.
Therefore, Kovai Medical Center and Hospital Limited has been able to maintain its working capital days
at efficient levels of about 14-16 days over the years.
120 | P a g e
The investor would notice that Kovai Medical Center and Hospital Limited has an SSGR of about 3-4% in
the years whereas it has been growing its sales revenue at a growth rate of 20-23% in over the years.
Kovai Medical Center and Hospital Limited.
As a result, the company has witnessed its debt levels increase from ₹33 cr. in FY2007 to ₹158 cr. in
FY2016
This assessment of SSGR gets substantiated when the investor analyses the cash flow position of Kovai
Medical Center and Hospital Limited.
Over FY2007-16, Kovai Medical Center and Hospital Limited has witnessed its sales increase from ₹73 cr.
in FY2007 to ₹465 cr. in FY2016. For achieving this sales growth the company has done an additional
capital expenditure (capex) of ₹412 cr. In addition, the company had an interest expense of ₹130 cr. over
FY2007-16 to service the ever-present debt on its books. Therefore, Kovai Medical Center and Hospital
Limited had to do meet a cash outflow of about ₹550 cr. to meet the capital requirements to expand its
medical centres and keep them updated with latest technologies.
However, the investor would notice that Kovai Medical Center and Hospital Limited has generated a cash
flow from operations (CFO) of ₹454 cr. over FY2007-16 resulting in a shortfall of about ₹100 cr, which
has been met by the company by raising incremental debt of about ₹125 cr. over FY2007-16 (₹158 cr. –
₹33 cr.).
company.
The above analysis re-emphasizes the conclusion arrived earlier that creating and running hospital assets is
a highly capital intensive business and it is quite evident that despite achieving remarkable growth rate,
good profitability, maintaining very efficient working capital, the capex requirements of Kovai Medical
Center and Hospital Limited have been high in comparison to the cash generated from operations and it has
to rely on incremental debt to meet such capex needs.
It comes as no surprise to investors that the company would have to raise further debt to expand its facilities
further when it creates its new hospital in Chennai.
However, it is good to see that until now, Kovai Medical Center and Hospital Limited have kept the debt
levels within check and have maintained good debt serviceability matrices. At an interest rate of 11.75%,
the company has an interest coverage of above 5, which is a comfortable position.
121 | P a g e
The interest coverage has improved over the years from the low levels of 1.9 in FY2012 when it has done
a major capex. Since FY2012, the company has utilized the new capacity well and as a result, it has been
able to reduce its debt levels from ₹228 cr. in FY2012 to ₹158 cr. in FY2016.
As a result, the credit rating agency CARE Limited has repeatedly upgraded its credit rating in recent past:
 September 2015: credit rating upgraded from A- to A

 November 2016: credit rating upgraded from A to A+
An improvement in credit rating is beneficial for any company as its leads to a reduction in the interest rate
for its existing facilities as well as improves the probability of getting funding for its future capex plans. In
the similar aspect, it would help Kovai Medical Center and Hospital Limited in meeting the funding for the
proposed new hospital units at Chennai.
It is advised that an investor should keep a close watch on the debt levels of the company going ahead.
The ability of Kovai Medical Center and Hospital Limited to grow its revenue with good profitability,
ability to optimally utilize its expanded capacities and keep its debt levels under check seem to have been
looked favourably by the market. As a result, the company has witnessed an increase in market
capitalization of ₹1,300 cr. over last 10 years against the earnings retained and not distributed to
shareholders of about ₹161 cr.
While studying about Kovai Medical Center and Hospital Limited, an investor comes across certain other
aspects, which are important for analysis:
The company was promoted by Dr Nalla G Palaniswami and his wife Dr Thavamani Devi Palaniswami in
1985. Currently, three children of the founder couple: Dr. Mohan S Gounder, Dr. Arun N Palaniswami and
Dr. Purani P Palaniswami have joined the company. They have taken positions on the board of directors
and seem to have active participation in the day to day affairs of the company through the positions like
Joint Managing Director and Whole Time Director.
Succession planning is an essential aspect of management analysis of any company as it reflects the faith
of the promoter management in the company.
2) Conflicting information about the profitability of subsidiary company:
Companies have a statutory requirement of disclosing the performance of their subsidiary companies as
part of their annual report. In line with this requirement, Kovai Medical Center and Hospital Limited has
disclosed the performance of its 100% owned subsidiary company Idhayam Hospitals Erode Limited, at
page 139 of its FY2016 annual report:
122 | P a g e
As per the above disclosure, the subsidiary company, Idhayam Hospitals Erode Limited made a profit after
tax (PAT) of ₹18.39 lacs during FY2016.
However, when an investor reads another section of the annual report of Kovai Medical Center and Hospital
Limited for FY2016, page: 136, then she notices that the subsidiary company Idhayam Hospitals Erode
Limited has made losses of ₹14.58 lacs during FY2016.
It is, therefore, advised that an investor should seek clarification from the company about the performance
of its subsidiary company and whether the information disclosed in FY2016 annual report has any errors.
3) Related party transactions:
123 | P a g e
As per the data presented in the FY2016 annual report of Kovai Medical Center and Hospital Limited, page:
106, the company has made purchases of about ₹25 cr. from companies related to promoters in FY2016.
The amount of purchases has increased from about ₹15 cr. in FY2015.
We believe that investors should analyse related party transactions between the company and
promoters/promoter controlled entities in-depth about whether these transactions are at arm’s length basis.
Investors should tread carefully in such circumstances as there have been many cases in the past (like the
recent case of Raymond Limited, source IiAS), where allegations have been made on promoters using
transactions with publicly listed entities to benefit themselves.
4) Managerial remuneration:
The managerial remuneration of the promoter management of Kovai Medical Center and Hospital Limited
seems high, however, it is a norm in the healthcare industry where the reputation of the consultants/doctors
acts as a pull factor for the customers. As a result, reputed doctors are able to command good remunerations.
However, it is advised that investors should always compare the remuneration levels with the performance
of the company.
124 | P a g e
It comes as a surprise when an investor reads the company’s policy that there is no direct relationship
between the company performance and the increase in remuneration that it offers to employees. (Annual
Report FY2016, page: 41)
5) High attrition rates:
An investor notices that Kovai Medical Center and Hospital Limited has taken the attrition rate at 40% in
its actuarial assumptions. If the company faces an annual attrition rate of 40%, then it seems that the
employee changeover is very high for its facilities. (Annual Report FY2016, page: 104):
We believe that an investor should seek clarification from the company about its actual attrition levels and
whether the company is ok with high attrition levels and whether the high attrition levels are associated
with its above-mentioned remuneration policy?
6) Dispute on the land owned by the company:
As per the FY2016 annual report, page: 96, Kovai Medical Center and Hospital Limited has lost its case in
the District Court, Erode about its claim on the ownership of a land parcel.
As per the report, the company has filed an appeal in the Honorable High Court of Judicature, Madras,
which is currently under process.
An investor should seek clarification from the company about the current status of this land dispute and
whether it impacts the future expansion plans of the company.
125 | P a g e
Now let us address the other queries raised by readers:
1) Doubt – in the years when the company is capitalising borrowing costs, the equation of
Total Interest Expense (i.e. Interest Expense –P&L + Interest Capitalized) = Interest Outflow
(Cash) doesn’t match, given the fact that there are no current liabilities outstanding in the
name of ‘Interest Expense Outstanding’ that justify the situation.
Many times, when companies capitalize the interest cost on the debt taken to fund the fixed assets, then
they show this interest cost as part of the value of the fixed assets created. As a result, this interest cost gets
classified as part of capital expenditure done by the company.
In the cash flow statement, this interest cost becomes a part of cash flow from investing (CFI) as an outflow
under the purchase of fixed assets. As a result, an investor is not able to reconcile the items of interest
expense (P&L), interest capitalized and interest outflow in cash flow from financing (CFF).
2) Regarding saturation of healthcare market of Coimbatore:
We believe that the well-run healthcare infrastructure of a location caters to a population, which can exceed
the local population. Medical tourism is a good example, which indicates that the healthcare infrastructure
of Coimbatore is also serving the overseas population as well.
Moreover, the parameter or world average of 27 beds per 10,000 population is the average number of beds
over world population. It is not the maximum upper limit. There are countries, which have higher bed
density and as the healthcare infrastructure in India improves, there is no reason why India cannot have a
higher bed density than the world average.
Currently (June 14, 2017), Kovai Medical Center and Hospital Limited is available at a price to earnings
(P/E) ratio of about 22 based on last 12 months of standalone earnings, which does not offer any margin of
safety in the purchase price as described by Benjamin Graham in his book The Intelligent Investor.
Overall, Kovai Medical Center and Hospital Limited seems to be a company, which has been growing at a
fast pace of 22-23% year on year for last 10 years (FY2007-16). The company has been able to achieve this
fast paced growth with good operating margins along with efficient working capital management, which is
in line with the dynamics of the healthcare industry in India.
The company operates in a capital intensive business, which requires significant investment to create new
facilities as well as to keep the existing facilities updated with latest medical technologies. As a result,
Kovai Medical Center and Hospital Limited has to borrow additional funds to meet its capex requirements
and to service existing debt on its books. The requirement of external sources of funds also gets established
when an investor notices that the company has been growing at a pace higher than its self-sustainable
growth rate (SSGR). It is advised that an investor keeps a close watch on its debt levels going ahead.
The company has plans to create a new hospital in Chennai where the ability of the company to complete
the construction within time and cost and then quickly raise the utilization to optimal levels would be
essential to keep the debt burden under check.
126 | P a g e
The promoters of Kovai Medical Center and Hospital Limited seem to have taken steps towards
management succession planning where their children have joined the company in key managerial & board
positions and seem to be playing an active role in day to day operations of the company.
The employee costs along with promoters’ remuneration of the company are high, however, these are still
justified considering the nature of healthcare industry, where reputed doctors are the key reason for
customers (patients) to visit the hospital. However, the related party transactions of the company with the
promoters’ related entities need to be analysed in greater detail.
Investors should seek further clarification from the company about the contradicting profitability data about
its subsidiary Idhayam Hospitals Erode Limited, high attrition levels, and disputed land transaction.
These are our views about Kovai Medical Center and Hospital Limited. However, readers should do their
own analysis before taking any investment related decision about Kovai Medical Center and Hospital
Limited.
P.S:
127 | P a g e
8) Nile Limited
Nile Limited is an Indian manufacturer of Lead and its alloys, supplying primarily to battery manufacturer
Amara Raja Batteries Limited.
Let us first try to analyse the financial performance of Nile Limited over last 10 years.
128 | P a g e
Nile Limited has been growing its sales since last 10 years (FY2008-17) at a rate of about 20% year on year
from ₹115 cr. in FY2008 to ₹579 cr. in FY2017. The sales growth has been achieved by the company by
continuously increasing its own production capacity, where it has increased the capacity from 6,000 tonnes
per annum (TPA) in FY2008 from only at one location of Choutuppal in Telangana to a combined capacity
of 82,000 TPA in FY2017 at two locations (Choutuppal: 32,000 TPA and Tirupati: 50,000 TPA). The latest
capacity addition of 10,000 TPA at Choutuppal became operational in February 2017.
129 | P a g e
As per the credit rating rationale of Nile Limited released by India Ratings and Research in April 2017
(page 4), the company had a capacity utilization of about 70% of the functional capacity in H1-FY2017
(i.e. 72,000 TPA).
It indicates that Nile Limited has the scope of improving the utilization of the 72,000 TPA capacity available
at H1-FY2017. It can additionally make use of the newly added capacity of 10,000 TPA at Choutuppal in
February 2017.
Moreover, as per the annual report for FY2012 (page 6, section: Management Discussion & Analysis), Nile
Limited has taken approvals from the Andhra Pradesh Pollution Control Board for expansion of the
Choutuppal plant to 50,000 TPA out of which it has created 32,000 TPA until FY2017.
It indicates that the company might not need to spend a lot of time in getting regulatory approvals for any
further capacity addition up to 18,000 TPA at Choutuppal in case it goes for further expansion.
The above observations indicate that Nile Limited has some operating leverage left in its favour by way of
the scope of improving utilization at existing manufacturing capacity and to quickly add capacity at
Choutuppal.
An investor would notice that the sales growth achieved by Nile Limited until now has been associated with
fluctuating profitability margins. The operating profit margin has been varying in the range of 4% to 9%
and has even declined to operating losses in FY2009.
Nile Limited has Lead and its alloys as primary sales product, where the key raw material is Lead (primary
Lead from the lead ores and secondary Lead from scrap lead). Scrap Lead is the key raw material being
used by Nile Limited. Moreover, Lead as a raw material forms about 80% of the cost of the final product.
The price of the raw material Lead as well as the price of final sale product is dependent upon the prevalent
price of Lead on the London Mercantile Exchange (LME). Therefore, it seems that if any company is able
130 | P a g e
to benchmark both the raw material prices to the LME exchange prices, then it would be able to earn stable
operating margins without worrying about the raw material price changes.
As per the April 2017 credit rating report of Nile Limited by India Ratings and Research (page 3), the
company has the benchmarking of prices with its customers already in place.
The above report indicates that Nile Limited will add a pre-determined premium on the raw material prices
and then sell the product to final customer i.e. Amara Raja Batteries Limited. Usually, in such business
arrangements, investors witness stable operating profit margins year on year.
However, in the case of Nile Limited, the operating profitability margins are not stable. The margins are
witnessing fluctuations like any company, which does not has any pricing power over the customers and in
turn does not has the ability to pass on the raw material price increases to end customers.
We believe that comparing the operating profitability margin of Nile Limited with the Lead prices in the
past is an essential exercise that an investor should do to understand its profitability parameters.
The below chart contains the historical lead prices from the London Mercantile Exchange (LME) from
2007 to 2017.
131 | P a g e
The comparative analysis of lead prices and the operating profitability margins of Nile Limited leads to the
following pattern:
Period Lead Prices OPM of Nile Limited

FY2009 Sharp decline Operating losses
FY2010 Sharp increase Sharp improvement in OPM
FY2011 Mild increase Decline in OPM
FY2012 Decline Decline
FY2013 Increase Increase
FY2014 Stable Stable
FY2015 Decline Decline
FY2016 Mile decline Stable
FY2017 Sharp increase Sharp improvement in OPM
The above analysis indicates that the OPM of Nile Limited is highly dependent on the Lead prices. The
higher the lead prices, the better the operating margin and the lower the lead prices, the poor the operating
margin.
This behavior of profitability margins goes against the spirit of benchmarking of sales prices with the raw
material prices.
One assumption which can be built is that the “fix pre-decided premium” over the LME prices, which is
added by Nile Limited on the raw material prices is an only a percentage premium and might not have any
fixed component built into it.
As a result, when the Lead prices go higher, then the pre-determined fixed percentage premium leads to
higher absolute profits in INR, which is sufficient to cover the costs like employee compensation, logistics,
power & fuel etc. Whereas when the Lead prices decline, then the pre-determined fixed percentage premium
does not provide sufficient absolute profits in INR, which might be sufficient to protect the OPM after
meeting costs like employee costs, power & fuel etc.
As a result, Nile Limited benefits when the raw material (Lead) prices go higher and it suffers when the
raw material prices go lower.
Such business characteristics make Nile Limited undergo the same difficulties, which “other companies”
who do not have such price escalation clauses in their customer contracts and thereby no pricing power
over their customers. Nile Limited and such “other companies” face the same challenges, however, the only
difference is that the timing of such difficulties of Nile Limited is exactly opposite.
Such “other companies” suffer when raw material prices go higher as they are not able to pass on the higher
input costs and therefore take a hit on their profitability margins and when the raw material costs go down,
then such “other companies” are not able to enjoy higher profitability margins for long because the
customers immediately renegotiate lower prices. On the contrary, Nile Limited enjoys higher profits when
raw material prices go higher and suffers lower profits (even losses) when raw material prices go lower.
132 | P a g e
So effectively, despite having price benchmarking, Nile Limited ends up facing the same challenges that
other companies without any pricing power face.
Therefore, it becomes essential that when companies negotiate benchmarked prices from their customers,
then along with a “fixed pre-determined premium” in terms of percentage of raw material prices, they also
incorporate a fixed INR premium. This is because when the raw material prices go down in future, then the
fixed INR premium will maintain an absolute level of profits to meet costs like employee expenses, power
& fuel, logistics etc.
It is advised that an investor should get the clarification from the company regarding the exact nature of the
sales contracts that it has with Amara Raja Batteries Limited and other customers and whether these
contracts have any “pre-determined fixed INR premium”, which might help Nile Limited maintain its
profitability in future periods of lower raw material prices.
The net profit margins (NPM) of Nile Limited have been following the trend of operating margins and the
NPM has been fluctuating from 2% to 8% over the years and declining to losses in FY2009.
During FY2011-13, the tax payout ratio of Nile Limited had been below the standard corporate tax rate
prevalent in India. However, since FY2014 onwards, the company has been declaring tax payout ratio,
which is in line with the standard corporate tax rate.
While assessing the net fixed asset turnover (NFAT) for Nile Limited, an investor would notice that the
NFAT of the company has been consistently on an increasing trend over last 10 years (FY2008-17) except
during the period of FY2012-13, when the company first completed the expansion of Tirupati plant from
20,000 TPA to 50,000 TPA in 2012 and then immediately next year expanded the Choutuppal plant from
12,000 TPA to 22,000 TPA in 2013.
The successive additions of capacity in FY2012-13, led to a brief period of decline in the NFAT when it
declined from 9.43 in FY2011 to 6.30 in FY2013.
However, it seems that Nile Limited could increase the utilization of newly added capacities quickly as the
NFAT soon increased to 7.91 in FY2014 and has been increasing ever since to reach 16.80 in FY2017.
The improvement in the NFAT after capacity addition indicates that the company has been able to time its
capacity additions well with the customer demand so that the new capacity does not have to remain idle
waiting for customer orders.
Moreover, an investor would notice that the NFAT levels Nile Limited being more than 10-15 are very high
when compared to the usual levels of NFAT prevalent in the manufacturing industry.
Our experience/analysis of multiple companies listed on Indian stock exchanges have shown that the
industries having high NFAT levels of more than 5 are characterized by low capital intensive nature of the
operations. In such industries, if this advantage of low capital intensively is not a result of some unique
advantage like patents, brand etc., then such companies face a lot of competition from unorganized sector
and cheaper imports. This is because a lot of entrepreneurs are able to put in manufacturing plants by raising
133 | P a g e
finance from friends and families and are in turn able to compete with large organized players as the
manufacturing process does not involve high technological barriers.
Such pattern of production is visible when an investor analysis the pattern of Lead production across the
globe. The below section from the investor presentation of Gravita India Limited, which is a direct
competitor of Nile Limited in Lead & its alloys segment helps an investor understand the Lead production
across the world.
China with its low-cost manufacturing abilities is able to produce 50% of the world’s Lead output and India
being a Lead deficient country is a net importer of Lead. It does not come as a surprise to the investor that
such industries with NFAT levels of 5 and above, which lack brands and patents, leading to the
commoditization of products and as a result, the suppliers/manufacturers in such industries lose their pricing
power from customers and become price takers.
In the case of Nile Limited, even though it has its sales prices benchmarked to London Mercantile Exchange
(LME) Lead prices, it still suffers the same difficulties of fluctuating profitability margins as other
companies without price benchmarking do. The reduced profitability of Nile Limited when raw material
prices go down indicates that Nile Limited is not able to protect its margins by having suitable price
contracts in its favour.
This lack of pricing power of Nile Limited seems to get explained from the high NFAT (i.e. low capital
intensiveness) of its business, which makes the industry highly competitive.
134 | P a g e
Looking at the inventory turnover ratio (ITR) of Nile Limited, an investor would notice that Nile Limited
has been consistently improving its ITR over the years from the levels of 2.6 in FY2009 to 14.4 in FY2017.
This is a remarkable achievement for any company, which is able to show such improved efficiency of
inventory management along with increasing sales.
To analyse the reasons for such improvement in inventory management, an investor would need to refer to
the credit rating rationale of April 2014 for Nile Limited prepared by India Ratings and Research, which
highlights some of the features of the contract that it has signed with Amara Raja Batteries Limited:
 Page 1): Amara Raja Batteries Limited contributes 80% to the overall sales of Nile Limited:
 Page 3): The contract with Amara Raja Batteries Limited has a minimum offtake clause i.e. Amara
Raja will buy at least a minimum agreed quantity and therefore, Nile Limited can plan its inventory
purchases accordingly:
The above two observations when seen together would lead to the conclusion that there is high visibility of
the amount of product demand for Nile Limited and therefore, it can easily assess its inventory requirements
and plan its inventory purchases well.
This business characteristic of the ability to do advance inventory planning is visible in the pattern of
improving inventory turnover levels of Nile Limited over the years.
When an investor analyses the receivables days of Nile Limited, then the investor would notice that the
receivables days of the company have been declining consistently from 53 days in FY2014 to 14 days in
FY2017. It is a good performance on working capital management by a company.
While going through the credit rating report of Nile Limited, published by India Ratings & Research in
April 2014 (page 6), an investor would find the reasons for this improvement in the receivables management
by the company:
135 | P a g e
India Ratings & Research highlights that Nile Limited is using bill discounting facilities to get its
receivables at an earlier date than scheduled.
Under bill discounting, a company which has sold its product to a good reputed customer, goes to a bank
and shows the bank the bill showing the acceptance of the goods by the “reputed customer” and the amount,
which the “reputed customer” has agreed to pay to the company after agreed amount of days.
The bank takes the comfort of the reputation of the customer and in turn agrees to give the company money
against the security of this bill after adjusting for its interest/fee charges. The company gets the money early
and the bank receives the repayment of the money given to the company when the “reputed customer”
makes the after agreed number of days.
While analysing the FY2017 annual report of Nile Limited, page 57, in the contingent liabilities section, an
investor notices that Nile Limited has been making good use of bill discounting facilities and at March 31,
2017, it has discounted bill of about ₹50 cr. (₹5.2 cr. with a letter of credit (LC) and ₹45 cr. without LC):
It is to be noted that the trade receivables outstanding at March 31, 2017, as per FY2017 annual report are
about ₹29 cr.
In a simple way, an investor may understand it assuming that Nile Limited had total trade receivables of
about ₹79 cr. at March 31, 2017, out of which it got an early payment of ₹50 cr. by discounting the bills of
“reputed customers”, which mostly are expected to be Amara Raja Batteries Limited, from the bank and
therefore it showed remaining ₹29 cr. as to be collected.
The investor would also notice that in case the “reputed customer” does not pay the money on the agreed
date due to any reason, then the bank will ask its money back from Nile Limited. This is the reason that the
money received by Nile Limited from bill discounting is shown under contingent liabilities.
Going ahead, an investor should keep a close watch on the receivables days as well as the inventory turnover
levels of Nile Limited.
136 | P a g e
The investor would notice that Nile Limited has an SSGR of about 18-25% over the years and it has been
growing its sales revenue at a similar growth rate over the 11 years.
Upon reading the SSGR article, an investor would appreciate that if a company grows at a sales growth
rate, which is equal to the SSGR and it can manage its working capital well, then it can afford to achieve
this growth rate without depending upon external sources of funds like equity/debt infusion. In such cases,
a company can meet its growth requirements from its profits.
An investor would notice that during FY2008-17, Nile Limited had a total net profit of ₹87 cr. and during
the same period, it had reported a total cash flow from operations (CFO) of ₹116 cr. As the growth rate of
Nile Limited is within the SSGR limits and the company has been able to convert its profits into cash flow
from operations, therefore, it becomes evident that the company has been able to fund its growth from
internal resources without needing debt or equity dilution.
This assessment gets substantiated when the investor analyses the free cash flow position of Nile Limited.
Over FY2008-17, Nile Limited has witnessed its sales increase from ₹115 cr. in FY2008 to ₹579 cr. in
FY2017. For achieving this sales growth the company has done an additional capital expenditure (capex)
of ₹43 cr. However, Nile Limited has generated a cash flow from operations (CFO) of ₹116 cr. over
FY2006-16 leading to a surplus of ₹73 cr. as free cash flow (FCF) for its stakeholders.
company.
Nile Limited has used the FCF to meet its interest expense requirements of about ₹44 cr over last 10 years
and to pay dividends to equity shareholders.
While studying about Nile Limited, an investor comes across certain other aspects, which are important for
analysis and subsequent final investment decision by investors:
1) Good project execution skills:
An investor would notice that Nile Limited has been able to expand its manufacturing capacity on a regular
basis and has been able to achieve optimal utilization of the installed capacities in a timely manner.
The evidence of increasing the manufacturing capacity from 3,000 TPA until the early 2000s to 82,000
TPA in 2017 indicates good project execution skills by the company management.
An investor would notice that the founder promoter Mr. V. Ramesh, has brought in Mr. Sandeep Ramesh
as an Executive Director in the company. Mr. Sandeep Ramesh is the son of Mr. V Ramesh. The relationship
between the two gets established from FY2017 annual report of the company at page 26:
137 | P a g e
3) Increased focus on the Lead business:
In FY2013, Nile Limited decided to sell off its glass lining division at a price of ₹54 cr and earned a profit
of ₹14.7 cr. on it. The company decided to focus on the Lead business. Increased attention of the
management on any line of business indicates that they tend to specialize in it. Therefore, many times, such
specialization lead to increased competitive advantages to such companies.
4) Challenges of sourcing the raw material in Lead business:
India is a net Lead importing country. Therefore, companies need to import to fully meet their Lead raw
material requirement. By analysing the previous annual reports of Nile Limited, it seems that companies in
Lead business need to make considerable efforts to ensure the supplies of Lead for their business.
In the current year, the company has been continuously trying to find new avenues to source raw material
(Lead). As per the management discussion & analysis section of FY2017 annual report (page 13), the
company has taken approval from govt. to import lead batteries:
The company has been making its efforts to secure raw material in the past as well. The earliest available
annual report of FY2010 for Nile Limited, on page 6, intimates the shareholders that it has done a joint
138 | P a g e
venture (JV) in the Republic of Georgia with a local partner to ensure the raw material supplies of Lead for
its plants. The company intimated that the JV has started commercial production and the first shipment is
expected to reach India soon.
However, the JV soon entered into problems and the very next year in FY2011, the JV entered into problems
apparently due to the financial position of the local JV partner. The company tried to resolve the situation
but without success.
In FY2013, the company acknowledged that it was not a good capital allocation decision and it started to
recognize the losses by making provisions for the investment of ₹91 lac done in the JV. It recognized 50%
loss in FY2013 and the remaining 50% in FY2014.
As per the FY2017 annual report, page 13, the application of Nile Limited to Reserve Bank of India (RBI)
for permission to write off the investment in GLW Limited of Georgia is still pending.
This also represents a case where the management seems to have erred in assessing the financial position
of the counterparty while selecting the local partner for the JV in Georgia.
5) The concentration of business around a single customer:
Nile Limited derives its 80% revenue from a single client: Amara Raja Batteries Limited. The company has
put up a plant of 50,000 TPA manufacturing capacity in Tirupati where Amara Raja Batteries Limited has
its manufacturing plant.
139 | P a g e
An investor would appreciate that a higher reliance on one single customer is expected to make the company
dependent on the counterparty for its growth as well as survival. Such companies usually do not enjoy high
negotiating power over their key customer.
As discussed earlier in the article, the pricing contract with Amara Raja Batteries Limited is making Nile
Limited suffer same challenges, which other companies without any price benchmarking/pricing power
face. However, still, the relationship has been working fine as Nile Limited seems to be utilizing its capacity
to the levels of about 70%.
The key point to note here is that in FY2017, one of the key competitors of the company, Gravita India
Limited has put up a manufacturing unit in Chittoor, AP, which is about 70 km from Tirupati.
(Source: Investors Presentation, Gravita India Limited FY2017)
The presence of a competitor in the same region of one’s key customer is expected to create issues like
taking away growth opportunities in future. An investor would appreciate that when a company is largely
dependent upon a single customer for its business, then any decline in business from the key customer can
be a critical issue for the company.
6) High promoters’ remuneration:
The annual report for FY2017 of Nile Limited, page 24, indicates that the remuneration drawn by Mr. V.
Ramesh and Mr. Sandeep Ramesh is ₹130.75 lac and ₹133.41 lac respectively. The total remuneration
drawn by both the promoter managers is exactly equal to the maximum remuneration allowed by the
Companies Act 2013, as disclosed by the company in the same section:
140 | P a g e
As per our experience of analysis of multiple companies, we believe that the usual remuneration levels of
promoters are about 2-3% of the net profit after tax (PAT) where promoters take about 2% as commission
on the profits and remaining as fixed salary.
An investor may also wish to compare the average salary increases for FY2017 of the management with
the average salary increases of the employees excluding the management at Page 15 of FY2017 annual
report:
7) Interest bearing deposits from related parties:
As per the annual report of FY2017 of Nile Limited, the company has taken deposits of ₹9 cr. from related
parties (page 56):
141 | P a g e
The company has also disclosed on page 46 of FY2017 annual report that these deposits bear an interest
rate of 10-12% (weighted average cost of about 11%):
The cost of bank debt for the company is currently:
 HDFC Bank: 1 year MCLR + 0.7% = 8.15% (at Aug 9, 2017) + 0.7% = 8.85%
 Kotak Mahindra Bank: 6 months MCLR + 0.55% = 8.35% (at Aug 9, 2017) + 0.55% = 8.90%
Therefore, it seems that in case the company is in urgent need of funds, then it can raise funds from the
banking system at a lower rate than the prevalent interest on the deposits from related parties.
142 | P a g e
We do not provide any buy/sell/hold recommendations on the stocks. It is advised that an investor should
take such decisions herself after doing her own analysis.
Currently, Nile Limited is available at a price to earnings (P/E) ratio of about 7.2 (based on FY2017
earnings), which offers some margin of safety in the purchase price as described by Benjamin Graham in
his book The Intelligent Investor.
Overall, Nile Limited seems to be a company operating in a commodities product market where despite
having price benchmarking contracts it faces the same difficulties, which are faced by manufacturers that
do not have any pricing power over the customers and in turn get impacted by changing raw material costs.
The company supplies primarily to only one customer, Amara Raja Batteries Limited (80% of Nile
Limited’s revenue) and the key customer seems to have the price contracts in such a fashion that Nile
Limited has to bear uncertainty in its profitability with changing raw material prices. As a result, even
though Nile Limited has increased its sales at an annual rate of 16% over last decade, however, the
performance of the company on profitability parameters leaves a lot to be desired.
Nile Limited has witnessed its operating efficiency parameters improve significantly over the years, which
is primarily helped by the assured offtake of its plant production by Amara Raja and the ability of the
company to get the bills discounted from banks. As a result, the company has been able to keep a control
over its working capital needs and the company has been able to grow within its internal resources and has
been able to control its debt over the years while achieving sales growth.
The management of the company seems to have displayed good project execution skills by successfully
completing the capacity expansion plans year on year. The founders seem to have been working on a
management succession plan and have brought in the second generation of the family into the company in
executive roles.
The promoters/related parties seem to be drawing remuneration in the higher range of the industry and the
interest being paid by the company to related parties is higher than the cost of its bank borrowings.
The reliance of the company primarily on a single customer puts the company in a weaker negotiating
position. Also the presence of one of the competitors, Gravita India Limited, in the same region might pose
risks to the business going ahead.
It is advised that an investor should monitor the operating efficiency levels of the company, loans &
advances movement of related parties among other things like profitability levels going ahead. Investors
should keep a close watch on the development related to the competitors of the company, esp. Gravita India
Limited to assess whether there are any early signs of impact on the business of Nile Limited from Amara
Raja Batteries Limited.
These are our views about Nile Limited. However, readers should do their own analysis before taking any
investment related decision about Nile Limited.
143 | P a g e
P.S:
144 | P a g e
9) Bhageria Industries Limited
Bhageria Industries Limited is an Indian player dealing in dyes & intermediaries and solar power projects.
Let us first try to analyse the financial performance of Bhageria Industries Limited over last 10 years.
145 | P a g e
Bhageria Industries Limited has been growing its sales since last 10 years (FY2007-16) at a rate of 20%
year on year from ₹43 cr. in FY2007 to ₹238 cr. in FY2016. The sales have further increased to ₹344 cr. in
FY2017. This sales growth journey has been quite turbulent for Bhageria Industries Limited and it has
witnessed sales decline in FY2010 and FY2016. The sales revenue reached the highs of ₹412 cr. in FY2015
and the company is yet to achieve those levels.
Just like fluctuations in the sales growth, Bhageria Industries Limited has witnessed the profitability
margins vary significantly over the years. The company reported operating losses in FY2008 and FY2009
and had very low amounts of operating profits until FY2013. Thereafter, the operating profit margin (OPM)
has improved but still, the OPM has shown very high fluctuations from 6% to 17%.
146 | P a g e
Such fluctuating pattern of OPM indicates that Bhageria Industries Limited does not have a pricing power
over its customers and is not able to timely pass on the raw material price increases to its customers. As a
result, when the raw material prices increase, Bhageria Industries Limited has to take a hit on its profitability
margins.
Such cyclical pattern of operating profitability margins is predominantly prevalent in companies that deal
with products, which are commoditised and the customers have an option of buying the products from a
number suppliers.
Bhageria Industries Limited has communicated the same to the shareholders in its FY2012 annual report
while discussing the operating performance (pg. 6):
And in the FY2016 annual report, page 4, when the sales and the profitability witnessed steep decline:
The same issue has been highlighted by the credit rating agency CARE Limited in its credit report of August
2016 for Bhageria Industries Limited:
The net profit margins (NPM) of the company have been following the trend of operating margins over the
years. The company barely had any net profits until FY2013 where it reported net losses in FY2009 and
FY2012. Since then the company has been reporting consistent profits, however, the NPM has been
fluctuating from 4% to 12%.
The tax payout ratio of Bhageria Industries Limited seems to be in line with the standard corporate tax rate
prevalent in India. Over the years, the tax payout is in the range of 28% to 33%.
While assessing the net fixed asset turnover (NFAT) for Bhageria Industries Limited, an investor would
notice that the NFAT levels of the company are consistently on very high levels of more than 10 and at one
point in time in FY2014, it had reached 62 times.
Such high levels of NFAT are usually seen in companies, which do not need to invest a lot in their plant
and machinery or those who rely on outsourcing of the manufacturing process and in turn primarily act as
147 | P a g e
trading companies. The companies, which are not into trading of goods and enjoy such high fixed assets
turnover on account of low capital intensiveness of their operations face a lot of competition from
unorganized sector unless their market is protected by intangible factors like brands or patents.
In the case of Bhageria Industries Limited, an investor would notice that the company deals in dyes and dye
intermediates, which are commodity chemicals. High fixed asset turnover in commodity chemicals space
indicates that a lot of competitors can start manufacturing the same product with limited investment and in
turn pose a risk to the market of the company in case it tries to increase its product prices. Therefore, it
won’t come as a surprise to the investor that Bhageria Industries Limited has witnessed fluctuating
profitability margins as it is not able to pass on the increases in the raw material costs to its customers on
account of such competition.
Moreover, the company also deals in trading of goods like pharmaceutical products, agrochemicals and
pigments etc. The trading component of the business though has very low margins but increases the NFAT
to very high levels.
In last a few years, the company has entered into solar power generation, which is a capital intensive
business and as a result, the NFAT of the company might reduce further going ahead.
When an investor analyses the receivables days of Bhageria Industries Limited, then the investor would
notice that the receivables days of the company used to be very high until FY2012 in the range of about
120 days. However, since then, the company seems to have put in efforts to improve its collection practices
and has brought down the receivables days significantly to 38 days in FY2014. An investor would notice
that the receivables days have again started to increase and have reached 68 days in FY2016 and about 50
days in FY2017.
It is advised that the investor should keep a close watch on the receivables days of Bhageria Industries
Limited going ahead to monitor whether the working capital efficiency of the company is deteriorating in
future.
Looking at the inventory turnover ratio (ITR) of Bhageria Industries Limited, an investor would notice that
ITR has been fluctuating wildly over the years in the past. The company has had an ITR of as low as 9.8 in
FY2012 and as high as 23.9 in FY2014. Such wide variations in the ITR indicate that the company is not
able to plan its inventory levels, which further seems to indicate that the company might not be able to
reliably gauze the demand of its products in the market.
148 | P a g e
This is further substantiated by the explanations given by the management for decline in sales in FY2016
(discussed above) that the demand for the company’s products witnessed a slowdown in the year, whereas,
at the start of FY2016 (i.e. at the end of FY2015), the company has kept the highest level of inventories.
The investor would notice that Bhageria Industries Limited has witnessed an SSGR ranging from negative
rates to 177% in FY2016. The key reasons for such wide fluctuations in the SSGR for the company are
significant variations in the NFAT and the NPM for the company during FY2012 to FY2016 (the SSGR
formula used by us takes 3 years rolling average of the input parameters).
The fluctuations in the NFAT, as well as NPM, have been discussed above including the impact of trading
business segment and the commodity nature of products and the conclusions of both the parameters indicate
that it is very difficult to assess the business of Bhageria Industries Limited on a steady state basis. This
seems true as even the management has found it difficult to assess the product demand, working capital
requirement etc. in the past.
Upon reading the SSGR article, an investor would appreciate that if a company is growing at a rate equal
to or less than the SSGR and it is able to convert its profits into cash flow from operations, then it would
be able to fund its growth from its internal resources without the need of external sources of funds. However,
the uncertainties in the business like in the case of Bhageria Industries Limited make the interpretation of
the SSGR parameters difficult.
However, still, it can be witnessed that currently, the SSGR is higher than the achieved sales growth of the
company and it can also be observed that the company has been able to reduce its debt from ₹21 cr. in
FY2007 to ₹13 cr. in FY2016. Moreover, the investor would also notice that the company has investments
of worth ₹42 cr. in FY2016 and therefore the company has a net debt of zero at FY2016. We will further
discuss this aspect of Bhageria Industries Limited later in the article.
(Later on, in FY2017, the company has raised further debt to fund its solar power plant operations.
However, the exact debt position of the company at FY2017 will be clear once the annual report of the
company for FY2017 is published and available in the public domain. As per the March 2017 results, the
company has long term debt of about ₹4.7 cr. and short term debt of about ₹139.5 cr. An investor does not
have the information about the extent of current maturity of long term debt in the other current liabilities of
₹44.7 cr. Therefore, one needs to wait until the annual report of FY2017 is available to investors.)
The debt free assessment of Bhageria Industries Limited up to FY2016 gets substantiated when the investor
analyses the free cash flow position of Bhageria Industries Limited.
Over FY2007-16, Bhageria Industries Limited has witnessed its sales increase from ₹43 cr. in FY2007 to
₹238 cr. in FY2016. For achieving this sales growth the company has done an additional capital expenditure
(capex) of ₹32 cr. However, Bhageria Industries Limited has generated a cash flow from operations (CFO)
of ₹73 cr. over FY2007-16 leading to a surplus of ₹41 cr. as free cash flow (FCF) to its shareholders.
company.
149 | P a g e
Bhageria Industries Limited seems to have utilized the resulting free cash flow (FCF) of ₹41 cr. to reduce
its debt from ₹21 cr. in FY2007 to ₹13 cr. in FY2016, pay interest expense of ₹15 cr. over FY2007-16 and
to pay dividends of about ₹14 cr to equity shareholders.
While studying about Bhageria Industries Limited, an investor notices certain other aspects, which are
important for analysis and subsequent final investment decision by investors:
The key management of Bhageria Industries Limited constitutes of Mr. Suresh Bhageria, Mr. Vinod
Bhageria and Mr. Vikas Bhageria. Mr. Vikas Bhageria, currently 37 years of age, is the son of Mr. Suresh
Bhageria.
This relationship gets established by studying the section “Annexure to Director’s Report” in the annual
report for FY2016, page: 27:
2) Shareholding of promoters:
An investor would notice that the promoters of Bhageria Industries Limited are steadily increasing their
shareholding in the company. As per BSE website, the promoters have increased their shareholding in the
company by 0.27% over last 2 quarters and now hold more than 50% shares in the company.
150 | P a g e
3) Amalgamation/acquisition of promoter Group Company: Nipur Chemicals Limited:
Bhageria Industries Limited is currently in the process of merging one of the promoter group entity Nipur
Chemicals Limited, which is in a similar line of business, into itself in an all share deal. All share deal
means that instead of cash, Bhageria Industries Limited will pay to the shareholders of Nipur Chemicals
Limited by way of shares of Bhageria Industries Limited.
Nipur Chemicals Limited is a promoter group company of Bhageria Industries Limited. An investor can
look at the following multiple information pieces to reach this conclusion:
a) Nipur Chemicals Limited is a shareholder in Bhageria Industries Limited:
At June 30, 2017, Nipur Chemicals Limited holds 0.29% shares in Bhageria Industries Limited:
b) Key management people of Nipur Chemicals Limited are classified as promoters in Bhageria Industries
Limited:
As per the corporate database website, Zauba Corp, the key management positions of Managing Director
and Whole Time Directors are held by Mr. Deepak Bhageria, Mr. Dinesh Bhageria and Mr. Rakesh
Bhageria respectively.
151 | P a g e
As per the shareholding pattern of Bhageria Industries Limited shared above and another image below, Mr.
Deepak Bhageria, Mr. Dinesh Bhageria and Mr. Rakesh Bhageria hold 5.25%, 1.13% and 5.10% stake in
the company respectively and have been classified as promoters of Bhageria Industries Limited. They also
hold additional shares in the names of their respective HUFs (Hindu Undivided Family).
152 | P a g e
Moreover, credit rating agency CARE Limited in its report of Nov 2016 has mentioned Nipur Chemicals
Limited as a group associate of Bhageria Industries Limited.
Therefore, an investor would appreciate that Bhageria Industries Limited is proposing to effectively
purchase a promoter group entity by making payment by way of shares of Bhageria Industries Limited.
The effective value of consideration proposed to be paid (i.e. the value of shared of Bhageria Industries
Limited proposed to be given to shareholders of Nipur Chemicals Limited comes to be about ₹229.11 cr.
based on closing price of Bhageria Industries Limited shares (₹385.55) on BSE on November 11, 2016,
which is the available reference price on November 14, 2016, when the board of Bhageria Industries
Limited approved the Scheme of Amalgamation. (November 14, 2016, was a trading holiday on account of
Gurunanak Jayanti).
153 | P a g e
An investor may arrive at this calculation in the following fashion:
As per page 11 of the Scheme of Amalgamation document available at the website of Bhageria Industries
Limited, the consideration to be paid to shareholders of Nipur Chemicals Limited is 11 shares of Bhageria
Industries Limited for each 10 shares of Nipur Chemicals Limited held by its shareholders.
As per page 3 of the Scheme of Amalgamation document, Nipur Chemicals Limited has 5,402,300 shares.
Therefore, the total number of shares of Bhageria Industries Limited to be paid/given to Nipur Chemicals
Limited would be 5,942,530 (= 11 * 5,402,300 / 10).
154 | P a g e
The value of 5,942,530 shares of Bhageria Industries Limited at the closing price of November 11, 2016,
at BSE (₹385.55) comes out to be ₹229.11 cr.
An investor may have a look at the business performance of Nipur Chemicals Limited. The financials of
Nipur Chemicals Limited are present on page 47 of the Scheme of Amalgamation document:
An investor would notice that Nipur Chemicals Limited has:
 Sales of ₹59.59 cr. in FY2016 and annualized sales of ₹64.54 cr. in FY2017 (i.e. double of H1-
FY2017 sales of ₹32.27 cr).
 Net profit of ₹7.75 cr. in FY2016 and annualized net profit of ₹12.52 cr. in FY2017 (i.e. double of
H1-FY2017 profit of ₹6.26 cr).
 The net worth of ₹44.84 cr. at March 31, 2016, and ₹51.10 cr. at Sept 30, 2016.
155 | P a g e
An investor may use these parameters and the total consideration to arrive at the valuation levels of Nipur
Chemicals Limited:
 Price to Sales Ratio (P/S ratio) of about 3.85 based on FY2016 sales (229.11 / 59.59) and 3.55
based on annualized sales for FY2017 (229.11 / 64.54)
 Price to Earnings Ratio (P/E ratio) of about 29.56 based on FY2016 profit (229.11 / 7.75) and
18.30 based on annualized profit for FY2017 (229.11 / 12.52)
 Price to Book Value Ratio (P/B ratio) of about 5.11 based on March 31, 2016, net worth (229.11
/ 44.84) and 4.48 based on net worth at September 30, 2016, FY2017 (229.11 / 51.10)
The above approach will provide an investor with a perspective of the consideration being paid by Bhageria
Industries Limited to merge/acquire the business of Nipur Chemicals Limited.
The price of Bhageria Industries Limited has witnessed a decline of about 12% in one day from ₹321.70 at
July 28, 2017 (Friday) to ₹283.90 on July 31, 2017 (Monday). We are able to find only one news/corporate
announcement at BSE from the company after the market hours of July 28, 2017, which is related to seeking
deferment of AGM for 2017 by 3 months due to the impending amalgamation.
An investor may wish to search for any other related development that might have led to this significant
decline in the share price in one day.
4) Solar power plant operations:
As per the BSE filing done by Bhageria Industries Limited on July 19, 2017, the company has
commissioned the 30 MW solar power plant in Ahmednagar district, Maharashtra on June 17, 2017.
156 | P a g e
A few critical details of the contract for the solar power plant like power tariff, contract tenure etc. are
available in the credit rating rationale of November 2016 by CARE Limited:
157 | P a g e
As per the credit rating rationale by CARE, the solar power plant has a power purchase agreement (PPA)
for 25 years at ₹4.41 per unit.
There is another critical information available in the rating rationale that the cost of the project has declined
from about ₹190 cr. to ₹170 cr.
An investor would appreciate that in recent times, the cost of solar modules has witnessed significant
declines. As per the below chart referring the solar modules (photovoltaic cells) prices from
pvxchange.com, the module prices have declined across all the markets:
As per the above chart, the solar module prices for South and South East Asia have declined from EUR
0.48 per watt-peak in June 2016 to EUR 0.38 per watt-peak, which is a 20% decline in costs in one year.
158 | P a g e
As the cost of solar modules is one of the biggest cost in the solar power project, there is no wonder that
the cost of the solar power plant for Bhageria Industries Limited also declined from ₹190 cr. to ₹170 cr.
The continuously declining solar module prices have led to the continuous declining trend in the cost of
solar power tariff. As per the recent auctions in May 2017, the solar power prices have declined to ₹2.44
per unit. (Source: Economic Times)
(Image source: Economic Times)
There has been a very sharp decline of about 45% in the solar power tariffs (from ₹4.41 per unit to ₹2.44
per unit) after the power purchase agreement (PPA) was signed by Bhageria Industries Limited for its solar
power plant with Solar Energy Corporation of India. If an investor takes a common logical approach, then
it looks difficult that any purchaser will keep on paying a higher price for power, which in this case is 80%
higher than the current market price (4.41 / 2.44), for next 25 years.
We believe that there is very high probability that such power purchase agreements (PPA) which have
tariffs higher than market price will be reneged or renegotiated at lower levels.
There is already news in the media that some power utility companies are now hesitating to sign the PPA
for projects, which were allotted at higher tariffs. There is also news in the media that some power utility
companies are not buying power from such high tariff plants despite PPAs being in place.
A rational buyer will always look for ways to reduce the cost of purchase. It is normal behavior and is
present across industries.
159 | P a g e
An example of the same tendency was recently witnessed when Petronet LNG refused to buy gas from
Qatar’s RasGas at previously agreed prices, which were double of the prevalent the market price. As a
result, the producer, RasGas had to renegotiate the prices, edit the contract that earlier did not allow the
change in price to now include clause of market dynamics based price revision and also waive off the
penalty for no/reduced purchase of gas by Petronet LNG. The following excerpt from an article in Business
Line covering this news is pertinent:
“NEW DELHI, DEC 31: Petronet LNG, India’s largest LNG importer, will ring in the new
year with good news. The company will get fuel from Qatar’s State-owned gas producer
RasGas at nearly half the cost originally agreed upon. It will also not have to pay the
₹12,000-crore penalty for lower off-take in 2015.
On Thursday, RasGas and Petronet signed a revised sale purchase agreement, according to
which, Petronet will get LNG at $6-7 per million British thermal unit (mBtu). Under the
original contract signed between the two companies in 1999, Petronet would get LNG at $12-
13 per mBtu. Supplies began in April 2004. The new contract is effective January 1, 2016, and
ends in 2028.
The earlier contract with RasGas did not allow any change in pricing, resulting in the
buyers paying higher than the prevailing market price. Under the new contract, the price for
the buyer will be governed by market dynamics based on a crude price linked formula.”
(Highlights mine)
As a result, an investor would appreciate that if the market price of solar power tariff continues to fall
further or even if it stays at current levels of ₹2.44 per unit and does not increase, then there is a probability
that Bhageria Industries Limited might have to face similar situation of tariff renegotiation or lower
purchase of power by utility companies. This is because hardly any rational buyer will keep on paying an
80% higher price (4.41 / 2.44) for 25 years. As witnessed above, such contracts have been renegotiated in
the past and they might also be renegotiated in the future.
Any reduction in the solar power tariff would lead to the reduction in the returns anticipated by Bhageria
Industries Limited from the solar power plant.
The investment by Bhageria Industries Limited in the solar power project of ₹170 cr, which is primarily
debt funded, is significant when compared to the overall net worth of the company of about ₹110 cr. at
March 31, 2017. Therefore, any impact on the potential tariffs/returns would not be good for the company
and the shareholders.
It is therefore advised that investors should keep a close watch on the developments related to the power
purchase levels from the company’s solar power plant by utility companies and also the indications of
renegotiation of power tariffs in future.
160 | P a g e
5) Taking short term positions in the stock markets:
Bhageria Industries Limited has been deploying cash in the stock markets and seems to be taking short term
bets.
While analysing the current investments of about ₹33 cr. at March 31, 2016 (annual report FY2016, page
58), an investor would notice that almost entire ₹33 cr. is invested in equities. ₹30 cr. has been invested
directly in shares of about 35 different companies whereas ₹3 cr. is invested in Axis Equity Fund, which is
also an equity exposure.
161 | P a g e
Managing a portfolio of ₹33 cr. and containing 35 stocks is a specialised function and might require
dedicated professionals.
The investor would notice that the amount of equity investments exceeds the operating assets (NFA+CWIP)
at March 31, 2016, which stand at ₹27 cr. and it looks like the company has diversified from its core
business of making dyes and intermediaries into solar power and equity investing.
Moreover, an investor would also notice that Bhageria Industries Limited has been taking short term bets
in equity markets. An investor would witness it while analysing the cash flow statement of annual report
FY2016, page 49, which contains items of “Short term Capital gain on sales of shares” for both FY2015
and FY2016.
It is advised that an investor should keep a close watch on the current investments portfolio of Bhageria
Industries Limited and monitor whether the company continues to deal in short term equity transactions.
It is important because the equity investments may decline 50% in value in any year without any change in
underlying fundamentals of the underlying companies. If the person responsible for current investments at
Bhageria Industries Limited is not able to manage equity investments properly, then the resulting losses
may eat up the earnings of the business of dyes & intermediates.
Currently (August 2, 2017), Bhageria Industries Limited is available at a price to earnings (P/E) ratio of
about 12 (based on FY2017 earnings), which offers some margin of safety in the purchase price as described
by Benjamin Graham in his book The Intelligent Investor.
Overall, Bhageria Industries Limited seems to be a company operating in a very competitive and tough
business where it does not have the pricing power in its hand over its customer. The company is not able to
pass on the raw material pricing increases to its customers and as a result, has been facing fluctuating
profitability margins over the years to the extent of reporting losses as well.
The dyes business of Bhageria Industries Limited has proved to be highly unpredictable and as a result, the
company seems to have faced challenges in estimating the demand for its products leading to sharp decline
in revenue in a few years along with suboptimal inventory management.
162 | P a g e
The company has currently entered into solar power production. However, the final returns, which Bhageria
Industries Limited will be able to make from solar power business are uncertain due to the fast changing
business & pricing dynamics of the solar power industry.
The company is currently undertaking merger of a promoter group entity, which operates in the similar line
of business. An investor may need to analyse the merger transaction in depth.
The company has been keeping its funds into equity investments and seems to have been taking short term
positions, which is not the core function of a manufacturing company. An investor should keep a close
watch on the current investments portfolio of the company.
Company’s promoters have been increasing stake in the company in recent times and have brought in the
next generation of the family in the business, which seems like the management succession plan.
These are our views about Bhageria Industries Limited. However, readers should do their own analysis
before taking any investment related decision about Bhageria Industries Limited.
P.S:
163 | P a g e
10) Ishan Dyes & Chemicals Limited
Ishan Dyes & Chemicals Limited, an Indian manufacturer of CPC Blue, Alpha Blue and Beta Blue pigments
finding use in plastics, paints, inks and water base industries etc.
Let us first try to analyse the financial performance of Ishan Dyes & Chemicals Limited over last 10 years.
While taking the financial data of Ishan Dyes & Chemicals Limited from different public sources like
Screener or Moneycontrol, an investor would notice that these sources do not contain the data for FY2008.
Moneycontrol has the data only from FY2009 onwards and Screener has the data of FY2006, FY2007 and
then FY2009 up to FY2016. Moreover, as the annual report of Ishan Dyes & Chemicals Limited for FY2017
is yet to be published (on July 20, 2017), therefore, only limited financial data of FY2017 is available in
the form of summary profit & loss statement and the summary balance sheet published by the company
with the results of Q4-FY2017.
As a result, to bring the continuity in the financial analysis of Ishan Dyes & Chemicals Limited for past 10
years, we have extracted the data of FY2008 from the previous year data published in the FY2009 annual
report, which is available at the website of Ishan Dyes & Chemicals Limited. We have used the limited
financial information available in the Q4-FY2017 results to do our analysis for FY2017.
Moreover, it seems that Ishan Dyes & Chemicals Limited did not publish the cash flow statement before
FY2009. The FY2009 annual report of Ishan Dyes & Chemicals Limited, which is the oldest available
annual report at its website, does not contain cash flow statement. As a result, to do the analysis of CFO,
we have done basis computation to arrive at the CFO for FY2007, FY2008 and FY2009 by using the
formula:
CFO = PAT + depreciation + interest expense + changes in inventory + changes in receivables
We believe that with the limited data available in the Screener data sheet for FY2006 and FY2007, we can
do a rough estimation of CFO by using the above components available in the data sheet. We understand
that the above formula does not factor in changes in trade/account payables because this data is not available
164 | P a g e
in the Screener data sheet. However, we believe that a rough estimation of CFO based on the above formula
for the initial few years in the history of last decade should help in approximating an analysis by the investor.
With these limitations and assumption in mind, let us analyse the past performance of Ishan Dyes &
Chemicals Limited:
Ishan Dyes & Chemicals Limited has been growing its sales since last 11 years (FY2006-17) at a rate of
16% year on year from ₹13 cr. in FY2006 to ₹67 cr. in FY2017. However, the achievement of this enhanced
revenue has been a rough journey for Ishan Dyes & Chemicals Limited. The revenue was growing at a brisk
pace of 25% until FY2014 when it reached the highest ever revenue of ₹75cr. In FY2015, the company
witnessed a decline in sales revenue to 50 cr. and is yet to surpass the maximum revenue achieved in
FY2014.
165 | P a g e
The growth in sales for Ishan Dyes & Chemicals Limited seems to be challenging experience because this
journey of growth in revenue has witnessed wild fluctuations in the profitability margins over the years.
Ishan Dyes & Chemicals Limited was making operating losses until FY2007 and in FY2008, it could report
the operating profit only to again fall into losses in FY2009. Since then operating profitability margin
(OPM) has been fluctuating wildly between the range of 4% to 14%. In FY2017, the company has reported
highest ever OPM of 17%.
As rightly highlighted by you, such fluctuating pattern of operating profit margin over the years indicates
that Ishan Dyes & Chemicals Limited is not able to immediately pass on the raw material price increases
to its customers. As a result, when the raw material prices increase, Ishan Dyes & Chemicals Limited has
to take a hit on its profitability margins. Such a situation indicates that the company does not command a
pricing power over its customers.
Such cyclical pattern of operating profitability margins is predominantly prevalent in companies that deal
with products, which are commoditised and the customers have an option of buying the products from a
number suppliers.
Ishan Dyes & Chemicals Limited has communicated the same to the shareholders in its FY2016 annual
report while discussing the risks and threats (pg. 59):
The impact of fluctuations in the raw material costs on the profitability margins of Ishan Dyes & Chemicals
Limited is very significant, which became evident in FY2015, when the raw material prices increased and
on top of it the final product prices declined to result in the operating profit margins declining from 12% in
FY2014 to 5% in FY2015.
The company has highlighted the same in its FY2015 annual report to the stakeholders:
166 | P a g e
The recent improvement in the operating margins of Ishan Dyes & Chemicals Limited to 17% seems to be
helped by the lower raw material costs (linked to crude oil prices) as well the reduced supply of
pigments/chemicals from China on account of strict environmental measures taken by Chinese govt. on the
manufacturers in their country.
The company management has highlighted declining RM prices, operating leverage and improved
efficiencies as reasons for the increase in profitability in FY2016 in the annual report, page 18:
In light of commoditised nature of the product of the company, it remains to be seen whether Ishan Dyes
& Chemicals Limited is able to maintain such operating profitability margins going ahead.
The net profit margins (NPM) of the company have been following the trend of operating margins and the
NPM has been fluctuating from 1% to 8-9% over the years.
The tax payout ratio of Ishan Dyes & Chemicals Limited been significantly lower than the standard
corporate tax rate prevalent in India. We suggest that an investor should seek inputs from the company
about the various tax incentives available to Ishan Dyes & Chemicals Limited along with their maturity
dates. This would help to enable the investor in estimating the correct payout ratio for the company and
make her assessment accordingly.
While assessing the net fixed asset turnover (NFAT) for Ishan Dyes & Chemicals Limited, an investor
would notice that NFAT, which was increasing consistently until FY2014, when it reached the highest level
of 9.3 has declined to 4.91 in FY2016 and has improved to 5.23 in FY2017.
It seems that Ishan Dyes & Chemicals Limited was able to improve its revenue by using efficient higher
utilization levels of the plants until FY2014, which led to rising NFAT until FY2014. However, from the
net fixed assets from ₹7 cr in FY2014 to ₹13 cr. in FY2016, it seems that the company invested in additional
capacities. The lower capacity utilization in the following years, as mentioned by the company in its
FY2015 annual report, has led to declining NFAT.
167 | P a g e
It is advised that in light of declining NFAT, which seems to be partly due to lower capacity utilization
levels, the investors should contact the company to understand the current capacity utilization levels to
assess whether the company has the probability of any operating leverage left.
Moreover, in April 2017, Ishan Dyes & Chemicals Limited has disclosed to the stock exchanges about their
plans to further increase the production capacity by 960 MTPA.
It is essential for investors to understand that whether:
1. the company has been able to optimally utilize its existing capacities and therefore, planning to
expand capacities or
2. the company is planning to spend more on plant & machinery despite lower current capacity
utilization, in the anticipation of higher orders under the assumption of continued reduced supply
from Chinese manufacturers (due to enforcement of strict environmental norms by China on its
chemical manufacturers).
Our experience/analysis of multiple companies listed on Indian stock exchanges have shown that the
industries having high NFAT levels in the range of about 5 are characterized by low capital intensive nature
of the operations. In such industries, if this advantage of low capital intensively is not a result of some
unique advantage like patents, brand etc., then such companies face a lot of competition from unorganized
sector. This is because a lot of entrepreneurs are able to put in manufacturing plants by raising finance from
friends and families and are in turn able to compete with large organized players.
168 | P a g e
The presence of a large number of unorganized players in such industries with NFAT levels of 5 and above,
which lack brands and patents, leads to the commoditization of products and as a result, the
suppliers/manufacturers in such industries lose their pricing power from customers and become price takers.
The lack of pricing power of Ishan Dyes & Chemicals Limited is evident from the fluctuating operating
profitability margin (OPM) as discussed above in the article.
When an investor analyses the receivables days of Ishan Dyes & Chemicals Limited, then the investor
would notice that the receivables days of the company have increased from 16 days in FY2009 to 51 days
in FY2017. The increase in receivables days represents the increasing delay in the collection from
customers, which seems to be an extension of the lack of supplier’s power over customers.
Looking at the inventory turnover ratio (ITR) of Ishan Dyes & Chemicals Limited, an investor would notice
that ITR has declined from 14.9 in FY2008 to 8.2 in FY2017 indicating that the efficiency level of inventory
utilization by the company is going down over the years. This is also evident from the fact that in FY2008,
the company carried an inventory of ₹3 cr. for sales of ₹33 cr. whereas by FY2017, the sales increased two
times to ₹67 cr. whereas the inventory levels increased four times to ₹12 cr.
Going ahead, an investor should keep a close watch on the receivables days as well as the inventory turnover
levels of Ishan Dyes & Chemicals Limited.
The investor would notice that Ishan Dyes & Chemicals Limited has an SSGR of about 20% over the years
whereas it has been growing its sales revenue at a growth rate of about 16% over last 11 years. The growth
rate has witnessed a moderation in the recent years.
rely on the fund infusion from outside in terms of debt or equity. However, if a company is growing at a
rate equal to or less than the SSGR and it is able to convert its profits into cash flow from operations, then
it would be able to fund its growth from its internal resources without the need of external sources of funds.
An investor would notice that during FY2006-16, Ishan Dyes & Chemicals Limited had a total net profit
of ₹25 cr. and during the same period, it had reported a total cash flow from operations (CFO) of ₹40 cr.
As the growth rate of Ishan Dyes & Chemicals Limited is within the SSGR limits and the company has
been able to convert its profits into cash flow from operations, therefore, it becomes evident that the
company has been able to fund its growth from internal resources without needing debt or equity dilution.
This assessment gets substantiated when the investor analyses the free cash flow position of Ishan Dyes &
Chemicals Limited.
Over FY2006-16, Ishan Dyes & Chemicals Limited has witnessed its sales increase from ₹13 cr. in FY2006
to ₹61 cr. in FY2016. For achieving this sales growth the company has done an additional capital
expenditure (capex) of ₹17 cr. However, Ishan Dyes & Chemicals Limited has generated a cash flow from
169 | P a g e
operations (CFO) of ₹40 cr. over FY2006-16 leading to a surplus of ₹23 cr. as free cash flow (FCF) to its
shareholders.
company.
Ishan Dyes & Chemicals Limited seems to have utilized the resulting free cash flow (FCF) of ₹23 cr. to
reduce its debt from ₹14 cr. in FY2006 to ₹9 cr. in FY2016, pay interest expense of ₹11 cr. over FY2006-
16 and to pay dividend to equity shareholders for the first time in FY2016.
While studying about Ishan Dyes & Chemicals Limited, an investor comes across certain other aspects,
which are important for analysis and subsequent final investment decision by investors:
1) Shareholding of promoters:
An investor would notice that the shareholding of promoters in Ishan Dyes & Chemicals Limited has been
low at the levels of 24.59% on June 30, 2017.
On the face of it, an investor would feel that the promoter’s shareholding is very low and it might create a
challenge for the promoters to get board approvals on their key strategic decisions, which need to be passed
by way of special resolutions requiring minimum 75% of the votes. Also, low promoter shareholding
exposes any company to potential hostile takeovers where the acquirer may buy significant stakes from
open markets and in turn make an open offer to other public shareholders and thereafter reach the majority
shareholding mark and thus take over the management control of the company.
However, after analysing many companies listed on Indian stock markets esp. those having small market
capitalization, it has been our experience that many times, the shareholding of such companies is distributed
among friends and family. Many times, such shareholders get classified as public shareholders legally, but
in effect are persons known to the promoters. I most of the cases, these shareholders vote with the promoters
and therefore the promoters are able to run the company as per their own strategic vision despite reporting
low promoter’s shareholding to the markets.
170 | P a g e
In the case of Ishan Dyes & Chemicals Limited, an investor would notice that out of the large shareholders
other than promoters, many shareholders belong to Patel families. At March 31, 2016, about 28% of non-
promoter shareholding was with Patel families:
The same pattern continues until date, when one notices the names of large shareholders at June 30, 2017,
where many people with surname Patel hold large stakes of about 28% in Ishan Dyes & Chemicals Limited:
171 | P a g e
It might be argued that the large public shareholders like Ms. Shardaben Jayantilal Patel and others might
share the surname Patel with the promoters, Piyush Patel and Shrinal Patel, which might be a coincidence
and they may not be related to each other.
However, in a recent development in the current month, Ishan Dyes & Chemicals Limited has intimated
the stock exchanges on July 11, 2017, that the largest public shareholder Ms. Shardaben Jayantilal Patel
has decided to take an exit from the company. Out of the 15,33,900 shares held by Ms. Patel, 25,000 shares
each would be bought by Piyush Patel (Acquirer 1) and Shrinal Patel (Acquirer 2) respectively and the
balance 14,83,900 shares would be gifted by Ms. Patel to Mrs. Mirali S Patel (Acquirer 3).
It is important to note that the person receiving the shares in the gift, Mrs. Mirali S Patel (Acquirer 3) would
be classified under promoter shareholders, thereby increasing the promoters’ stake, which would be
henceforth reported to stock exchanges.
The above chain of events can be interpreted to suggest that the earlier largest public shareholder of Ishan
Dyes & Chemicals Limited, Ms. Shardaben Jayantilal Patel might be a close acquaintance of promoters’
family.
Therefore, we advise that when investors analyse the low reported shareholding by promoters of many
companies, the investors should further assess the details of large public shareholders to understand whether
there is any probability of large public shareholders being friends/acquaintance of promoters. The presence
of large public shareholders who are known to promoters and are willing to vote with the decision of
promoters should give the comfort to shareholders that the promoters would be able to guide the company
as per their vision.
172 | P a g e
As rightly highlighted by you, Ishan Dyes & Chemicals Limited is currently being run by a father-son duo
of Mr. Piyush Patel and his son Mr. Shrinal Patel. The presence of the next generation of promoter’s family
in the company management offers a visibility of smooth management succession in the company.
3) Issues in the cash flow statement: Calculations of cash flow from operations (CFO):
While reading the cash flow statement in the FY2016 annual report of Ishan Dyes & Chemicals Limited at
page 69, an investor would notice that during calculation of cash flow from operations, the company has
not factored in the impact of change in the working capital position i.e. change in the inventory, trade
receivables, trade payables etc. during FY2016.
Assessment of the impact of working capital changes is an essential step in arriving at the cash generated
by any company from its operations. It is advised that readers go through the following article to understand
step by step calculation of CFO from profits for any company:
In light of the same, it is advised that the investors should seek clarifications from Ishan Dyes & Chemicals
Limited and the auditor about the way it has arrived at the cash flow from operations reported for FY2016
and whether the reported numbers present the accurate cash flow picture.
173 | P a g e
4) Issues in the cash flow statement: Calculations of cash flow from financing (CFF):
While reading about the debt position of Ishan Dyes & Chemicals Limited in the table of indebtedness at
page 30 of FY2016 annual report, the investor would notice that the company has taken additional debt of
about ₹4 cr. in FY2016, which has led to the debt level increase from ₹3.5 cr. in FY2015 to ₹7.5 cr. in
FY2016.
However, when the investor read the cash flow statement at page 69 of the FY2016 annual report of Ishan
Dyes & Chemicals Limited, then she notices that the company has not mentioned any detail about any debt
inflow in the cash flow from financing section:
We suggest that investors should seek clarifications from Ishan Dyes & Chemicals Limited and the auditor
about the way it has arrived at the cash flow from financing reported for FY2016
5) Insufficient details of the significant increase in short term loans and advances:
174 | P a g e
In FY2016, Ishan Dyes & Chemicals Limited witnessed a significant increase in the short term loans and
advances from ₹2.2 cr. in FY2015 to ₹7.5 cr. in FY2016. Upon reading the detailed note no. 16 to financial
statements at page 79 of the FY2016 annual report, an investor would notice that out of the total increase
of ₹5.3 cr. in the short term loans and advances, ₹2.3 cr. is on account of advances to govt. authorities,
which might be a part of day to day business operations of the company. Whereas the balance increase of
about ₹3.0 cr. has been classified as “Others”.
An investor would notice that an amount of ₹3 cr. is a significant sum for Ishan Dyes & Chemicals Limited
in the light of the net profits after tax (PAT) of FY2016 being ₹3.9 cr. It might represent a situation where
about 75% of the profits earned by Ishan Dyes & Chemicals Limited has been handed over to some
undisclosed counter party as loans & advances.
We believe that an investor should contact the company and attempt to seek further clarifications about the
short term loans and advances.
6) Repetition of sections in the annual report:
While going through the FY2016 annual report for Ishan Dyes & Chemicals Limited, an investor would
notice that in the “Industry Structure and Development” section of management discussion and analysis,
instead of elaborating on the industry structure and dynamics, the company has repeated the “State of
Company’s Affairs and Financial Performance” section of the directors’ report.
Pg. 59: “Industry Structure and Development” section of management discussion and analysis
175 | P a g e
Pg. 18: “State of Company’s Affairs and Financial Performance” of the directors’ report
Let us now address other queries raised by readers:
1) Related party transactions and managerial remuneration:
We believe that analysing related party transactions is an essential part of assessing the management quality
and integrity. This section is the first section to highlight any attempt by the management to shift the
economic benefits of the company to other related/group/promoter owned entities. Hence, we recommend
that every investor should analyse the related party transactions section of each of the companies that she
wants to invest into.
A quick assessment of the related party transactions data indicates two type of transactions between the
company, Ishan Dyes & Chemicals Limited and its promoters, Mr. Piyush Patel and his son Mr. Shrinal
Patel. These are salary/remuneration and loans & advances to promoters.
 Salary/remuneration is a normal feature of the company operations and an investor should focus
on finding out whether the remuneration is excessive in relation to value contributed by the person.
In the case of promoters of Ishan Dyes & Chemicals Limited, the remuneration is in the range of
₹18-24 lac per annum, which seems moderate because in the current situation the starting salary
levels of candidates passing from tier-1 B-schools have the starting salaries equal to or higher than
these levels.
 Loans and advances to promoters is one area where most of the red-flags have been found in
many companies. Therefore, we always advise investors to analyse and monitor the transactions
where promoters take loans and advances from the company. This is because such transactions can
help the promoters unduly benefit from the economic benefits of the company at the cost of
minority shareholders.
We recommend that investors should read the following article to understand and see a case where
promoters benefited themselves at the cost of other shareholders by way of loans and advances:
176 | P a g e
Further reading: Why Management Assessment is the Most Critical Factor in Stock Investing?
2) Whether the father-son duo are capable enough to make it big?
Is this company just a small company owned and run just by the father-son duo with no big
future prospects?
We believe that it is very difficult to make any predictions in this regard for the promoters/managements of
companies.
In such cases, we take comfort from a long history of promoters in any business like in the case of Ishan
Dyes & Chemicals Limited, the promoters have been in this business from the early 1990s and have seen
multiple business cycles, regulatory environments etc. and have brought the company from scratch to
current levels.
Though the past experience might not guarantee that in future things will not turn difficult, nevertheless,
we believe that any investor should keep the experience of promoters in any field in her mind while making
her final investment decision.
We believe that contacting the company and taking clarifications of the aspects covered in the above
sections will help the investor in further improving her understanding of the company and its business &
financial position.
3) I purchased this stock after demonetization and then increased my holding, my average
price has now gone to Rs 51 and the share has been showing weak signs after the last quarter
results (Current price ₹46), did I miss out something which the market was able to notice?
We do not attempt to assign reasons for the short term stock price movements as many factors apart from
fundamentals of the company also have an influence on prices in the short term. These factors may include
market sentiment, the flow of liquidity etc.
4) The only thing that has kept me invested in this stock is the fact that they have given
dividend for the first time last year plus bonus share this year. Should I expect more looking
at the current scenario?
We do not provide any buy/sell/hold recommendations on the stocks. It is advised that an investor should
take such decisions herself after doing her own analysis.
Currently (July 20, 2017), Ishan Dyes & Chemicals Limited is available at a price to earnings (P/E) ratio
of about 11 (based on FY2017 earnings), which offers some margin of safety in the purchase price as
described by Benjamin Graham in his book The Intelligent Investor.
Overall, Ishan Dyes & Chemicals Limited seems to be a company operating in a commodities product
market where the manufacturers do not have any pricing power over the customers and in turn get impacted
by changing raw material costs and other business factors. As a result, even though Ishan Dyes & Chemicals
177 | P a g e
Limited has increased its sales at an annual rate of 16% over last decade, however, the performance of the
company on profitability parameters leaves a lot to be desired.
Ishan Dyes & Chemicals Limited has witnessed its operating efficiency parameters decline over the years.
However, still, the company has been able to keep a control over its working capital needs. As a result, the
company has been able to grow within its internal resources and has been able to reduce debt over the years
along with creating avenues for sales growth.
The reported financials of Ishan Dyes & Chemicals Limited have a scope for improvement in terms of
presentation of data in different sections of the annual report. It is advised that investors should seek
clarification from the company about these aspects especially the cash flow statement and loans &
advances.
The promoters of the company seem to have good control over the management despite their low reported
shareholding in the company. The promoters seem to have put in the succession plan in place and are giving
opportunities to their next generation to learn the ropes of the business under their guidance.
It is advised that an investor should monitor the operating efficiency levels of the company, loans &
advances movement with both promoters and third parties among other things like profitability levels going
ahead.
These are our views about Ishan Dyes & Chemicals Limited. However, readers should do their own analysis
before taking any investment related decision about Ishan Dyes & Chemicals Limited.
P.S:
178 | P a g e
11) AksharChem (India) Limited
AksharChem (India) Limited is an Indian manufacturer of dye intermediates (Vinyl Sulphone) and
pigments (CPC Green and CPC Violet) based out of Gujarat.
An investor needs to keep an important event in the life of AksharChem (India) Limited while analysing
the company for investment. The event relates to the rearrangement of business assets between the group
companies: AksharChem (India) Limited and Asahi Songwon Colours Limited in FY2015.
Before FY2015, the business of the two companies constituted primarily Vinyl Sulphone in AksharChem
(India) Limited and CPC Blue and CPC Green pigments in Asahi Songwon Colours Limited. However, in
FY2015, the promoter family rearranged the business in a manner that the CPC Green business division of
Asahi Songwon Colours Limited was shifted to AksharChem (India) Limited.
As a result, from FY2015 onwards, AksharChem (India) Limited contains Vinyl Sulphone and CPC Green
pigment divisions and Asahi Songwon Colours Limited contains CPC Blue pigment divisions.
We will discuss more about the business rearrangement among the promoter family later in the article,
however, it is of importance currently that the financial performance of AksharChem (India) Limited before
and after FY2015 might not be comparable on a sequential basis. This is because of up to FY2014, the
financial numbers represent the performance of Vinyl Sulphone alone and from FY2015 onwards, a mix of
Vinyl Sulphone and CPC Green pigment.
Moreover, it also presents a good opportunity for the investor to understand the business dynamics of Vinyl
Sulphone business division as the financial numbers up to FY2014 are exclusive to Vinyl Sulphone.
In light of this background, let us analyse the past financial performance of AksharChem (India) Limited:
179 | P a g e
Until FY2014, AksharChem (India) Limited has been growing at an average rate of about 20% per annum,
however, the growth was interrupted by a period of sudden decline in sales as well as very poor profitability.
In fact, AksharChem (India) Limited hardly made any profits until FY2012. It was making operating losses
almost every alternate year. Primarily it is from FY2015 onwards that the company seems to have seen
stabilization in its profitability margin.
Based on the above observation, an investor would notice that Vinyl Sulphone previous to FY2012 has
been a very gruesome business, which despite year-round efforts of the management was resulting in losses.
The FY2012, directors’ report from the annual report of AksharChem (India) Limited represents the
business situation being faced by the company during this period:
180 | P a g e
The fact of highly cyclical nature of margins of Vinyl Sulphone business has been highlighted by the credit
rating agency CARE in its rating rationale for AksharChem (India) Limited in March 2015:
The above disclosures coupled with operating losses from past years make is clear to the investor that in
the past Vinyl Sulphone has not been a great business to be in. The management of the company has agreed
to the same in the conference call held by it in February 2017:
The above section clearly states that in the past Chinese players enjoyed cost advantages on account of
lower costs related to following environmental friendly production processes and it was very difficult for
Vinyl Sulphone players to make any profit.
However, since last few quarters, the Chinese govt. has changed its stance towards its chemical industry
and it has now tightened the environmental regulations around it. As a result, the Chinese players have
currently, lost the cost competitive edge. As per the conference call of AksharChem (India) Limited for
February 2017:
181 | P a g e
As a result, AksharChem (India) Limited has been able to witness very high operating margins since last
few quarters on its Vinyl Sulphone segment resulting in overall high margins for the company. It is the
major reason for the sudden increase in profitability margins of the company.
An investor would appreciate that the major risk to such profitability of the company would the resurgence
of Chinese manufacturing in future, which might again tilt the scale against AksharChem (India) Limited.
The management seems very optimistic that it would take at least 10 years for Chinese companies to put
their house in order and to again become competitive in the international market, as disclosed in the
February 2017 conference call:
However, we believe that instead of taking the management’s view on the face value, an investor should
notice that the primary factor leading to previous advantages of the Chinese players and their current
disadvantages is the stance of the Chinese government.
An investor should be aware that political dispensations in the countries, as well as their policy stances
towards industries, keep on changing continuously. If the future leader of the state in China changes the
approach of current government, then the industry situation might go back to the previously prevailing
scenario and the supposedly high operating margins of Vinyl Sulphone division might again end up
becoming operating losses.
Therefore, we suggest that the investors avoid believing the management without doing their own
homework and always take the calculated risk while making investment decisions where the success is
dependent upon the changing stance of governments.
182 | P a g e
The other business division of AksharChem (India) Limited: CPC Green, does not seem to be facing the
Chinese competition. As per the management, there is no “Chinese Story” in the pigments business as India
is in a very strong position:
As the operating margins of the company have witnessed a marked improvement in the recent quarters, the
management is of the view that it would be able to maintain operating profit margins in the range of 27-
30% going ahead.
To assess the feasibility of such margins, an investor needs to assess the profitability margins of each of the
business segments of AksharChem (India) Limited: Vinyl Sulphone and CPC Green pigments.
We have analysed above that the profitability margins in the Vinyl Sulphone business seem only due to the
changed stance of Chinese Govt towards its chemical industry. Otherwise, the Vinyl Sulphone business
would hardly make any profits, as has been the case in the past.
To assess the sustainable margins of the pigment business, an investor should analyse past performance of
Asahi Songwon Colours Limited, which has been a pure play in the pigments segment.
The past performance of Asahi Songwon Colours Limited indicates that the OPM though cyclical in nature
over the years has been around 15-16%. The same OPM levels might be expected to continue ahead for the
pigments division of AksharChem (India) Limited, which forms about 40% of the sales of the company.
To achieve and sustain the operating profitability margins of 25-30% as communicated by the management,
AksharChem (India) Limited needs to earn OPM of 30% on Vinyl Sulphone (60% of sales of company) to
achieve OPM of 25% for entire company and needs to earn an OPM of 40% on Vinyl Sulphone to achieve
OPM of 30% for entire company.
183 | P a g e
An investor would recall that the profitability margins of Vinyl Sulphone division had been dismal and
erratic in the past bordering on losses and its profitability margins have improved recently only due to the
interference of Chinese Govt. Therefore, the profitability margins expected by the management going ahead
would depend a lot upon the actions/non-actions of Chinese Govt on its policies towards chemical industry
going ahead.
As a result, even though the management seems confident that they would be able to command better
margins for next 10 years, we advise that investors should take it with a pinch of salt and keep monitoring
the profitability margins closely going ahead.
As far as the visibility of future growth is concerned, the management has mentioned in the February 2017
conference call that AksharChem (India) Limited is currently using about 73% of the installed capacity of
Vinyl Sulphone and about 98% of the installed capacity of pigment division.
To continue supporting the sales growth further, AksharChem (India) Limited plans to expand its
manufacturing capacity further by taking a capital expenditure of ₹175 cr, which should provide the ability
to increase revenue going ahead.
An investor would appreciate that the manufacturing processes of chemical industry have a lot of impact
on the environment, therefore, obtaining environmental clearance for the planned capacity becomes crucial
for any company. As mentioned by the management in the results presentation of February 2017, it takes
about 3 years to get environmental clearance.
Moreover, as per the credit rating report for AksharChem (India) Limited released by CARE Limited, the
company is in an advantageous position as it already has got environmental approval for its future planned
capacity.
184 | P a g e
The tax payout ratio of AksharChem (India) Limited has been fluctuating in the past until FY2013, till the
time it had been reporting dismal financial performance with intermittent losses. However, since FY2014
onwards, the company has been reporting tax payout ratio at the levels of standard corporate tax rate
prevailing in India.
While assessing the operating efficiency parameters as well, we need to keep ourselves aware of the
addition of CPC Green pigment in its business a few years back as the Vinyl Sulphone and CPC Green
pigment have different manufacturing characteristics and they need to be assessed in this light.
The investor may analyse the asset utilization parameters of AksharChem (India) Limited until FY2014 to
understand the characteristics of Vinyl Sulphone business and the asset utilization levels of Asahi Songwon
Colors Limited (in the screenshot shared above) to understand the characteristics of Pigment business.
An investor would notice that the net fixed asset turnover (NFAT) of AksharChem (India) Limited has been
averaging about 5-6 until FY2014, whereas the NFAT of Asahi Songwon Colors Limited has been around
2-3 over the years. It indicates that the Vinyl Sulphone business has been less capital intensive than the
pigment business.
As a result, it is expected that going ahead, the capital intensiveness of AksharChem (India) Limited would
increase. It seems to be the reason that the NFAT of the company has witnessed a decline in last 2 years
since when the CPC Green pigment division has been merged with it.
The management has also accepted it in the conference call in February 2017 and stated that going ahead,
the company might witness an NFAT of about 2, which would entail much more capital expenditure to fund
future growth than what it has been incurring in the past.
When an investor analyses the inventory turnover ratio (ITR) of AksharChem (India) Limited, then she
would observe the similar factors that the ITR of Vinyl Sulphone division has been very high 18-20 in the
past (ITR of AksharChem (India) Limited until FY2014), whereas the ITR of pigment division has been
comparatively lower at levels of 8-9 (ITR of Asahi Songwon Colors Limited).
Therefore, upon merger, the ITR of AksharChem (India) Limited has witnessed decline to 11 in FY2016.
Going ahead as well, the ITR of AksharChem (India) Limited is expected to remain lower than what it used
to achieve until FY2014 and become more working capital intensive than the past.
185 | P a g e
The same observations stand out when the investor analyses the receivables days of the two different
business divisions of AksharChem (India) Limited. The customers of Vinyl Sulphone used to pay
AksharChem (India) Limited in about 45-50 days in the past, which it has brought down to 27 days in
FY2014. However, the customers of the pigment division seem to clear payments in 70-85 days (receivables
days of Asahi Songwon Colors Limited).
As a result of merging of Vinyl Sulphone and pigment division, we notice that the receivables days of
AksharChem (India) Limited have increased from 27 days in FY2014 to 43 days in FY2016 leading to
more money getting stuck in the receivables.
Therefore, the assessment of all the operating efficiency parameters: NFAT, ITR and receivables days
indicate that going ahead, the business of AksharChem (India) Limited is expected to witness higher capital
intensiveness as well as higher working capital requirements, which would put a stress on the funds
requirement and liquidity position of the company going ahead.
The analysis of free cash flow generation indicates that AksharChem (India) Limited has been barely able
to meet its capital expenditure requirements through internal accruals. The acquisition of CPC Green
pigment division was funded by equity dilution as new shares of AksharChem (India) Limited were given
to shareholders of Asahi Songwon Colors Limited in FY2015 in lieu of the demerger of CPC Green division
from it. The payment of this consideration in cash would have stretched the balance sheet of AksharChem
(India) Limited.
In light of the same, it becomes essential that the company maintains the recent trend of improved
profitability and moreover also convert the profits into cash. If the assumptions by the management of
sustained pricing power to Indian chemical suppliers for next multiple years does not prove good, then we
might see the company failing to meet the above described increased funds requirement from internal
accrual. This, in turn, might put a stress on the balance sheet strength going ahead.
Therefore, it is essential for the investors to continuously monitor the profitability and working capital
management efficiency of the company going ahead.
Investors should be cautious of investing in companies, which might have to fund their expansion plans by
raising debt and more so when the companies might not maintain high profitability margins. This is because,
in such situations, high debt has the potential of increasing the risk and further reduced profitability under
tough business conditions.
You 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
Upon analysis of AksharChem (India) Limited, the investor notices multiple other aspects, which deserve
attention:
186 | P a g e
1) Succession planning:
The rearrangement of the business divisions between AksharChem and Asahi seems a way of assets
allocation by the mother Ms Paru M. Jaykrishna among her two sons: Mr. Munjal M. Jaykrishna and Mr.
Gokul M. Jaykrishna.
Prior to rearrangement, AksharChem had a smaller business of Vinyl Sulphone and Asahi had a larger
business of CPC Blue and CPC Green pigments. As a result of the rearrangement effective from FY2015,
AksharChem is now vested with Vinyl Sulphone and CPC Green pigment businesses and Asahi is left with
CPC Blue business, which seems more or less comparable now.
As a subsequent event, brothers Munjal and Gokul have resigned from the executive positions of each
other’s companies on October 9, 2015:
Mr. Munjal M. Jaykrishna resigns from Asahi Songwon Colors Limited
Mr. Gokul M. Jaykrishna resigns from AksharChem (India) Limited
The fact that two brothers are now handling the two companies independently has been re-affirmed by
Munjal in the February 2017 conference call as well:
Things look good until this point as it seems that the independent business interests have been handed over
to each of the brothers by Ms. Paru Jaykrishna and the brother seems to be keen to grow their businesses.
187 | P a g e
This is evident from the recent expansions done by AksharChem (India) Limited in its capacity of CPC
Green and addition of new pigment CPC Violet.
However, if the investor reads the results presentation released by AksharChem (India) Limited in February
2017, then she notices that it has plans of starting production of CPC Blue pigment:
The investor would appreciate that CPC Blue is the key business remaining in Asahi Songwon Colors
Limited. Therefore, it remains to be seen whether the start of manufacturing of CPC Blue pigment by
AksharChem (India) Limited would pose a competitive threat to Asahi Songwon Colors Limited and
thereby pose the probability of start of business/sibling rivalry among the family or it is a business
collaborative decision where the family is still tightly knit.
Therefore, we believe that the investors should be cautious and keep a close watch on the developments
related to the management actions of both the companies AksharChem and Asahi to understand whether
the brother is moving in a confrontational position. This is essential because there has been evidence in the
past where the minority shareholders have lost while the majority shareholders/promoters have been busy
settling their personal business rivalries using public companies as their means.
2) Investment decisions in quoted shares of other companies:
As per FY2016 annual report, AksharChem (India) Limited has invested about ₹13.2 cr. in shares, which it
has classified as quoted shares. There are multiple points which an investor would notice in these
investments:
 The list even contains minuscule investments of a few thousand rupees in some of the companies,
which questions the seriousness of these investment decisions as being significant value adding to
the shareholders of AksharChem (India) Limited. Eight companies out of the total list of more than
30 companies have investments less than ₹1 lac.
 Multiple companies out of the list have since delisted from the stock exchanges e.g. DCL Finance
Ltd, Raymond Synthetic Ltd etc. However, AksharChem (India) Limited has not got rid of these
investments and moreover, is still showing them under quoted investments section. It is uncertain
188 | P a g e
whether AksharChem (India) Limited is still assuming that it would be able to recover the
investments done in such delisted companies out of the total list of investments
 Various companies have undergone name changes e.g. Raymond Synthetic Ltd to Recron
Synthetics Ltd, Ipitata Sponge Iron Ltd to Tata Sponge Iron Ltd etc. However, the new names of
these companies are yet to be updated in the annual report of AksharChem (India) Limited. It makes
the independent assessment of the current worth of the said quoted investments a bit challenging.
It would have been better that the company would either use these funds in the company operations, to do
capital expenditure or distribute it to shareholders.
3) Investment decisions of AksharChem (India) Limited in its Subsidiaries:
Upon analysis of AksharChem (India) Limited, an investor would notice that the company in recent past
has bought and sold subsidiary companies in quick succession. It pertains to its investments in Akshar
Pigments Private Limited and Chhatral Environment System Private Limited.
In the case of both these companies, the management has mentioned that these companies were yet to start
operations and therefore, it has sold its stake in these companies. However, there does not seem to be any
change in the status of these companies since the time AksharChem (India) Limited invested in these
companies sometime back.
Therefore, it might be the case that the management might not have put enough thought while making these
investment decisions and might have acted in an impulsive manner both at the time of initial investment
and then divestment a short time later.
4) High remuneration payments and subsequent recovery of the same from the promoter
managers:
The remuneration of promoter management witnessed a steep increase of about 17 times in FY2014 from
₹0.12 cr. in FY2013 to ₹2.12 cr. in FY2014:
However, it seems that AksharChem (India) Limited had paid the remuneration in excess of the statutory
limits and therefore, the company had to recover the excess remuneration in the subsequent year FY2015:
189 | P a g e
One of the reasons leading to the recovery of excess remuneration might be that AksharChem (India)
Limited might have failed to get the central govt. approval for payment of remuneration to management,
which is higher than the statutory limits.
5) Some issues in the consolidation of the company accounts:
Usually, while consolidating the accounts, a company is expected to merge its subsidiary companies (>50%
shareholding) in itself and show the interest of the third parties in such subsidiary companies as minority
interest. Usually, in such cases, the investment in the subsidiary company is not shown as a non-current
investment as it forms part of the shareholder’s equity and reserves of the consolidated entity.
However, while analysing the consolidated financials for AksharChem (India) Limited on page 114, the
investor would notice that it has disclosed its investments in its 99.9% subsidiary Akshar Pigments Pvt. Ltd
as a separate non-current investment:
We believe that an investor should spend more time analysing the basis/assumptions in the consolidation
of accounts, which are followed by the company and if necessary, then take clarification from the company.
Now let us address some of the specific queries asked by readers:
1) Project execution skills:
We believe that while assessing the project execution skills of the management, investors should focus
more on the organic greenfield/brownfield capacity addition. In the case of AksharChem (India) Limited
as well as the Jaykrishna group, it seems that the companies have been able to successfully execute the
expansion projects in the past.
2) Allotment of shares to the management on the preferential basis:
In FY2012, AksharChem (India) Limited allotted shares to the promoters on preferential basis at ₹18.50:
190 | P a g e
The share price at the date of allotment was ₹25.55/-.
There are a few points, which the investor needs to think over while making the final opinion about this
preferential issue:
 The preferential issuance of equity shares to promoters is a better event for the company and
minority shareholders than the preferential issuance of warrants to promoters. This is because, in
the case of preferential issuance of equity shares, all the money is received from promoters upfront,
which can be used by the company for its purposes. Whereas in case of warrants, only 25% is
available to the company for usage and balance 75% is contingent on the promoter finding the
warrants in the money at the time of exercise (meaning that the market price of shares is higher
than the warrants’ price and promoters make a profit by converting warrants into shares). So the
75% is received only when promoter benefits by warrants conversion otherwise the company will
have only 25% of the funds for its usage. It leads us to believe that warrants are only 25% beneficial
to the company & minority shareholders and 75% beneficial to promoters.
191 | P a g e
 Until FY2011, AksharChem (India) Limited was going through very tough business phase due to
Chinese completion. It had hardly made any operating profit over last 5 years. In such a situation,
companies find it difficult to raise funds from external sources like banks etc.
 The share price of AksharChem (India) Limited since November 2010 to mid of May 2011 had
been hovering around or below the allotment price of ₹18.50. However, whether the stock price in
this duration, which saw very low volumes, was the actual market price or the promoters had
deliberately kept it depressed so as to get the preferential allotment at a low price is something we
are not able to comment on. An investor should make her own inference in this regard.
AksharChem (India) Limited is currently (March 13, 2017) available at a P/E ratio of about 10 based on
last 12 months EPS, which offers a margin of safety in the purchase price as described by Benjamin
Graham in his book The Intelligent Investor.
However, it remains to be seen, whether the company would be able to show any margin of safety in the
business model by generating sustained free cash flow going ahead.
Overall, AksharChem (India) Limited seems to be a company which was undergoing through very difficult
business situation until recently when it got a better performing CPC Green pigment division as part of the
promoter family arrangement. The company has been lucky that the better profitability of CPC Green
division has been supported by the surprising improved profitability of Vinyl Sulphone division due to
change policies of Chinese govt. As a result, the credit rating of AksharChem (India) Limited has witnessed
good upgrades in recent time.
However, the CPC Green division has brought in a business, which is more capex and working capital
intensive when compared to existing Vinyl Sulphone business. As a result, going ahead, the growth of
AksharChem (India) Limited is expected to consume more funds than what it was doing in the past.
The promoters seem to have settled for independent business responsibilities in the group with both the
brother looking after separate businesses. However, the plans of AksharChem (India) Limited to start
production of CPC Blue pigment, which is the key product of Asahi Songwon Colors Limited, is raising
the probability of sibling rivalry being at play. An investor needs to be cautious in such a situation.
The investment decisions of AksharChem (India) Limited leaves a lot to be desired whether it is related to
investing in subsidiaries or into quoted equity shares of other listed entities. It is desired that the company
would improve its investing process so as to generate more value for the shareholders from its investments.
Going ahead, we believe that investors should keep a close watch on the developments in the Chinese
policies related to the chemical industry, consumption of capital by the company for its growth and the
management decision with respect to new products and investments.
These are our views about AksharChem (India) Limited. However, readers should do their own analysis
before taking any investment related decision about AksharChem (India) Limited.
192 | P a g e
P.S:
193 | P a g e
12) Machino Plastics Limited
Machino Plastics Limited is an Indian auto ancillary player specializing in manufacturing injection plastic
moulded parts for key players like Maruti Suzuki India, Suzuki Motorcycle India, Volvo Eicher, Hero
Motors etc.
Let us analyse the past financial performance of Machino Plastics Limited:
194 | P a g e
Machino Plastics Limited had been growing its sales at a moderate pace of 7-10%% year on year over last
10 years (FY2007-16). The growth has been currently sustained by its plants in Gurgaon & Manesar. To
sustain the growth momentum in future, Machino Plastics Limited has been doing additional capacity
addition both at its existing plant at Manesar as well as a new plant in Madhya Pradesh.
The plant at Madhya Pradesh seems to have witnessed a lot of delays as Machino Plastics Limited has
started work on the plant in FY2013 and had initially expected to complete the construction and start
operations of the plant in April 2014. The below excerpt from the FY2013 annual report indicates the
original completion plans of the management about this plant.
195 | P a g e
However, as per the FY2016 annual report, the plant is yet to be operationalized.
The minimal capex spending by Machino Plastics Limited in last two financial years (FY2015 and
FY2016), when it spent about ₹1 cr. and ₹5 cr. on capex respectively, indicates that the company has gone
slow on completion of the new plant. However, the balance sheet declared by Machino Plastics Limited for
Sept 30, 2016, indicates that the net fixed assets have increased by about ₹15 cr. from ₹77 cr. at March 31,
2016, to ₹92 cr. at September 30, 2016.
The increase in NFA by ₹15 cr. along with the depreciation expense of ₹5.6 cr. in H1-FY2017, indicates
that the company has spent about ₹20-21 cr. of capital expenditure in H1-FY2017. An investor should
196 | P a g e
contact the company or wait for the annual report for FY2017, which might be published in July-Sept 2017
to understand the details of the capex and the plant on which the company has been doing it.
The company has been growing in the past and the capex plans indicate that the company has a strategy in
place to create the capacity to generate future growth.
However, when the investors analyse the profitability margins of Machino Plastics Limited, then it 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 18%-9%-16%-8%-11% and net profit margins (NPM) have been fluctuating from 7% and net losses
(FY2012-14) over the years.
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.
The concern about the susceptibility of the profitability margins to the changes in the raw material prices
has also been highlighted by the credit rating agency CRISIL in its rating rationale for Machino Plastics
Limited in October 2016:
The management of the company has also highlighted the vulnerability of profitability margins in the annual
report of FY2016 in the section management discussion and analysis under “Risks and Concerns”:
197 | P a g e
This statement by the management of Machino Plastics Limited highlights the key factors being faced by
auto ancillary players in India. Apart from the intense competition from other players, the fact of very strong
customers (OEMs) ensures that OEMs extract every bit of profitability from their vendors.
It is said that OEMs keep a close watch on the financial results of the vendors and the moment OEMs notice
that the vendors are making good profitability margins, immediately a request/instruction of discount in the
purchase price is sent to the vendor by OEMs.
Therefore, in the case of auto ancillary industry, unless the manufacturers have some very strong
competitive advantage, it is very difficult to find sustained good profitability margins. No wonder that
Machino Plastics Limited had to report losses in FY2012-14.
The tax payout ratio of Machino Plastics Limited has been fluctuating by a huge margin over the years. In
FY2016, the company has reported 72% tax payout ratio. We advise that the investor contacts the company
to understand the tax payouts done by the company.
Operating efficiency parameters of Machino Plastics Limited reflect that over recent years, Machino
Plastics Limited has been able to improve its operating efficiency on almost all the parameters.
Net fixed asset turnover ratio (NFAT) has improved from 1.58 in FY2012 to 2.59 in FY2016. The inventory
turnover ratio has improved from 16 in FY2007 to 33 in FY2016.
Receivables days of Machino Plastics Limited have also improved from 38 days in FY2008 to 20 days in
FY2016. However, when an investor analyses the summary balance sheet declared by Machino Plastics
Limited on Sept 30, 2016, then she would notice that the receivables have suddenly increased by 21 cr.
from ₹11 cr. at March 31, 2016, to ₹32 cr. at Sept 30, 2016.
An investor should monitor the receivables levels and check whether the abrupt increase in receivables is a
one of within the year phenomenon or the high receivables continue until March 31, 2017, when the
company would declare its summary balance sheet with Q4-FY2017 results.
The above analysis indicates that Machino Plastics Limited has been able to manage its inventory and
receivables efficiently over the years and it has ensured that the profits of the company are not stuck in
working capital and are available as cash profits to the company.
198 | P a g e
When we analyse the cumulative profits and cash flow data for last 10 years (FY2007-16), then we realize
that during these 10 years, Machino Plastics Limited has been able to convert its profits into cash flow from
operations. PAT for these 10 years (FY2007-16) is ₹23 cr. whereas the CFO over the similar period has
been ₹153 cr.
The key factors leading to the significantly high cCFO over cPAT over last 10 years are the depreciation
expense of ₹115 cr, which is a non-cash expense and therefore, does not involve cash outflow in the years
in which the depreciation expense is reported. The other factor leading to high cCFO over cPAT is the
interest expense of ₹39 cr. over FY2007-16, which being a financial cash outflow is adjusted while
calculating the CFO.
Efficient working capital management by Machino Plastics Limited leading to good cash profits has
ensured that the company has been able to meet almost its entire capex of ₹153 cr. done over last 10 years
from its operating cash. The incremental debt of about ₹16 cr. from total debt of ₹18 cr. in FY2007 to ₹34
cr. in FY2016 has been used to meet the interest costs during the last 10 years.
The significantly higher cCFO over its cPAT due to proper working capital management has ensured that
the company has been able to manage its capex by keeping its leverage (debt to equity) levels at constant
levels with a slight improvement over the years.
In light of this fact, it assumes significance that any deterioration of working capital management either in
inventory utilizations or receivables management would lead to lower CFO and the company would have
to rely more on the external sources of funds like debt or equity dilution to fund its capex plans.
The same impact is already visible when an investor compares the financial position of Machino Plastics
Limited over March 31, 2016, and Sept 30, 2016.
As highlighted above in our analysis, the investor would notice that in H1-FY2017, Machino Plastics
Limited has done a capex of about ₹21 cr. and also that during H1-FY2017, the receivables levels of the
company have witnessed a significant increase by ₹21 cr. from ₹11 cr. at March 31, 2016, to ₹32 cr. at
September 30, 2016.
The investor would notice that as Machino Plastics Limited is not able to collect its receivables, the capex
of ₹21 cr. in H1-FY2017 has been funded by debt by the company. The company seems to have raised
additionally about ₹22 cr. in H1-FY2017 as the debt of the company has increased from ₹34 cr. at March
31, 2016, to at least ₹66 cr. at Sept 30, 2016.
199 | P a g e
(The level of debt at Sept 30, 2016, is mentioned as “at least ₹66 cr.” as there might be some portion of the
long-term debt, which might be mentioned by the company in other current liabilities, details of which are
not provided by companies in the summary balance sheet declared by them with half yearly results.)
The above analysis clearly indicates that the moment Machino Plastics Limited witnessed delay in
collection of receivables, it had to rely on debt to fund its capital expenditure plans. In light of this fact, it
is essential that investors keep a close watch on the recent increased receivables levels of the company
going ahead.
Investors should be cautious of investing in companies, which might have to fund their expansion plans by
raising debt and more so when these companies do not have high profitability margins. This is because, in
such companies, high debt has the potential of increasing the risk of bankruptcy and reduced profitability
under tough business conditions.
You 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: Analysis: Ahmednagar Forgings Limited
Also Read: Analysis: Amtek India Limited
When an investor analyses the annual reports of Machino Plastics Limited, then the investor would notice
that the company has been sourcing its raw material from its promoter entities. As per the FY2016 annual
report, the primary entity from which Machino Plastics Limited procures its raw material is Machino
Polymers Limited:
200 | P a g e
The management has disclosed in the annual report that the pricing of raw material from Machino Polymer
Limited is settled by Maruti Suzuki Limited, which is benchmarked with other vendors as well.
We have observed in the above analysis that Machino Plastics Limited is not able to pass on the increase
in raw material prices to its end customers like Maruti Suzuki Limited and Suzuki etc., which are its key
shareholders as well. As a result, its OPM has been fluctuating over the years and has also led it to report
losses during FY2012-2014.
However, when an investor analyses the credit rating report of the promoter group company Machino
Polymers Limited, from which Machino Plastics Limited buys a lot of raw material, then the investor would
notice that the promoter group entity Machino Polymer Limited has clauses for passing on the increase in
raw material costs to its customers. The credit rating report of Machino Polymers Limited by ICRA in Dec
2016 highlights this key fact:
As a result, we find that the subject company Machino Plastics Limited is in a peculiar situation where its
profitability margins are getting squeezed from both the ends:
1. At one end, its key customers like Maruti and Suzuki, who are its shareholders as well, do not allow
it to pass on the increase in inputs costs to them
2. At the other end, its key supplier Machino Polymers Limited, which is controlled by its promoter
shareholder, passes on all the increases in raw material costs to it.
No wonder that the poor entity Machino Plastics Limited has been reporting erratic profitability margins
and even losses over the years when two sets of its shareholders have the contractual arrangements with the
company, which benefit respective shareholders at the cost of Machino Plastics Limited.
201 | P a g e
In such a situation, we do not believe that the arrangement of Maruti Suzuki Limited being its key customer
as well as a key shareholder is doing a lot of good to the company.
While analysing the annual reports of the company further, the investor notices some of the other key
findings as well:
1) A penalty by BSE for not appointing woman director as per statutory requirements:
FY2016 annual report indicates that BSE Limited has levied a fine of ₹50,000/- on Machino Plastics
Limited as it did not appoint the woman director in time as required by the statutory requirements.
This noncompliance by the company despite having reputable shareholders like Maruti and Suzuki does
not go well with the expected governance standards from the company.
2) Dispute with Caparo Maruti Limited:
As per the annual report of FY2016, Machino Plastics Limited has made investments of ₹1.25 cr. in a
company Caparo Maruti Limited.
However, upon further reading of the annual report, the investor notices that the investment is being denied
by Caparo Maruti Limited, which has led to a dispute between the parties, which is currently under
litigation. Apparently, Caparo Maruti Limited has cancelled the shares, which Machino Plastics Limited
claims that it has subscribed to by making the investment of ₹1.25 cr. in the company.
202 | P a g e
The dispute assumes significance from two aspects:
1. the investee company is contesting the investment done by the investor. This is quite a strange
situation and creates doubts about the recoverability of the money invested by Machino Plastics
Limited.
2. the warring companies, Caparo Maruti Limited and Machino Plastics Limited share common
shareholders in the form of Maruti Suzuki Limited. However, despite the presence of Maruti Suzuki
Limited, the dispute is continuing and is being litigated in the courts.
The following section from the credit rating report by CARE for the company Caparo Maruti Limited,
published in April 2016, clarifies the shareholding of Caparo Maruti Limited
It seems strange that in the above case, Maruti Suzuki Limited is fighting the dispute with itself. Maruti
Suzuki first sits on the board of Caparo Maruti Limited and decides about the steps to be taken by it in the
legal dispute. Then, Maruti Suzuki Limited sits on the board of Machino Plastics Limited and decides about
the countermeasures to be adopted against the steps taken by Caparo Maruti Limited.
It is also to be noted that due to privileges of being a board member, Maruti Suzuki Limited might be fully
aware of the core facts about the disputed investment of ₹1.25 cr. but still, the matter is being fought out in
the courts and is wasting time and resources of all the parties.
The above instance gives further credence to our belief that the presence of key shareholders like Maruti
and Suzuki is not being a lot beneficial to Machino Plastics Limited.
3) Submission of financial projections to stock exchanges:
Machino Plastics Limited might be one of the few companies which submit financial projections to the
stock exchange. In fact, it is the first company that we have come across, which is giving full financial
targets to the public as a part of the company policy.
203 | P a g e
The company might be assuming this action as a step to increase transparency. However, worldwide, the
experience has been that when managements declare business targets in public, then there is the very high
probability that they would do anything, even taking shortcuts, to meet those targets.
Therefore, we believe that disclosure of financial projections/business targets by the company in public
might not be beneficial for shareholders.
4) Management Remuneration:
Over the years, Machino Plastics Limited has been paying its promoters a remuneration, which is higher
than the statutory ceiling stipulated by the companies act. The auditors have highlighted the same in the
audit report for FY2013 by way of a qualification in the report:
Since then, the company seems to have approached the central govt. and has stipulated in the AGM agenda
that in case the profits of the company are inadequate, still, the managerial remuneration will not be reduced
by the company.
204 | P a g e
These observations though assume significance, however, at the same time, if an investor notices the
absolute level of remunerations, then it varies in the range of ₹40-70 lac for each of the promoter director.
Such level of remuneration though looking very high in percentage terms to the profits of the company does
not look overtly high when one notices that in current markets MBA pass outs with 6-8 years of experience
are able to earn this remuneration in the corporate world.
Therefore, we leave the interpretation of this parameter of remuneration at the hands of the investor.
Machino Plastics Limited is currently (March 3, 2017) available at a P/E ratio of about 43 based on last 12
months EPS, which does not offer any margin of safety as described by Benjamin Graham in his book The
Overall, Machino Plastics Limited seems to be a company, which has been growing at a moderate pace in
the past and has been doing capex to show growth in future. However, the growth has not been associated
with sustained profitability as its key stakeholders are doing related party transactions both at its customer
end as well as supplier end. Related parties both at the customer end as well as supplier end to the company
seem to have the contracts favouring them at the cost of Machino Plastics Limited, which has resulted in
fluctuating profit margins even leading to losses in recent past.
Machino Plastics Limited has been able to manage its working capital well in the past and therefore, could
meet its capex requirements primarily from internal accruals. However, in recent quarters the company
seems to have been faltering on receivables collections and as a result of its capex now is being met through
debt funding.
We believe that the governance standards at Machino Plastics Limited and the group level leave a lot of
scope of improvement as witnessed by the inability of the company to appoint woman director in time and
the dispute among parties with common key shareholders.
We believe that the overt assumption that the key customers of Machino Plastics Limited are also key
shareholders of the company, is not proving out to be a lot beneficial for the company.
These are our views about Machino Plastics Limited. However, readers should do their own analysis before
taking any investment related decision about Machino Plastics Limited.
P.S:
205 | P a g e
206 | P a g e
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
207 | P a g e
at screener.in, then whenever she downloads the “Export to Excel” sheet for any company, she gets the data
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:
208 | P a g e
 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"
209 | P a g e
Balance Sheet (Annual Report FY2016)
210 | P a g e
 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
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.
211 | P a g e
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
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
212 | P a g e
 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.
213 | P a g e
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.
214 | P a g e
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:
215 | P a g e
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 a 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
216 | P a g e
Quarterly Results:
Quarterly Results Screener.in "Data Sheet"
Quarterly Results March 2017, Company Filings to Stock Exchange
217 | P a g e
 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.
218 | P a g e
 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.
219 | P a g e
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
220 | P a g e
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:
221 | P a g e
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.
222 | P a g e
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:
223 | P a g e
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:
224 | P a g e
 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.
225 | P a g e
 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.
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”
226 | P a g e
 Upon clicking the button “Reset Customization”, the web page will ask “Are you sure you want
to reset your Excel customizations?”
 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,
227 | P a g e
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.
228 | P a g e
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.
229 | P a g e
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/
The information about the composition of the portfolio to be available in the following format:
230 | P a g e
% 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.
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.
231 | P a g e
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.
"Peaceful Investing" Workshop-on-Demand has been launched primarily with two objectives:
232 | P a g e
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.
233 | P a g e
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.
234 | P a g e
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
235 | P a g e
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)
236 | P a g e
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.
237 | P a g e
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.
238 | P a g e
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.
239 | P a g e
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
240 | P a g e
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 16, 2017, I do not own stocks of any of the
companies discussed in the detailed articles in this book.
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
241 | P a g e

DrVijayMalik Company Analyses Vol 1

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

DrVijayMalik Company Analyses Vol 1

Uploaded by

Copyright:

Available Formats

www.drvijaymalik.

Company Analyses (Vol. 1)

Copyright © Dr Vijay Malik.

Printed in the Republic of India

Important: About the book

All the best for your investing journey!

Regd. with SEBI as an Investment Adviser

1) Omkar Speciality Chemicals Limited

Company website: Click Here

Financial data on Screener: Click Here

Self-Sustainable Growth Rate (SSGR):

 ₹14.25 cr. infused by promoters in the form of subscription to warrants

 is consuming far more cash than it produces by way of operations

1) Management not able to meet its stated commitment to shareholders:

Now, an investor is left confused about:

2) Management not able to meet its stated commitment to shareholders again:

3) Large established companies not paying up the sales consideration on time:

4) Declining freight charges despite increasing sales in FY2016:

Annual report FY2016, page 116:

6) Long delays in commissioning of the largest capex by the company: Unit 5:

7) The operating capacity data of the company:

8) The responsibilities of Mr. Omkar Herlekar:

A few things should come to the investor’s mind on this transaction:

Company website: Click Here

Financial data on Screener: Click Here

Natural Rubber OPM of MRF Limited

OPM (standalone) has declined from

ICRA Credit Rating Rationale (May 2011):

ICRA Credit Rating Rationale (June 2012):

Annual report 2016, page 15, Board’s Report:

Self-Sustainable Growth Rate (SSGR):

1) Errors in the Annual Report:

2) In-House Registrar & Transfer Agent:

3) Related Party Transactions (Purchases from promoters’ entities):

3) Wonderla Holidays Limited

Company website: Click Here

Financial data on Screener: Click Here

Read: Analysis: Amtek India Limited (Castex Technologies Limited)

Read: Analysis: Ahmednagar Forgings Limited (Metalyst Forgings Limited)

4) Divi’s Laboratories Limited

Divi’s Laboratories Limited is a Hyderabad-based Indian pharmaceutical manufacturer, which focuses on

Company website: Click Here

Financial data on Screener: Click Here

Self-Sustainable Growth Rate (SSGR):

The salaries of three of the key management personnel:

 Mr. Murali Divi (₹45 cr),

 Mr. N.V. Ramana (₹23 cr) and

Two things become evident from this observation:

5) Caplin Point Laboratories Limited

Company website: Click Here

Financial data on Screener: Click Here

Operating efficiency performance:

Self-Sustainable Growth Rate (SSGR):

1) Innovative and risk taking promoters/management:

2) Management succession planning:

3) No salary being taken by founder promoter:

4) Nominal salary to the son of the founder promoter:

Further Reading: Analysis: Ruchira Papers Limited

5) Avenues of future growth:

7) An error in the annual report FY2016:

Let us now address the specific queries raised by readers:

4) Please help us to understand the merit/demerit of these related party transactions.

5) What should an investor interpret from these high receivable days?

6) Nandan Denim Limited