DrVijayMalik Company Analyses Vol 7

www.drvijaymalik.
com
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Copyright © Dr Vijay Malik. All Rights Reserved.

www.drvijaymalik.com
Company Analyses (Vol. 7)
Live Examples of Company Analysis using “Peaceful Investing” Approach
By
Dr Vijay Malik
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Copyright © Dr Vijay Malik.
All rights reserved.
This e-book is a part of premium/paid services of www.drvijaymalik.com
No part of this e-book may be reproduced, distributed, or transmitted in any form or by any means, including
photocopying, recording, or other electronic or mechanical methods, without the prior written permission
of the Dr Vijay Malik.
Printed in the Republic of India
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Important: About the book

This book contains the analysis of different companies done by us on our website (www.drvijaymalik.com)
in response to the queries asked by multiple readers/investors.
These analysis articles contain our viewpoint about different companies arrived at by studying them using
our stock investing approach “Peaceful Investing”.
The opinions expressed in the articles are formed using the data available at the date of the analysis from
public sources. As the data of the company changes in future, our opinion also keeps on changing to factor
in the new developments.
Therefore, the opinions expressed in the articles remain valid only on their respective publishing dates and
would undergo changes in future as the companies keep evolving while moving ahead in their business life.
These analysis articles are written as a one-off opinion snapshots at the date of the article. We do not plan
to have a continuous coverage of these companies by updating the articles or the book after future quarterly
or annual results. Therefore, we would not update the articles or the book based on the future results
declared by the companies.
Therefore, we recommend that the book and the articles should be taken as an illustration of the practical
application of our stock analysis approach “Peaceful Investing” and NOT as a research report on the
companies mentioned here.
The articles and the book should be used by the readers to improve their understanding of our stock analysis
approach “Peaceful Investing” and NOT as an investment recommendation to buy or sell stocks of these
companies.
All the best for your investing journey!
Regards,
Dr Vijay Malik
Regd. with SEBI as an Investment Adviser
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Table of Contents
Important: About the Book ........................................................................................................................... 4

1) Rain Industries Ltd ................................................................................................................................... 6
2) Ashok Leyland Ltd ................................................................................................................................. 67
3) Honeywell Automation India Ltd ......................................................................................................... 133
4) Heidelberg Cement India Ltd ............................................................................................................... 162
5) Century Textiles & Industries Ltd ........................................................................................................ 198
6) Paushak Ltd .......................................................................................................................................... 259
7) ADF Foods Ltd ..................................................................................................................................... 281
8) Filatex India Ltd ................................................................................................................................... 322
How to use Screener.in "Export To Excel" Tool ...................................................................................... 361
Premium Services ..................................................................................................................................... 386
Disclaimer & Disclosures ......................................................................................................................... 400
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1) Rain Industries Ltd

Rain Industries Ltd is the world’s second-largest manufacturer of calcined pet coke (CPC) and coal tar pitch
(CTP) used primarily in aluminium production.
Company website: Click Here
Financial data on Screener: Click Here
While analyzing Rain Industries Ltd, an investor would notice that almost all the business activities of the
company are present in its subsidiaries. Rain Industries Ltd in its standalone financials does not have any
operating activity. On a standalone basis, the company only has investments and loans in the subsidiaries
and receives dividends and interest from them.
All the operating businesses of Rain Industries Ltd like calcined pet coke (CPC), coat tar pitch (CTP) and
cement etc. are present in its subsidiaries. At the end of 2019, the company had 26 subsidiaries and one
associate company (2019 annual report, page 96-98).
We believe that while analysing any company, an investor should always look at the company as a whole
and focus on financials, which represent the business picture of the entire group. Consolidated financials of
any company, whenever they are present, provide such a picture.
Therefore, in the analysis of Rain Industries Ltd, we have used consolidated financials in the assessment.
In addition, an investor should note that Rain Industries Ltd follows the calendar year (January – December)
for its financial reporting instead of the normal convention of the financial year (April – March).
With this background, let us analyse the financial and business performance of the company over the last
10 years
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Financial and Business Analysis of Rain Industries Ltd:

While analyzing the financials of Rain Industries Ltd, an investor would note that in the past, the company
has been able to grow its sales at a rate of 10%-15% year on year. Sales of the company increased from
₹3,752 cr. in 2010 to ₹12,365 cr in 2019. However, the sales have declined slightly to ₹12,062 cr in the 12
months ending March 2020 (i.e. April 2019 – Mar. 2020).
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In the last 10 years (2010-2019), the sales growth of the company has not been consistent and it faced
periods of decline in its sales.
The company witnessed a decline in its sales in 2012 when the sales of the company declined from ₹5,627
cr in 2011 to ₹5,352 cr in 2012. In 2013, the sales of the company increased to ₹11,728 cr, primarily, due
to acquisition Ruetgers Group of Belgium on January 4, 2013.
However, the company again witnessed a decline in its sales in 2015 and 2016. The sales of the company
declined from ₹11,921 cr in 2014 to ₹9,258 cr in 2016. Thereafter, the sales of the company increased over
the next two years to ₹14,049 cr in 2018. However, the sales of Rain Industries Ltd declined again to
₹12,361 cr in 2019 and further to ₹12,062 cr in the 12 months ending March 2020 (i.e. April 2019 – Mar.
2020).
Similarly, when an investor analyses the profitability of the company over the last 10 years (2010-2019),
then she notices fluctuating cyclical patterns in the profit margins as well.
The operating profit margin (OPM) of the company was 19% in 2010, which increased to 24% in 2011.
Thereafter, the OPM consistently declined to 10% in 2014. Thereafter, the OPM increased to 20% in 2017.
The OPM then declined to 12% in 2019. Rain Industries Ltd reported an OPM of 13% in the 12 months
ending March 2020 (i.e. April 2019 – Mar. 2020).
Therefore, an investor would notice that the sales, as well as the operating profit margin of Rain Industries
Ltd, have witnessed large fluctuations over 2010-2019. Such kind of fluctuating business performance
indicates to an investor that the business performance of Rain Industries Ltd is exposed to cyclical factors.
When an investor notices such kind of cyclical performance in both sales as well as profitability, then she
acknowledges the need for a deeper understanding of the business of Rain Industries Ltd to understand the
factors influencing the business performance of the company. This is because, once an investor has
understood the key factors for Rain Industries Ltd, then she would be able to have a view about the expected
future performance of the company.
To understand the underlying factors influencing the business of Rain Industries Ltd, an investor would
first have to understand its key products and the industries they are dependent on. This is important because
once an investor is able to understand the industries on which the company depends to sell its products and
the industries on which it depends to buy its raw material, then she can easily anticipate the impact of
different macroeconomic developments on the business performance of Rain Industries Ltd.
An understanding of the consumer industries of Rain Industries Ltd will help the investor to assess when
its products will have high demand with high prices and when its products are expected to face low demand
at low prices. Similarly, understanding the industries that supply raw material to Rain Industries Ltd will
help an investor understand when it will face challenges in the availability of raw material and in turn will
have to pay more for them; thereby affecting the profit margins.
Rain Industries Ltd has the following key business segments and their products:
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A) Carbon segment:
In 2019, the Carbon segment constituted 66% of total revenue and 73% of operating profits of the company.
Carbon segment has the following key products:
A.1) Calcined Pet Coke (CPC):
CPC used in the production of aluminium in the form of anodes. Aluminium production consumes about
70-80% of the total CPC produced around the world.
Credit rating report of Rain Industries Ltd by India Ratings in December 2015, page 1:
About 70%-80% of CPC and CTP are consumed by aluminium smelters as anode and binders,
respectively.
CPC is produced from Green Pet Coke (GPC). GPC is a byproduct of crude oil refineries.
Therefore, an investor would appreciate that the business performance of CPC is highly linked to aluminium
and crude oil refining industries. If the aluminium industry is not doing well, then the demand and prices
of CPC will decline. Similarly, if the crude oil refining industry is not doing well, then the availability of
the raw material, GPC, will be low and its cost will be high.
A.2) Coal Tar Pitch (CTP):
As per the above disclosure from the credit rating report by India Ratings, about 70-80% of CTP production
around the world is consumed by aluminium producers. Apart from aluminium production, CTP is used to
manufacture graphite electrodes, which are used in steel manufacturing by the electric arc furnace route.
CTP is produced from coal tar, which is a byproduct of metallurgical coke production. Metallurgical coke
is used in the production of pig iron, which is then converted into steel. This is the blast furnace route of
steel production.
Therefore, an investor would notice that the business performance of CTP is linked to aluminium and steel
industries. If the aluminium industry is not doing well, then the demand and prices of CTP will decline.
Similarly, if the steel industry is not doing well, then the availability of the raw material, coal tar, will be
low and its cost will be high.
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Apart from CPC and CTP, in the carbon segment, Rain Industries produces some other products. These are
produced by coal tar distillation and therefore, they are also highly dependent on steel production for their
raw material.
Therefore, an investor would notice that the business performance of the carbon segment of Rain Industries
Ltd (66% of total revenue and 73% of operating profits) is highly dependent on aluminium, crude oil
refining, and steel manufacturing.
B) Advanced materials segment:

This segment constituted 26% of revenue and 18% of operating profit for Rain Industries Ltd in 2019. The
key products in the advanced material segment are naphthalene derivatives, petrochemical intermediates,
resins, and engineered products.
These products are made from Naphthalene oil and crude oil derivatives. Naphthalene oil is derived from
coal tar, which is linked to steel manufacturing. Therefore, for raw materials of the advanced material
segment, Rain Industries Ltd is dependent on steel manufacturing and crude oil refining industries.
The construction industry is one of the key consumers of Naphthalene.
2014 annual report, page 58:
A popular use of Naphthalene is production of dispersants which are used in construction industry
as superplasticizers and in production of concrete and gypsum. Therefore demand for Naphthalene
is correlated to the construction industry.
Resin sales are dependent on the automotive industry among others.
Continued lower resins performance due to weakness in European automotive and adhesives
industries
Therefore, an investor would notice that the business performance of the advanced material segment of
Rain Industries Ltd (26% of total revenue and 18% of operating profits) is highly dependent on steel
manufacturing, crude oil refining for its raw materials and on construction, and automobile industry for its
sales.
C) Cement segment:
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This segment constituted 8% of revenue and 9% of operating profit for Rain Industries Ltd in 2019. The
cement segment is primarily dependent on housing and infrastructure sectors for its demand.
After learning about the products and their influencing industries, when an investor takes a comprehensive
overview of Rain Industries Ltd, then she finds that the business performance of the company is primarily
dependent on the following industries:
 Aluminium: It is the largest consumer industry for the products made by Rain Industries Ltd
(CPC and CTP). This is the most important industry determining the business performance of Rain
Industries Ltd.
 Steel: Steel manufacturing by blast furnace route provides coal tar, a raw material for CTP and
advanced materials. Steel manufacturing by electrical arc furnace route consumes CTP in the form
of graphite electrodes.
 Crude oil refining: it provides green pet coke (GPC), which is the primary raw material to
produce CPC.
 Housing and Infrastructure: Key consumers for cement and advanced materials
(naphthalene).
 Automobile: Key consumers for advanced material (resins).
With this basic understanding of the business of Rain Industries Ltd, it would become easy for an investor
to understand the business performance of the company over the years.
In 2012, the decline in the sales revenue, as well as profit margins, was linked to the oversupply of
aluminium in the world market at the end of 2011. As a result, the aluminium prices fell and a few
aluminium producers decided to shut down their plants.
The year 2012 started off choppy with dip of Aluminum prices to around US$ 2,000 and the stocks
in LME reported at historical high level of over 5 Million tons and there have been announcements
of productions curtailments by the smelters in response to dampening demand and high operating
cost vis-à-vis falling metal prices.
In 2013, the sales revenue of Rain Industries Ltd more than doubled; however, at the same time, the
operating profit margin (OPM) almost halved from 21% to 11%. The increase in sales was due to the
acquisition of the Rutgers group by the company. However, the decline in OPM was a result of the weak
state of the aluminium industry.
The credit rating agency, India Ratings, highlighted this aspect in the credit rating report of Rain Industries
Ltd in September 2014, page 1:
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RAIN’s consolidated revenue increased in 2013 to INR115bn (2012: INR53.4bn) primarily

because of the revenue from the newly acquired subsidiary (RUETGERS). However, the volume
of calcined pet coke (CPC) fell 5% yoy in 2013 and realisations dipped 13% on continued
weakness in aluminium markets. However, the price of the key raw material – green pet coke
(GPC) has fallen moderately (less than 5%), resulting in a decline in EBITDA per tonne.
In 2014, even though the sales of the company witnessed some increase; however, the company reported
the lowest profit margins in the last 10 years (2010-2019).
Year 2014 turned out to be a challenging year due to various macro-economic factors including
prolonged weakness in primary Aluminum metal prices, falling commodity prices in general
and Crude Oil price in particular, subdued end markets, falling interest rates in Europe and
adverse currency movements…
Although there is an increase in revenues by Rs. 1.9 billion, there is a substantial fall in net
profit by Rs. 3.0 billion due to weaker operating margins.
After 2014, up to 2016, the sales of Rain Industries Ltd declined significantly by more than 20% from
₹11,921 cr in 2014 to ₹9,258 cr in 2016. The company said that a decline in its product prices is the key
reason for lower sales. However, the company could improve its profit margins because of its cost
optimization initiatives.
2016 annual report, page
The revenue in CY2016 was lower compared to CY 2015 mainly due to lower price realizations.
Although the revenue in CY 2016 was lower, the operating margins in CY 2016 were
comparatively higher due to the contributions from new expansion projects (i.e. Russian Tar
Distillation Plant, Chalmette FGD Plant, Indian CPC Blending Facility, etc.) and various cost
optimizing initiatives.
After 2016, first, the sales, as well as profit margins of the company, increased in 2017 as the business
entered into the upward phase of its business cycle where the demand for the products of the company as
well as its sales increased.
The revenue in CY 2017 was higher by 20.6% compared to CY 2016 mainly due to an increase in
volumes and improved price realizations.
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The company highlighted the positive momentum of the industry experienced by it in 2017 in its annual
report for 2018 as well. Rain Industries Ltd highlighted that the upcycle in the aluminium business has led
to an increase in aluminium prices. As a result, many closed aluminium plants have also started production
now. Therefore, the demand for the products of Rain Industries Ltd as well as their prices has increased.
We began 2018 by continuing to ride a wave of momentum that began in mid-2017, as

global aluminium production and demand for our calcination and distillation products steadily
increased, leading to corresponding improvements in selling prices and margins. The global
economy also continued to strengthen, especially in the US, where import tariffs and rising prices
for aluminium and steel motivated US manufacturers to restart mothballed facilities and increase
capacity utilisations.
However, in 2018, the upward phase of the business cycle was over and the company faced many
challenges. As a result, it witnessed its profit margins decline sharply from 20% in 2018 to 14% in 2019.
2018 was a turbulent year for your Company, characterized by shifting market dynamics, a
continued deceleration of the Chinese economy and government actions that had a decidedly
tangible impact on our businesses……..the spread between our raw material costs and prices for
our finished products began to shrink, reversing a trend that was a principle factor in our strong
earnings and EBITDA in 2017.
The revenue in CY2018 was higher by 22.7% compared to CY2017 mainly due to improved price
realisations, including the depreciation of the Indian Rupee against the US Dollar and Euro.
The operating margins in CY2018 were comparatively lower due to higher operating cost resulting
from an increase in raw material prices.
The down cycle in the aluminium industry continued in 2019 when Rain Industries Ltd experienced a
decline in sales as well as profit margins. The prices of the company’s products declined whereas the costs
of the raw materials went up.
The revenue in CY2019 was lower by 12.0% compared to CY2018 mainly due to lower price
realisations and reduction in volumes. The operating margins in CY2019 were also lower due
to higher operating cost resulting from an increase in raw material prices in the first half of the
year.
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Therefore, an investor notices that the business performance of Rain Industries Ltd is highly cyclical with
phases of high demand for its products followed by phases of reduced demand. In the upward phases of the
business cycle, the company reports high-profit margins and in the downward phases, it reports declining
profit margins.
Even in the March 2020 quarter, the company highlighted that the prices of its products have declined by
about 19%.
May 2020 conference call transcript, page 7:
During Q1 of 2020 the average blended realization decreased by 19.1% due to changes in
industry-related dynamics…
The dependence of the performance of key business segments of Rain Industries Ltd on the commodity
prices has been highlighted by the credit rating agency, India Ratings, in its report for one of the subsidiaries
of the company, Rain CII Carbon (Vizag) Ltd (RCCVL) in July 2019, page 2:
Commodity Price Fluctuations: RCCVL’s profitability remains exposed to fluctuations in

commodity prices, which depends on demand-supply dynamics.
When an investor correlates the above discussed different business phases of Rain Industries Ltd with the
business phases of the aluminium industry, which is the largest consumer of its products, then she realizes
that the fate of the two is highly linked to each other.
The following chart shows the historical price of aluminium on the London Mercantile Exchange (LME)
in USD per tonne for the last 10 years (2010-2020).
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From the above chart, an investor can notice the following phases of the aluminium industry in the last 10
years and then correlate them with the business performance of Rain Industries Ltd:
 2010-2011: Aluminium prices increased | profit margins of Rain Industries Ltd increased
 2012-2015: Aluminium prices decreased | profit margins of Rain Industries Ltd decreased
 2016-2018: Aluminium prices increased | profit margins of Rain Industries Ltd increased
 2019-2020: Aluminium prices decreased | profit margins of Rain Industries Ltd decreased
Looking at the above correlation, an investor can easily ascertain that going ahead whenever the aluminium
industry will have a phase of high demand (higher prices), then Rain Industries Ltd will also witness good
sales with high-profit margins. On the other hand, during the phases of low demand for aluminium (lower
prices), then Rain Industries Ltd will also witness poor performance with low-profit margins.
Rain Industries Ltd highlighted this association between the aluminium industry cycles and its own
performance in its 2019 annual report, page 79:
…there may be cyclical periods of weak demand that could result in decreased primary aluminium
production. RAIN Group’s sales have historically declined during such cyclical periods of weak
global demand for aluminium.
Moreover, from our discussion on the industries affecting the business of Rain Industries Ltd, aluminium,
steel, crude oil, housing, construction, infrastructure, and automobile etc., an investor would notice that all
these industries are cyclical. As a result, the cyclical nature of these industries whether by way of raw
material providers or customers of Rain Industries Ltd is bound to affect the business performance of the
company. As a result, we notice that the business performance of Rain Industries Ltd has resulted in a
cyclical pattern with phases of high demand with high-profit margins alternating with phases of low demand
and low-profit margins.
From our previous analysis of companies operating in cyclical industries like graphite electrode
manufacturers, an investor would remember that in the cyclical industries the business conditions could be
brutal where many manufacturers go out of business in down-phases whereas, during up-phases,
manufacturers add a lot of capacity additions lead to oversupply, setting the stage for another down-phase.
For further understanding, an investor may read our analysis of HEG Ltd operating in graphite electrode
manufacturing industry, which is a cyclical industry, in the following article: Analysis: HEG Ltd
An investor would remember that during down-phases of cyclical industries, many manufacturers shut
down their plants. In the case of Rain Industries Ltd, we noticed that at times, during the down phases of
the industry, the company had to reduce the production of CPC. At other occasions, it had to shut a few of
its manufacturing facilities when the business hit a downturn during 2011-2015.
In 2009, the company restricted the production of CPC from its plants due to low demand.
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However, in the year 2009 due to global economic downturn that coupled with
unprecedented decline in the Aluminum metal prices resulted in substantial reduction of global
aluminum production. The demand for CPC was also reduced in the similar percentage. In these
circumstances management took a holistic response by initiating various actions
including curtailment of CPC production, overhead rationalization and working capital
improvement.
In 2014, Rain Industries Ltd shut down one of its manufacturing facility in the USA.
Effective January 1, 2014, Rain Group closed the Calcining facility in Moundsville – West
Virginia, USA. This site has been slated for closure brought on by the impact of new and more
stringent regulations by the Environmental Protection Agency, USA. These regulatory challenges
would require a level of investment exceeding US$ 50 million on a plant that has been operating
at less than 50% capacity since 2008, which is not economically feasible.
In 2015, the company closed its manufacturing facility in China.
Effective January 1, 2015, Rain Group closed the 20,000 Tons capacity Vertical Shaft Calcining
Petroleum Coke (“CPC”) plant in China due to new Environmental regulations applicable from
January 2015 which would require additional investment.
Similarly, in the next downturn, which started in 2018, the company closed further manufacturing facilities.
As a result, we are shutting down production lines in Germany that rely on outdated technology or
whose products are no longer competitive or fail to meet the needs of a changing market.
Due to falling demand for certain advanced materials, we announced the shutdown of our
Uithoorn production facility in the Netherlands by March 2020.
The cyclical industries are characterised by shut down of facilities during down-phases and creation of
overcapacity in up-phases. In the light of sharp upturn in the aluminium industry in 2017, many large
aluminium producers who had closed their plants in the previous downturn restarted these plants. This
resulted in oversupply in the market and as a result, the aluminium prices declined in 2019.
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However, in 2019, the aluminium market was weak as London Metal Exchange prices fell
following a surging supply. The glut occurred as a second large North American aluminium
smelter restarted idled capacity, and a leading Brazilian producer resumed full-scale
production……
An investor would appreciate that these decisions by manufacturers keep the perpetual cycles of
commodities and their dependent industries going.
Even in the case of CPC and CTP, the key products of Rain Industries Ltd that are dependent on the
aluminium industry, the world has an overcapacity indicating the supply is higher than the demand.
2019 annual report, page 75 shows that the world has a surplus of calcined pet coke (CPC) capacity and it
is expected to remain surplus in the years to come.
Similarly, the world currently has a surplus of coal tar pitch (CTP) capacity, which is expected to remain
in surplus for many years. 2019 annual report, page 77:
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The surplus in the manufacturing capacity is not limited to the carbon segment (CPC and CTP) of Rain
Industries Ltd. Other business segments also face a similar situation.
In the case of advanced material, the company intimated its shareholders that naphthalene currently has an
overcapacity. As per the management, the overcapacity in naphthalene business will continue to affect it.
Oversupply will continue to impact naphthalene business.
Even for other products in the advanced materials business segment like resins, modifiers and
petrochemicals, the company faces intense competition from China.
Key threats to RAIN Group’s Advanced Materials business are volatility in commodity prices
and Chinese competition. The price of benzene, C9 and C10 fractions largely depend on the price
of crude and fuel oil. Tariffs implemented by the United States have caused Chinese products to
compete in the European market.
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On similar lines, the third business line of Rain Industries Ltd, cement business, also faces huge
overcapacity. In India, the cement industry on an average has a low capacity utilization of about 70% where
the capacity utilization in South India, which is the relevant market for Rain Industries Ltd, is about 60%.
The Indian cement industry’s average utilisation has increased to approximately 70% in CY 2019,
led by improvement in demand and lower capacity additions during CY 2019. Pan-India utilisation
is expected to reach 75% in CY 2020 while the utilisation levels in the southern region are expected
to remain stable at 60% in CY 2020.
An investor would appreciate that when any product has a surplus capacity over its demand, then in a fair
market the manufacturers do not have a high negotiating power over their customers. As a result, the
manufacturers face fluctuating sales and profit margins.
In such businesses, during the downturn, the manufacturers that have a high level of debt have a high
probability of bankruptcy and in turn, being taken over by other players. In the case of calcined pet coke
(CPC), the ownership of large CPC manufacturing assets has seen significant changes over the years.
In 2007, the largest CPC manufacturer in the world Great Lakes Carbon (GLC) was sold. Rain Industries
Ltd (formerly Rain Commodities Ltd) tried to buy it; however, the Oxbow group of USA got GLC by
paying a higher price. (Source: Oxbow Carbon bids $820M for Great Lakes Carbon fund,
topping Rain offer)
Privately owned Oxbow said early Wednesday it plans to bid $13 a unit for Great Lakes, a Toronto
Stock-Exchange-traded company that supplies global aluminum customers such as Alcan Inc.
(TSX:AL), BHP Billiton Ltd. and DuPont.
In early February, Rain Commodities Ltd. bid $437 million, or $11.60 a unit, to acquire the
remaining 80 per cent of the Great Lakes Carbon fund it doesn’t already own in the largest
takeover bid yet for a Canadian-based company by an investor from India.
Soon thereafter, the second-largest CPC manufacturer was available for sale and Rain Industries Ltd bought
it. (Source: Rain to acquire CII Carbon for $595m)
Barely three months after opting out of the race for Canadian company Great Lakes Carbon, the
Hyderabad-based Rain Group has sprung a surprise by announcing the agreement to buy US-
based CII Carbon LLC for $595 million.
The acquisition, this time through Rain Calcining, fulfils the same objective the group had sought
to achieve through the bid for Grate Lakes through Rain Commodities: to become the world’s No
1 maker of calcined petroleum coke (CPC)
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From the above developments in the calcined pet coke (CPC) industry, an investor would notice that in
quick succession both the world’s first and the second largest manufacturers were sold by their existing
owners.
Such kind of events indirectly present to an investor a glimpse of the challenges of running a business in
commodities and their dependent businesses. Commodity cycles are almost inevitable and they might be
tough to handle for manufacturers who have a weak financial position in terms of high debt, which may
become unsustainable during down-cycles. Then even the world’s largest manufacturers may not be able
to save their businesses. Therefore, in the commodities and their dependent businesses, an investor should
always be cautious about the debt levels of the manufacturers and the companies in which she decides to
invest.
In the case of Rain Industries, all the customers, as well as raw material supplier industries, are cyclical.
These cyclical industries in turn, affect the business of Rain Industries Ltd and make it suffer wide
fluctuations in its sales and profit margins.
Therefore, going ahead, an investor should be cautious and monitor the profitability margins of the company
closely.
While analysing the tax payout ratio of Rain Industries Ltd, an investor would appreciate that the key
operating businesses of the company are spread across many countries like the USA, Belgium, Germany,
India etc. As a result, the tax payout ratio of the company is impacted by the laws of all these countries.
Nevertheless, an investor would notice that for most of the last 10 years (2010-2019), the tax payout ratio
of the company has been in line with the standard corporate tax rate of 30% in India and other countries of
the world. However, in some of the years, the tax payout ratio has been lower like 2013, 2014, 2017 and
2019.
In 2013 and 2014, the tax payout ratio is lower due to deferred taxes, which primarily seem due to the
impact of the acquisition of Rutgers Group of Belgium done by the company.
In 2017, while reading the annual report, an investor gets to know that during the year, the tax rates declined
in the USA and Belgium. In addition, the company had done internal corporate reorganizations, which
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optimized the debt across USA and Europe leading to increase in deductions of interest in the profit & loss
statement (P&L).
As a result, the interest costs are allocated fairly between North-American and
European operations and completely addressed the new US tax regulation of restricting interest
deduction being capped at 30% of operating profits. With the reduction of corporate tax rates in
Belgium and USA, coupled with the internal reorganization implemented by RAIN Group over last
two years in Belgium and Germany, the effective tax rate would reduce by 2% to 3%.
In the United States of America, The Tax Cuts and Jobs Act of 2017 was approved and enacted
into law on December 22, 2017. The law includes significant changes to the U.S. corporate income
tax system, including a reduction in the Federal corporate tax rate from 35% to 21%.
In 2019, the company received the benefits of corporate tax deductions announced by India.
The corporate announcement at BSE, May 28, 2020, page 8:
Out of the two major Indian subsidiaries in the Group, One entity elected to exercise the option
permitted u/s 115B AA of the Income-tax act, 1961 in the quarter and year ended December 31,
2019. Accordingly, the Group computed provision.for income tax for the year ended December
31, 2019 with respect to the Indian subsidiary using the new tax rate and re-measured its Deferred
Tax Liabilities basis the rate prescribed in the said section.
Operating Efficiency Analysis of Rain Industries Ltd:
a) Net fixed asset turnover (NFAT) of Rain Industries Ltd:

When an investor analyses the net fixed asset turnover (NFAT) of Rain Industries Ltd in the past years
(2010-19), then she notices that the NFAT of the company has consistently been in the range of 1.2 to 1.5.
In 2019, the company had an NFAT of 1.32.
An NFAT of 1.32 indicates that if a company invests ₹1 in its fixed assets, then it is able to generate sales
of ₹1.32 from this investment. While analysing companies, an investor would notice that an NFAT of 1.32
is on the lower range for manufacturing companies, which usually have NFAT from 1-4. A low NFAT
indicates a capital-intensive business.
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In addition, when an investor notices that the net profit margin (NPM) of the company has been in the range
of 3-4% (3% in 2019), then she acknowledges that the company is making low returns on its assets. Such
businesses, which require a lot of investment in assets to generate its sales and in addition, earn low profits
on its sales, are particularly vulnerable to excessive debt burdens.
This low asset turnover combined with low profitability has serious implications as a huge amount of
incremental investment is needed to show future growth. For example, let us assume that in the first year,
such a company targets to achieve ₹1,000 cr. of additional sales.
As per the NFAT of 1.32 then it would need to invest INR 750 cr. in fixed assets (1,000/1.32, because the
fixed asset turnover ratio is 1.32).
This ₹1,000 cr. of additional sales would provide additional net profits of ₹30 cr. (assuming 3% NPM of
Rain Industries Ltd in 2019).
If the company retains entire profits and invests in its operations, then this incremental investment of ₹30
cr. of entire profits would generate only ₹40 cr. of incremental sales in the second year (as the fixed asset
turnover ratio is 1.32, 30*1.32=39.6).
If the company wishes to grow sales by another ₹1,000 cr. in the second year as well, then it would have to
generate ₹960 of sales (=1,000 – 40) by investing additional ₹720 cr. (=960/1.32 or can be calculated as
₹750 cr of total requirement – ₹30 cr. of net profits reinvested). This ₹720 cr. needs to come from either
fresh equity infusion or debt.
Please note that these calculations would give the same inference even if an investor assumes that the new
capital investment in the first year will take about 3 years to reach full utilization and the company will plan
a new capital expenditure only after about 3 years of last capacity addition.
Thus, we may see that with a low fixed asset turnover of 1.32 combined with a low net profit margin of 3%
results in a situation where the company would have to keep on relying on additional sources of funds to
maintain its growth. As a result, it does not come as a surprise to the investor that over last 10 years, the
debt of Rain Industries Ltd has increased by ₹4,667 cr from ₹3,178 cr in 2010 to ₹7,845 cr in 2019.
We observe this aspect of the growth of Rain Industries Ltd when we analyse its self-sustainable growth
rate (SSGR) later in the article.
Moreover, looking at the continuous significant capital requirements of the business, an investor appreciates
that eventually the existing investors get tired of running such businesses and after a while, they sell out.
We saw this in the terms of acquisitions done/attempted by Rain Industries Ltd where the companies who
were the largest manufacturers of CPC and CTP were sold by their existing investors to other shareholders.
In the CPC business, both the world’s largest (Great Lakes Carbon) and the second-largest (CII Carbon)
manufacturers were sold within a span of a few months. In the CTP business, in 2013, the shareholders of
the second-largest CTP manufacturer (Rutgers) sold off the business to Rain Industries Ltd in 2013 whereas
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the world’s largest CTP manufacturer (Koppers) had to shut down many of its plants in 2016-2017
(Source: For Rain Industries, it pours when there’s deficit of pet coke, coal tar)
CTP too, is in short supply as the largest producer Koppers has shut down some of its plants.
Looking at the above developments, an investor would appreciate that growth in such capital-intensive,
cyclical businesses, which do not produce a decent return on their assets is very tricky. As the internal return
generation ability of the business is low, therefore, the growth is mostly debt-funded.
Carrying a large amount of debt in a business, which is cyclical and frequently faces periods of subdued
business performance, is risky. This is because, many times, the high debt may make the survival of the
low margin capital-intensive business very difficult in a down-cycle when the earnings decline and the large
debt repayments fall due.
Many times, such businesses rely on continuous debt refinancing and may face the bankruptcy risk if they
are not able to get refinancing when the large repayments of the existing debt are due. From the above
discussion, an investor would appreciate that in tough times (down cycles), in these low-margin, capital-
intensive, cyclical businesses, it does not matter even if you are one of the world’s largest manufacturers.
When the lenders come to collect its due, you have to sell assets irrespective of being one of the largest
manufacturers. An investor should always keep this aspect of low margin, capital-intensive, cyclical
businesses whenever they appraise them.
In cyclical businesses, there will always be phases of an uptrend when the industry would face the tailwinds
and the sales as well as profit margins would increase. It is common for the investors to lose sight of the
true nature of the business during these rosy times. However, the commodity cycles of uptrend and
downtrend have been in existence since centuries and almost always, in such businesses, the periods of
good business performance are followed by periods of subdued business performance.
In the recent past, investor witnessed such a scenario in another such cyclical, capital-intensive industry,
Graphite Electrodes that supplies electrodes to steel manufacturers for use in the electric arc furnace. An
overview of the performance of one of graphite electrodes manufacturers, HEG Ltd, over recent past will
provide good insights to the investor about the role industry phases play in such cyclical industries.
If an investor analyses the quarterly business performance of HEG Ltd from March 2017 quarter to the
latest available results of December 2019 quarter, then she can appreciate the way in which the uptrend of
the industry influenced the performance of the company. (The data in the below table is in ₹ crores/10
millions).
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In the above data, an investor will notice that during March 2017, and June 2017 quarters, HEG Ltd used
to report quarterly sales of ₹200-250 cr and hardly any net profit. In March 2017 quarter, it reported a profit
of only ₹1 cr and in June 2017 quarter, it reported a net loss of (₹7 cr).
From September 2017 quarter, the uptrend in the industry started and the sales, as well as the profit of the
company, started increasing rapidly. The industry cycle reached the peak in September 2018 quarter when
HEG Ltd reported sales of ₹1,794 cr in the September 2018 quarter as compared to ₹200-250 cr in March-
June 2017 quarters. Similarly, HEG Ltd reported net profit after tax (PAT) of ₹889 cr in September 2018
quarter as compared to ₹1 cr profit or (₹7 cr) loss in March-June 2017 quarters.
HEG Ltd witnessed its net profit margin (NPM) rise to 50% at the peak of the industry cycle in September
2018 quarter as compared to losses in June 2017 quarter.
However, thereafter, the industry cycle turned and the down-cycle started. As a result, the business
performance of HEG Ltd started declining. In the latest available results for December 2019 quarter, HEG
Ltd has reported sales of ₹394 cr, down from the high of about ₹1,800 cr quarterly sales at the peak of the
cycle. The sales in December 2019 quarter are more in line with what the sales of HEG Ltd used to be
before the up-cycle in the graphite electrode industry started in September 2017. Similarly, in December
2019, HEG Ltd reported net profits of ₹6 cr with an NPM of 2%, down from the quarterly net profit of ₹889
cr with the NPM of 50% at the peak of the industry cycle in September 2018.
If an investor analyses the history of cyclical industries over a long period, then she will notice that in these
industries, the periods of good business performance always lead to periods of subdued performance and
vice-versa. This has been the case since centuries and it may remain the same in the future as well.
Therefore, an investor should always keep this fact of changing business performance during industry
cycles in mind while assessing these cyclical industries. The investor should not be overly influenced by
the good business performance of the company over the up-cycle phase of the industry. If she loses sight
of the cyclical business phases of these industries, then she may lose money while investing in these
industries.
In the case of HEG Ltd, when the industry up-cycle started in September 2017 and reached the peak in
September 2018, the stock market took the share price of HEG Ltd from the levels of ₹150/- in early 2017
to an all-time high of ₹4,950/- in October 2018 at the peak of up-cycle. However, once the down-cycle of
the graphite electrode industry started and the business performance of the company started declining, its
share price has also come down to about ₹450/- in March 2020. HEG Ltd share price closed at ₹913.15 on
June 12, 2020.
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An investor may read our complete analysis of HEG Ltd in the following article: Analysis: HEG Ltd
Therefore, while investing in the cyclical commodities and their dependent industries, an investor should
always keep in mind that periods of good business performance lead to periods of subdued business
performance. The investor should not be carried away when she notices the increasing sales and profit
margins of the companies in the up-cycle phase of the industry.
While analysing Rain Industries Ltd, from the above discussion, an investor would notice that in 2017, the
company faced the up-cycle phase of the industry when its sales, as well as profit margins, increased at a
sharp pace. The aluminium demand, as well as prices, were increasing. Many inefficient aluminium plants,
which were earlier closed due to unviability at low prices, were again started by the aluminium
manufacturers. As a result, the demand for CPC and CTP increased. The company also acknowledged this
momentum of industry upcycle of 2017 to its shareholders in its annual report.
We began 2018 by continuing to ride a wave of momentum that began in mid-2017, as

global aluminium production and demand for our calcination and distillation products steadily
increased, leading to corresponding improvements in selling prices and margins. The global
economy also continued to strengthen, especially in the US, where import tariffs and rising prices
for aluminium and steel motivated US manufacturers to restart mothballed facilities and increase
capacity utilisations.
However, starting in 2018, the industry cycle turned and the industry entered a down cycle. The sales and
the profit margins of the company started declining.
….many of the challenges that impacted our businesses in late 2018 persisted, in particular:
continued softness in the Chinese economy; reduced automotive sales in China, Europe, the UK
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and Japan, which impacted demand for raw materials that we produce for aluminium, automobile
tyres and adhesives; and disruption to our calcination business due to India’s restrictions on
petroleum coke imports, resulting in high-cost inventories in a declining market that reduced profit
margins.
The down cycle of the aluminium industry that started in 2018 is continuing in 2020.
If the investor notices the share price movement of Rain Industries Ltd over these industry phases of upcycle
in 2017 and then the resultant down cycle, then she notices that the share price movement is similar to HEG
Ltd discussed above.
From the above chart, an investor would notice that before the start of the industry upcycle of 2017, the
share price of Rain Industries Ltd used to be in the range of ₹30/-. In the industry upcycle the stock market
to the share price to the highs of ₹475/-. However, once the down-cycle of the aluminium industry started
and the business performance of Rain Industries Ltd started declining, its share price has also come down
to about ₹47/- in March 2020. Rain Industries Ltd share price closed at ₹73.85 on June 12, 2020.
Therefore, once again, we would stress that while investing in the cyclical commodities and their dependent
industries, an investor should always keep in mind that periods of good business performance lead to
periods of subdued business performance. If an investor is carried away by the increasing sales and profit
margins of the companies in the up-cycle phase of the industry, then she may face negative surprises when
the industry enters the down-cycle and she may even lose her hard-earned money put in the investment.
b) Inventory turnover ratio of Rain Industries Ltd:

While analysing the inventory turnover ratio (ITR) of the company, an investor notices that the ITR of Rain
Industries Ltd had been nearly stable in the range of 6.0 to 7.0 over the last 10 years (2010-2019). This
reflects efficient inventory management by the company.
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Nevertheless, an investor would appreciate that the raw material of the company are by-products of cyclical
commodity businesses where prices keep on fluctuating widely over time. As a result, the company has
frequently faced inventory write-downs where it purchased raw materials at a high price; however, later on,
the prices declined sharply to an extent that the company had to recognise a loss.
In March 2020 quarter, Rain Industries Ltd recognised a loss of ₹90 cr due to write-down of inventory.
May 2020 press release, page 3:
…..there is no material impact on its financial results as at March 31, 2020, and carrying value
of its assets except certain inventory-related write-downs amounting to ₹ 900 million.
When an investor reads the publicly available annual reports of Rain Industries Ltd from 2009, then she
realises that the company has faced inventory write-downs since a very long time. In 2008, the Rain
Industries had to write-down inventories worth ₹68 cr.
During the previous year, the Group recorded write-down of inventory by Rs.686,236 which was
disclosed as an Exceptional Item.
An investor may note that in the 2009 annual report, the financial data is reported in (₹ ‘000). Therefore,
the above figure of ₹686,236 represents ₹68.6 cr.
In 2014, Rain Industries Ltd faced an inventory write-down of ₹23 cr.
On account of a sharp decline in the prices of certain commodity inputs the Group’s inventories
were significantly impacted in the last quarter. This decline of Rs. 236,921 was unusual and has
been reported as an exceptional item by the Group.
In 2016, Rain Industries Ltd had to record a loss of ₹54 cr due to losses on inventories.
Profit After Tax for CY 2016 is adjusted for (a) ₹ 262 Million towards provision made for closure
cost of impregnated wood product manufacturing facility in Hanau, Germany (b) incremental
pension liability from actuarial losses of ₹ 1,109 Million (c) provision for inventories ₹ 547
Million…..
In 2017, the company faced inventory write-down of ₹40 cr, which further increased to ₹51 cr in 2018.

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The above inventories are net of provision for net realisable values of ₹ 516.99 and ₹ 401.10 as at
December 31, 2018 and December 31, 2017 respectively.
The hit on the profits of Rain Industries Ltd continued in 2019 when the company recorded a loss of ₹51 cr
due to loss of value of inventories.
The above inventories are net of provision for net realisable values of ₹ 513.14 and ₹ 516.99 as at
December 31, 2019 and December 31, 2018 respectively.
From the above discussion, an investor notes that the write-down of inventory due to commodity price
declines is a frequent item for Rain Industries Ltd. In such a situation, she doubts the reasons why the
company used to disclose it under “Exceptional Items” in the financial statements.
c) Analysis of receivables days of Rain Industries Ltd:

While analysing the receivables days of the company, an investor notices that the receivables days of Rain
Industries Ltd have remained stable in the range of 40-45 days over the last 10 years (2010-2019). This
reflects efficient receivables management by the company.
The position is despite a few challenges faced by the company in collecting receivables during the down-
phases of the business cycle.
As discussed above, in 2015 one of its customers filed for chapter 11 bankruptcy and as a result, Rain
Industries Ltd had to provide for a loss on its dues/receivables from that customer.
Provision for doubtful debts of Rs 134.32 included in the exceptional items consist of provision for
the amount receivable from one of the customer for Group’s US and Canadian subsidiaries for
the sale of goods. On February 8, 2016 the customer filed for Chapter 11 bankruptcy protection
in the USA.
Then again, in the next down-phase, in 2018, the company had to make a large provision of ₹78 cr for
receivables that it believes would be difficult to collect.
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Nevertheless, looking at the inventory turnover ratio as well as at receivables days of Rain Industries Ltd,
an investor would notice that the company has been able to keep its working capital position under control
and not let it deteriorate over the last 10 years (2010-2019). As a result, it has not witnessed a lot of money
being stuck in the working capital.
An investor observes the same while comparing the cumulative net profit after tax (cPAT) and cumulative
cash flow from operations (cCFO) of the company for 2010-19.
Over 2010-19, Rain Industries Ltd Limited reported a total cumulative net profit after tax (cPAT) of ₹4,187
cr. During the same period, it reported cumulative cash flow from operations (cCFO) of ₹12,083 cr. An
investor notices that the company has very high cCFO when compared to the cPAT over the last 10 years
(2010-2019).
It is advised that investors should read the article on CFO calculation, which would help them understand
the situations in which companies tend to have the CFO lower than their PAT. In addition, the investors
would also understand the situations when the companies would have their CFO higher than the PAT.
Learning from the article on CFO will indicate to an investor that the cCFO of Rain Industries Ltd is
significantly higher than the cPAT due to following factors:
 Interest expense of ₹4,775 cr (a non-operating expense) over 2010-2019, which is deducted while
calculating PAT but is added back while calculating CFO.
 Depreciation expense of ₹3,574 cr (a non-cash expense) over 2010-2019, which is deducted while
Therefore, an investor would appreciate that during 2010-2019, Rain Industries Ltd has kept its working
capital requirements under check. As a result, it has been able to convert its profits into cash flow from
operations.
The Margin of Safety in the Business of Rain Industries Ltd:
a) Self-Sustainable Growth Rate (SSGR):
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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.
Conversely, if any company attempts to grow its sales at a rate higher than its SSGR, then its internal
resources would not be sufficient to fund its growth aspirations. As a result, the company would have to
rely on additional sources of funds like debt or equity dilution to meet the cash requirements to generate its
target growth.
While analysing the SSGR of Rain Industries Ltd, an investor would notice that the company has
consistently had a low SSGR (negative to 0%) over the years. One of the key reasons for a low SSGR for
the company has been its low asset turnover and low profitability.
As discussed above, Rain Industries Ltd has consistently had a low NFAT in the range of 1.25-1.50. In
addition, the net profit margin (NPM) of the company has been consistently low at 3%-7% over the last 10
years.
While studying the formula for calculation of SSGR, an investor would understand that the SSGR directly
depends on the net fixed asset turnover (NFAT) and the net profit margin (NPM) of a company.
SSGR = NFAT * NPM * (1-DPR) – Dep
Where,
 SSGR = Self Sustainable Growth Rate in %

 Dep = Depreciation rate as a % of net fixed assets
 NFAT = Net fixed asset turnover (Sales/average net fixed assets over the year)
 NPM = Net profit margin as % of sales
 DPR = Dividend paid as % of net profit after tax
(For systematic algebraic calculation of SSGR formula: Click Here)
Therefore, an investor would notice that Rain Industries Ltd has continuously had a low SSGR (negative
to 0%) over the last 10 years (2010-2019). However, an investor would appreciate that the company has
been growing at a rate of 10%-15% over the years.
The historical low SSGR indicates that the company does not seem to have the inherent ability to grow at
the rate of 10%-15% from its business profits. As a result, investors appreciate that Rain Industries Ltd
would have to raise money from additional sources like debt or equity to meet its investment requirements.
While analysing the past financial performance of Rain Industries Ltd, an investor notices that the company
relied on additional debt to meet the requirement of funds to grow at 10-15% over the last 10 years. The
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total debt of the company increased from ₹3,178 cr in 2010 to ₹7,845 cr in 2019 indicating a net increase
of ₹4,667 cr (= 7,845 – 3,178) over the last 10 years.
An investor reaches a similar observation when she analyses the free cash flow (FCF) position of the
company over the last 10 years (2010-2019).
b) Free Cash Flow (FCF) Analysis of Rain Industries Ltd:

While looking at the cash flow performance of Rain Industries Ltd, an investor notices that during 2010-
19, the company had a cumulative cash flow from operations of ₹12,083 cr. During this period it did a
capital expenditure (capex) of ₹11,018 cr. As a result, an investor would note that over 2010-2019, Rain
Industries Ltd had a free cash flow (FCF) of ₹1,065 cr. ( = 12,083 – 11,018).
In addition to the capital expenditure, the company had to meet the interest expense of about ₹4,775 cr on
the debt that it had for 2010-2019. Please note that the amount of interest capitalized by Rain Industries Ltd
is already reflected in the amount of capital expenditure.
As a result, the company had a total cash shortfall of ₹3,710 cr (= 1,065 – 4,775). The company met this
shortfall by raising additional debt of ₹4,667 cr over the last 10 years.
In light of the cash shortfall faced by Rain Industries Ltd after meeting the capital expenditure and interest
payments, an investor would appreciate that the dividend payments, as well as the buy-backs done by the
company in the past, are effectively funded by the debt that it had raised.
An investor would note that money is a fungible item. Therefore, a company may easily show that it is
paying dividends from its profits and raises large amounts of debt to meet capital expenditure (capex) and
interest payments. However, the investor should appreciate that if any company has a cash shortfall from
capex and interest payments and it has to raise debt to meet these expenses, then any payment done by the
company to the shareholders in the form of dividends or buybacks has effectively come from the debt.
Free cash flow (FCF) is one of the main pillars of assessing the margin of safety in the business model of
any company.
Looking at the above discussion on the cyclically fluctuating business performance, low asset turnover,
low-profit margins, high capital requirements to fund growth, low SSGR, cash deficit requiring additional
debt, an investor may appreciate that the business of Rain Industries Ltd is a tough challenge. In the past,
even the largest manufacturers of the world like Great Lakes Carbon (GLC), CII Carbon, Rutgers, Koppers
etc. could not escape the tough challenges posed by this industry. As a result, Great Lakes Carbon, CII
Carbon and Rutgers had to be sold by their existing shareholders whereas Koppers had to shut down many
of its manufacturing facilities.
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In light of these challenges, it becomes obvious to the investor that the business of Rain Industries Ltd relies
primarily on additional debt to meet its growth and continuous debt refinancing to sustain the large debt. If
interest rates increase or at the time of debt repayment, due to any reason, the debt markets freeze, then it
would be very difficult for any company carrying large debt to service the debt.
While reading 2013 annual report of Rain Industries Ltd, an investor comes to know that subscribers of its
“Junior Subordinated Notes” (JSN) had declared a loan default and asked the company for early loan
repayment along with an additional 5% rate of interest.
On February 4, 2013, holders of Junior Subordinated Notes requested an accelerated loan

repayment and additional default interest of 5% per annum from the assumed date of default.
Based on legal advice received, management strongly believes no default has occurred and
accordingly have not recognized any liability in the books.
However, none of the subsequent annual reports has any further details about the said default or the dispute
with the subscribers of “Junior Subordinated Note” (JSN). Therefore, an investor is not able to assess the
complete development of events in the above case whether the company had actually defaulted and later
on settled with the JSN subscribers or the JSN subscribes were wrong in their interpretation of the terms of
the notes.
Nevertheless, an investor would appreciate that if a company has a large amount of debt where it is relying
on refinancing for loan repayment, then it carries the risk of bankruptcy if, at the time of repayment of the
existing loan, the credit markets freeze due to any reasons.
The fact that Rain Industries has been relying on refinancing for repayment of its existing debt has been
highlighted by the credit rating agency, India Ratings, in its credit rating report for the company in February
2017, page 1:
Rain’s debt servicing requirement in 2018 is INR27.6 billion. The company will have to resort to
refinancing these repayment obligations as the internal cash generation is insufficient.
Reliance on refinancing as a strategy to repay existing debt is very risky. Many times, such situations have
led to bankruptcy for highly leveraged manufacturers.
Rain Industries Ltd has experienced the impact of bankruptcies in its business when in 2015, one of its
customers filed for chapter 11 bankruptcy and as a result, Rain Industries Ltd had to provide for a loss on
its dues/receivables from that customer.
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Provision for doubtful debts of Rs 134.32 included in the exceptional items consist of provision for
the amount receivable from one of the customer for Group’s US and Canadian subsidiaries for
the sale of goods. On February 8, 2016 the customer filed for Chapter 11 bankruptcy protection
in the USA.
An investor would appreciate that carrying large debt in a cyclical, capital-intensive, low return generating
business is risky.
In light of the above challenges, it does not come as a surprise to the investor when she notices that the
stock market has not given a high valuation to Rain Industries Ltd when compared to the amount of earnings
retained by it from its profit by not distributing them to the shareholders.
Over the last 10 years, the company retained profits of about ₹3,800 cr; however, the market capitalization
of the company has increased by only about ₹1,180 cr. This amount to the generation of about ₹0.31 in
market value for every ₹1 of shareholders retained by the company in the last 10 years.
As a result, over the last 10 years, shareholders have witnessed wealth erosion of about ₹2,620 cr (= 3,800
– 1,180) when the company decided to keep the money with itself.
Additional aspects of Rain Industries Ltd

On analysing Rain Industries Ltd and reading its publicly available past annual reports and reading other
public documents an investor comes across certain other aspects of the company, which are important for
any investor to know while making an investment decision.
1) Management Succession of Rain Industries Ltd:

Rain group with Rain Industries Ltd as the holding company is run by Mr. N. Radhakrishna Reddy (age 78
years) and his two sons, Mr. Jagan Mohan Reddy Nellore (age 53 years) and Mr. N. Sujith Kumar Reddy
(age 48 years). The presence of father along with two sons in active managerial positions in the group
provides for visibility of the succession planning in the group.
In the conference calls conducted by the company to discuss its results with the investors, usually, Mr.
Jagan Mohan Reddy Nellore, Vice Chairman, is the active participant along with other professional
managers. Therefore, he might be the most active out of the family members who are a part of the
management of the group.
Nevertheless, an investor should do her own analysis to understand the terms between the two brothers Mr.
Jagan Mohan Reddy Nellore (age 53 years) and Mr. N. Sujith Kumar Reddy (age 48 years). This is because
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it may lead to ownership issues in the future. An investor may be aware of many instances where the
business group went through prolonged periods of discord between family members when the senior-most
member of the family was not there e.g. Reliance group.
In addition, the investor may seek details from the company about any member of the next generation i.e.
children of Mr. Jagan Mohan Reddy Nellore and Mr. N. Sujith Kumar Reddy or any other family members
who might have joined the company in the management positions.
2) Complex corporate structure of Rain Industries Ltd:

While analysing the company, an investor notices that Rain Industries Ltd in itself does not have any
operating business. The company only has loans & advances and investments in its subsidiaries and it earns
interest and dividends from these investments. All the operating businesses whether they are located in
India or abroad, are present in other subsidiaries.
As per 2019 annual report, the company had 27 subsidiaries and associates on December 31, 2019.
However, in the past, the number of subsidiaries was even higher. In 2016, the company had 41 subsidiaries
and associates including 4 subsidiaries in India and 37 in overseas locations.
An investor would appreciate that the analysis, as well as audit of these many subsidiaries, is a cumbersome
task. One main auditor audits the standalone and the consolidated financial statements of Rain Industries
Ltd. In addition, many of the subsidiaries in different other countries would have different auditors. The
main auditor of Rain Industries Ltd has to rely on the reports of these other auditors for preparing the
consolidated financials. It becomes difficult for the investor to assess the quality of the auditors assessing
the financial statements of the subsidiaries.
Moreover, it is still ok if at least all the financial statements of all the subsidiaries are audited before the
consolidated financials of Rain Industries Ltd are published. However, there have been instances when at
the time of publishing the consolidated financial statements, the financial statements of many of the
subsidiaries had not been audited by any qualified auditor. At these occasions, the management submitted
unaudited financial statements of these subsidiaries to the main auditor who incorporated these unaudited
financials while preparing the consolidated financials.
At times, the size of the subsidiaries whose unaudited financial statements were included in the consolidated
financials was very significant. E.g. in 2019, the consolidated financial statements of Rain Industries Ltd
included unaudited financials of companies that had ₹1,038 cr of revenue, ₹287 cr of net profits.
The consolidated financial statements include the unaudited financial statements of subsidiaries
and associate, whose financial statements reflect Group’s share of total assets of ₹10,462 million
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as at 31 December 2019, Group’s share of total revenue of ₹10,385 million and Group’s share of
total net profit after tax of ₹2,879 million for the period from 01 January 2019 to 31 December
2019 respectively, as considered in the consolidated financial statements.
In the past, in 2017, the consolidated financial statements of Rain Industries Ltd included unaudited
financials of companies that had ₹3,671 cr of net assets out of the total net fixed assets of ₹8,690 cr. owned
by the company.
We did not audit the financial statements of certain subsidiaries, whose financial statements reflect
total assets of ₹ 37,154 million and net assets of ₹ 36,713 million as at December 31, 2017 and
total revenues of ₹ Nil and net cash outflows of ₹ 244 million for the year ended on that date, as
considered in the consolidated Ind AS financial statements. The above financial information is
before giving effect to any intra group eliminations and consolidation adjustments. These financial
statements are unaudited….
Therefore, an investor would appreciate that when the consolidated financial statements of a company
include the significant size of unaudited financials, it leads to an uncertainty in the minds of investors about
the numbers that she is analysing. There is always a probability that when these unaudited financial
statements are subsequently audited by any qualified auditor, then the auditor may have many observations
on them and may challenge the assumptions of the management in the preparation of financial statements.
Such events may even lead to changes in the financial statements later on.
An investor may seek clarifications from the company directly whether the said unaudited financial
statements of the subsidiaries included in the consolidated financial statements of Rain Industries Ltd, were
subsequently audited by any qualified auditor. If yes, then did the financial statements change to any extent
after the said audit was completed?
If the management says that the unaudited financial statements of none of the subsidiaries changed after the
subsequent audit, in any of the years in the past, then it may raise another doubt. If the unaudited financial
statements submitted by the management never change after the audit, then it raises the possibility of the
presence of “rubber-stamp” auditors who simply sign on the financial statements submitted by the company
without doing their own due-diligence. In these cases, the investor may make her own judgment.
Apart from the challenges of completing the audit of all the subsidiaries in time for consolidated financial
statements as well as the quality of the audit, the presence of a large number of subsidiaries presents other
challenges. At times, such companies keep on reorganizing their corporate structure, which presents
additional challenges for the auditors as well as investors.
Rain Industries Ltd undertook a major corporate reorganization in 2017 when it merged many of the
subsidiaries.
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RAIN Group has implemented internal reorganization during the past two years to achieve optimal
allocation of debt from US to European operations and simplify the corporate structure in Belgium
and Germany by merging companies (resulting in reduction of 9 legal entities).
In such reorganizations, assets of one company are transferred to another entity and usually, it involves
many assumptions on the part of the management. All these instances of mergers, reorganisations present
challenges to investors and auditors in their analysis.
Rain Industries Ltd has sold and purchased holdings of its different companies among its subsidiaries in
other years as well, which again complicates the assessment of the financial position of the group for any
investor and as well as the auditor.
Rain Industries Limited (the Company) holds 60,000 (100%) equity shares in Rain Coke Limited.
Due to internal re-organization, 60,000 equity shares held in Rain Coke Limited were sold to Rain
Cements Limited ( Wholly Owned Subsidiary).
Rain Cements Limited (A wholly owned Subsidiary Company) holds 10,00,000 equity shares in
Rain CII Carbon (Vizag) Limited (A Step down wholly owned subsidiary Company). Due to
internal re-organization 10,00,000 equity shares held by Rain Cements Limited in Rain CII
Carbon (Vizag) Limited were purchased by the Company.
Similarly, in 2010, when the company transferred its cement business to its subsidiary, Rain Cements Ltd,
then it recognised a loss of about ₹200 cr.
The assets and liabilities of the Cement business have been transferred at their net book values as
on April 1, 2010. Rs. 1,995,200, being the loss on transfer of Cement Business (the excess of the
net assets value over the consideration receivable) has been charged to the Profit and Loss
Account and disclosed as Exceptional Item.
Investors may note that in the 2010 annual report, the company has reported its financial data in (₹ ‘000).
Therefore, “Rs. 1,995,200” in the above section represents ₹199.52 cr.
This loss is present only in the standalone financial statements of the company and has been cancelled out
while preparing the consolidated financial statements. However, still, in an investor’s mind, it raises a doubt
whether the assets of the cement business are actually worth the amount that they are stated in the balance
sheet or the assets are impaired and the company is delaying the recognition of the same.
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Investors may appreciate that when they have to work upon multiple layers of subsidiaries and their
investments like layers of an onion, to understand the financial position of any company, then it always
creates a possibility for error that their final analysis may not be accurate.
When companies deal with multiple subsidiaries, then invariably the annual reports are not able to provide
sufficient details for each one of them. The management only describes the affairs of key large subsidiaries
and segments in the annual report and many small subsidiaries are ignored.
For example, one of the subsidiaries of Rain Industries Ltd, RGS Egypt Limited, finds mention in
the 2010 annual report for the first time when an investor gets to know that the company has made
investments in RGS Egypt Limited by acquiring a 51% stake.
In the 2010 annual report, at page 90, in a note in the short font below the fixed assets schedule, the investor
gets to know that Rain Industries Ltd has received fixed assets of ₹9 cr on the acquisition of RGS Egypt
Limited. In addition, on page 95, the investor notices that the company received finished goods stock of
about ₹15 cr on this acquisition. Therefore, an investor may assume that the total assets acquired by Rain
Industries Ltd while it took over 51% in RGS Egypt Limited are about ₹25 cr.
The 2010 annual report did not have any comment from the management about why the subsidiary was
acquired. What are the business plans for RGS Egypt Limited? Who are the other partners that owned the
remaining 49% and whether it is a third party or a related party?
Thereafter, in 2017 annual report, as a small footnote under the list of subsidiaries included in consolidated
financials at page 56, the investor gets to know that Rain Industries Ltd has sold off RGS Egypt Limited.
Just like at the time of acquisition of RGS Egypt Limited in 2010 when there was no explanation, in 2017,
at the time of disposal of RGS Egypt Limited, there was no explanation by the management in the annual
report about the reasons for its disposal.
In another such instance, in the 2009 annual report, an investor notices that the shareholding of the company
in its subsidiary Rain Global Services LLC. (RGS) declined from 100% to 61% in 2009.
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The annual report of 2009 does not contain any explanation from the management about either the reasons
for this decline in the shareholding in RGS or who is the counterparty who has acquired a 39% stake in
RGS.
Investors face such situations frequently in the cases where companies have a complex corporate structure
involving many subsidiaries, associates and joint ventures. Many times, in such cases, the management is
not able to provide details about all the decisions taken by them in the annual report and instead, restrict
their discussions to the key large subsidiaries and business segments. However, the absence of discussion
on many corporate decisions like acquisition and disposal of subsidiaries leaves the investors to make their
own assumptions about the management actions.
Investors may appreciate that in complex corporate structures, many times, underlying weaknesses may
take a long time to be exposed as investors, investment analysts, and auditors find it difficult to assess
complex corporate structures.
3) Management’s claim about low availability of raw material “Anode grade

GPC” as a key barrier to entry:
While reading the annual reports of Rain Industries Ltd, an investor notices that since many years, the
company has claimed that it is difficult to get the key raw material, anode grade green pet coke (GPC),
which is used to make calcined pet coke (CPC) as well as the supply of coal tar used to make coal tar pitch
(CTP).
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The company highlighted it in its 2012 annual report, page 6:
Long-term contracted raw material supply-a key barrier to entry: In both CPC and CTP industries,
secure access to raw materials is a key competitive advantage. Given the expectation for
a continued tightening in the worldwide supply of traditional Anode Grade GPC and Coal Tar,
we believe it would be difficult for a new entrant to get secure supply of these critical raw
materials.
The company continued to highlight it over the years. In 2019, Rain Industries Ltd highlighted that the key
threat to the CPC industry is the availability of good quality GPC.
The main threat for the CPC industry is the availability of suitable-quality GPC.
However, when an investor notices the demand and supply of anode grade GPC in the world in the 2019
annual report, then she notices that until now, the world has a surplus of anode grade GPC.
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An investor may note that the recent shortage of GPC faced by the company for its Indian plants is due to
the restrictions imposed by India on the import of GPC. This shortage is not due to scarcity of GPC in the
world.
Moreover, the company also disclosed in its 2016 annual report that the price differential between the
“sweet crude” leading to the production of anode grade GPC and the “sour crude” that normally leads to
fuel grade GPC, is declining. As a result, in future, more refineries may opt to consume “sweet crude” that
would increase the availability of anode grade GPC.
As the spread between Sweet-Crude to Sour-Crude has narrowed, it is expected that few
Oil refineries would shift to Sweet-Crude resulting in improved availability of Anode Grade GPC.
Please note that an investor should always take the future projection data of demand of any product with a
pinch of salt as many of the times, these data turn out to be very different from the actual demand when the
time comes. The cyclical nature of the commodities businesses is a key example. No one can accurately
predict these cycles and the demand at a particular point of time in future including the
promoters/professional who is working in these industries full-time.
An investor may remember the acquisition of Corus by Tata Steel in April 2007 (Source: Tata Steel
completes £6.2bn acquisition of Corus Group plc). However, it later turned out that Tata
Steel acquired it at a very expensive valuation and at the peak of the steel industry cycle. Subsequently, the
steel industry entered a downturn and Tata Steel could never recover from this expensive acquisition. It is
still facing problem with many of the assets/plants acquired by it in different European countries.
Later on, the former MD of Tata Steel, Mr. J.J. Irani acknowledged that acquiring Corus was a mistake.
(Source: Corus acquisition was an aspirational mistake: J J Irani)
From the above example of Tata Steel and Corus, an investor may appreciate that even the companies,
professionals, or promoters who are a part of any commodity industry for their entire life make mistakes in
assessing the demand of commodities at any point of time.
Therefore, when Rain Industries Ltd highlights that the availability of anode grade GPC is a key entry
barrier for new players in the CPC business as in future, the demand of GPC would be higher than its
supply, then investors should take it with a pinch of salt.
Moreover, from our above discussion on industry cycles of graphite electrodes, an investor would recollect
that supposed scarcity of raw material and non-entry of new players in the industry for many decades is not
able to save the existing players from subdued business performance in the down cycle of the industry.
In our analysis of HEG Ltd, we noticed similar claims by the management of the company in relation to the
graphite electrodes industry.
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At the peak of the graphite electrodes industry up-cycle, in the FY2018 annual report, the management of
HEG Ltd highlighted the very high barriers to entry in the graphite electrodes industry. It mentioned about
factors like availability of its key raw material “needle coke”, a type of pet coke like anode grade GPC,
along with other barriers like technology, capital-intensiveness, long time to start a new plant etc.
FY2018 annual report of HEG Ltd, page 20:
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However, from our discussion above on the sharp decline in the business performance of HEG Ltd during
the down phase of the industry cycle, an investor would appreciate that the supposed high barriers to entry
are not able to protect existing manufacturers from subdued business performance in down-cycles. From
the above discussion, an investor would remember that even the shareholders of the world’s largest
producers of CPC and CTP producers had to sell their companies despite having key competitive
advantages like high barriers to entry.
Therefore, it is advised that in case of commodities and their dependent businesses, an investor should
always question the claims of the management whether it is HEG Ltd, or Tata Steel or Rain Industries Ltd.
Cyclical commodity businesses have the potential of proving wrong even the seasoned
professionals/promoters who have spent their entire life dealing with these commodities.
4) Curious case of compulsory convertible debentures (CCDs):

While reading the 2016 annual report of Rain Industries Ltd, at page 170, an investor notices that in the
long-term borrowings section in the consolidated financials, the company has disclosed the presence of
unsecured debentures for ₹15.06 cr.
Upon further reading of the footnotes, the investor gets to know that these are compulsorily convertible
cumulative debentures (CCCDs) raised by the group.
This represents 15,062,600 compulsorily convertible cumulative debentures of INR 10 each,

carrying an interest rate of 12.5%p.a. They are convertible into equity shares in the ratio of 1:1 at
the end of 20 years from the date of issuance. The interest on these debentures shall accrue from
the expiry of 18 months from the commercial operations date.
An investor notices that these CCCDs are present only in the consolidated financials and are absent in the
standalone financials; therefore, it indicates that these are raised by any subsidiary of Rain Industries Ltd.
Moreover, their presence in the consolidated financials without being cancelled in the intra-group
transactions on consolidation indicates that the subsidiary of the company has raised these CCCDs from
outside parties.
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In addition, there is no mention of these CCCDs in the related party transactions table at page 180 in the
annual report, indicating that these are not subscribed by the promoters but by any outside third party.
However, there is no mention in the annual report about which subsidiary has raised these CCCDs.
Moreover, an investor is not able to find out any board resolution or any intimation to the shareholders of
Rain Industries ltd in the previous annual reports of the company about raising these CCCDs. It might be
because of the reason that the CCCDs are raised by a subsidiary and the board of Rain Industries Ltd would
have given approval as the majority shareholder in the subsidiary, which might not have needed approval
from the public shareholders of Rain Industries Ltd.
Nevertheless, an investor suddenly comes across this equity dilution in the form of 1.5 cr CCCDs in the
2016 annual report.
In addition, the quick manner in which these CCCDs, which had a tenor of 20 years, had appeared in 2016
annual report, in the same quick manner, they disappeared in the 2017 annual report.
While analysing the 2017 annual report in detail, an investor finds a sum of ₹15.06 cr, which is reduced
from borrowings and seems to be adjusted into “other equity” in the “Reconciliation of Balance Sheet as at
December 31, 2016” section.
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After that, there is no mention of these compulsorily convertible cumulative debentures (CCCDs) anywhere
in the subsequent annual reports.
An investor notice that these CCCDs, which are a liability/loan in the balance sheet are different from the
other compulsory convertible debentures (CCDs) of ₹15.67 cr, which is an asset/investment done by the
Rain group in its subsidiary Rain Coke Ltd.
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The investment by Rain Industries Ltd in the CCDs of Rain Coke Ltd makes its appearance in the 2016
annual report, are present in the 2017 annual report as well but they disappear in 2018 annual report as Rain
Industries Ltd sold Rain Coke Ltd in 2018 to GreenKo group.
Rain Coke Limited is a 51% owned company which is involved in generation of

Solar power. As the Group does not control Board and other partners have
significant participating rights, the Group’s interest in Rain Coke Limited has
been accounted for under the equity method of accounting under Ind AS 111-
“Joint arrangements”. The investment in Rain Coke Limited has been sold to
GreenKo Group on December 15, 2018.
Therefore, while reading the annual reports of Rain Industries Ltd, an investor should not get confused
between the liability of compulsorily convertible cumulative debentures (CCCDs) raised by the group in
one of its subsidiaries with the investment/asset of compulsory convertible debentures (CCDs) done by
Rain Industries Ltd in Rain Coke Ltd in 2016.
If we focus on the compulsorily convertible cumulative debentures (CCCDs) of ₹15.06 cr raised by the
group in 2016, which give the right to the subscriber to convert them into 1.5 cr shares, then the investor
does not get sufficient information from the annual report about many key aspects. The investor does not
get to know the purpose of these CCCDs, which subsidiary had raised them, who invested in them, why
none of the subsequent annual reports had any disclosure on them if they had a tenor of 20 years before
conversion.
An investor may contact the company directly to seek clarifications and further information on these
compulsorily convertible cumulative debentures (CCCDs).
5) Related party transactions of Rain Industries Ltd:

While reading the annual reports of the company, an investor comes across some transactions between the
company and the entities controlled by the promoters/related party entities, which are of significant size.
These transactions provide some insights to the investors.
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a) Rain Enterprises Private Ltd (REPL):
While reading the 2018 annual report, an investor notices some large transactions with one of the promoter
owned entity, Rain Enterprises Private Ltd (REPL).
2018 annual report, page 284
An investor notices that in 2018, Rain Industries Ltd provided an advance of ₹230 cr to REPL, which was
refunded by REPL within the year. Similarly, in 2017, Rain Industries Ltd provided an advance of ₹443 cr
to REPL out of which it refunded ₹396 cr within the year. The balance ₹47 cr in 2017 is shown as the
purchase of services from REPL in the annual report.
2018 annual report, page 284
An investor should note that many times such transactions of advances to related parties, which are refunded
by them within the year act as short-term interest-free loans to the related parties in order to meet cash needs
during the year.
In addition, while reading the related party transaction in the 2018 annual report and comparing it with the
related party transactions of the 2017 annual report, an investor notices a strange thing. The advance of
₹443 cr given by Rain Industries Ltd to REPL and the refund of ₹396 cr by REPL to Rain Industries Ltd in
2017, which is present in the 2018 annual report, is not present in the 2017 annual report. In addition, the
purchase of services of ₹47 cr from REPL in 2017, which is present in the 2018 annual report shared above,
is not present in the related party transactions table in the 2017 annual report.
The only transaction between Rain Industries Ltd and REPL in 2017 annual report, page 299 is about
“Reimbursement of ocean freight, and other expenses” of ₹5.2 cr.
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Moreover, REPL is the entity through which the promoters own 7.53% stake in Rain Industries Ltd from
2014 until March 2020. Therefore, it is not a case where the status of the company changed from a non-
related party to a related party between 2017 and 2018.
An investor may contact the company directly for any clarifications in this regard.
b) Arunachala Logistics Private Limited (ALPL):
While reading the annual reports of Rain Industries Ltd, an investor notices that the company has
transactions of significant size with another promoter entity Arunachala Logistics Private Limited (ALPL).
ALPL at its website claims itself to be “one of the biggest fleet operators in south India owning a huge
number of Heavy trucks operating all over South India” at its website (https://www.arunachala.biz/)
Rain Industries Ltd did transactions of ₹365 cr (2019), ₹349 cr (2018), ₹317 cr (2017), and ₹305 cr (2016)
with ALPL.
An investor would appreciate that such large value transactions between the company and the promoters’
entities carry a potential of shifting economic benefits from the minority shareholders to the promoters if
they are not at a fair market price. If the company pays a comparatively higher price to the promoter entity
for its services than what it could get at independent third-party vendors, then it may be equivalent to
shifting of economic benefit from minority shareholders to the promoters.
In addition, similar to the case of Rain Enterprises Private Ltd (REPL) shared above where the transactions
with REPL of 2017 are present in the 2018 annual report; however, they were absent in the 2017 annual
report. In the case of ALPL, an investor notices that the transactions between Arunachala Logistics Private
Limited (ALPL) and Rain Industries Ltd in 2016 are present in the 2017 annual report, but they are absent
in the 2016 annual report. In fact, the 2016 annual report does not even mention ALPL as a related party.
The 2016 annual report does not mention the name of Arunachala Logistics Private Limited (ALPL) as a
related party.

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An investor may think that in 2016, Rain Enterprises Ltd might have business dealings with ALPL but it
might not be a related party in 2016. This can be because the promoters might have acquired the company
only in 2017. As a result, ALPL might have become a related party in 2017 only. Nevertheless, while
preparing the 2017 annual report, the company might have disclosed its dealings with ALPL of 2016 even
though it was not a related party in 2016.
This can be one of the possibilities. However, when an investor tries to find more data about Arunachala
Logistics Private Limited (ALPL), then she notices that the directors of the company are two persons with
Reddy surname and they are directors of ALPL since 2000 and 2002 respectively. (Source: Zaubacorp
Corporate Database)
An investor would appreciate that if someone purchases/takes over a company, then the usual first step is
to change the directors in control to bring in herself or her own people as directors. Since the current
directors of ALPL are in the position since 2000 and 2002; therefore, it is unlikely that the ALPL underwent
an ownership change in 2017.
Investors may do their own due diligence in this regard or contact the company for clarifications.
This is important because if in the subsequent annual reports, an investor finds related party transactions
related to previous years, which are not disclosed in previous annual reports, then she would always be
sceptical about relying on the data presented by the company in its annual reports. Say, while reading the
2019 annual report, the investor would always feel that the data in 2019 may not be the complete data and
the 2020 annual report to be published next year may disclose transactions belonging to the year 2019, with
some related parties that are not disclosed in 2019 annual report currently.
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c) Rain Entertainments Private Limited (REPL)
While analysing the past annual reports, an investor notices that Rain Industries Ltd had transactions with
a promoter owned entity, Rain Entertainments Private Limited (REPL).
An investor notices that in 2012, Rain Industries Ltd had given an advance of ₹10 cr to purchase raw
material to REPL and then in 2013, it gave an additional advance of ₹19.9 cr to REPL for purchasing raw
material.
2013 annual report, page 121-122:
The amount receivable by Rain Industries Ltd from Rain Entertainments Private Limited (REPL) increased
to ₹123 cr in 2014.
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When an investor tries to find out more information about the business activity of Rain Entertainments
Private Limited (REPL), then she is not able to find a lot of information about the company on the internet
except an expired job posting by the company on job portal “Naukri” for the position of “Cinema Project
Operator”.
If Rain Entertainments Private Limited (REPL) is a company that runs cinema screens, then an investor is
left confused about the nature of raw material that Rain Industries Ltd is buying from REPL.
An investor may do her own further due diligence and contact the company directly for any more
clarifications.
6) Frequent disruptions in plants of advanced materials/chemical division of

Rain Industries Ltd:
While reading the past annual reports and other company disclosures, an investor notices that the
manufacturing plants of advanced materials (previously called chemicals) division face disruptions
frequently.
In 2017 annual report, Rain Industries Ltd intimated its shareholders that the performance of the chemicals
division suffered due to “unplanned shutdowns”.
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During CY 2017, our Chemicals business segment generated ₹ 17.9 billion in net revenue, an
increase of 5.3% as compared to ₹ 17.0 billion during CY 2016.….Despite increase in revenue,
the Adjusted Operating Margin decreased from 14.7% to 7.5% due to increases in operating
expenses and raw material prices coupled with unplanned shutdowns.
The plants of this division, now reorganized as “Advanced Material” faced “unplanned shutdowns” in 2018
as well.
During CY2018, our Advanced Materials business segment generated ₹ 34.8 billion in net revenue,
an increase of 8.8% as compared to ₹ 32.0 billion during CY2017.……The adjusted operating
margin decreased from 16.8% in CY2017 to 10.9% in CY2018 due to an increase in operating
expenses and raw material prices, coupled with unplanned shutdowns.
The advanced material division again faced “unplanned shutdowns” in 2019.
During CY2019, our Advanced Materials business segment generated ₹ 31.3 billion in net revenue,
a decrease of 10.0% as compared to ₹ 34.8 billion during CY2018.……..The operating margin
decreased from 11.5% in CY2018 to 9.9% in CY2019 due to an increase in operating expenses
and raw material prices, coupled with unplanned shutdowns.
Even in the Q1-2020, the Naphthalene derivatives plant (a part of advanced materials business division)
faced disruptions.
May 2020 conference call transcript, page 4:
Naphthalene derivates also saw lower sales during this quarter and were impacted by disruptions
in our system due to electrical outages that resulted in several days of loss production at phthalic
anhydride plant.
Looking at the frequent disruptions year after year at the advanced material plant, which result in production
loss and hamper the business output, an investor starts to question the quality of the assets bought by Rain
Industries Ltd when it purchased Rutgers Group in 2013. This is because the company entered into
chemicals business (later reorganised into advanced materials division) after it had purchased Rutgers in
2013.
The Group has entered into the Chemical Business through the acquisition of RÜTGERS effective
from January 4, 2013.
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We believe that going ahead; an investor should keep a close watch on the disruptions or “unplanned
shutdowns” faced by Rain Industries Ltd.
7) Curious case of Rain Industries Ltd increasing cement capacity when the
utilization levels are very low:
An investor would notice that in a fair market, any manufacturer put in additional investment to increase
the capacity of its plants when it achieves high utilization levels of the plant. If the utilization levels of the
plant are low, then it indicates a situation of oversupply and in such a case, putting more money in the plant
may not be a good decision.
Even in the case of Rain Industries Ltd, an investor notices that during the business down cycles, the
company has closed its unviable facilities that had low capacity utilization. An investor would remember
from the above discussion that the company refused to put additional investments in one of its USA facility
and its China facility when new environment regulations demanded that it should put more money in these
plants to make them relevant for the changed laws.
The company decided that their capacity utilization was low and the huge amount of investment did not
make economic sense.
However, when an investor analyses the cement business of Rain Industries Ltd, then she notices that the
company has started expanding the capacity of the cement business even when the capacity utilization of
the cement business is only about 60%.
In the 2019 annual report on page 153, Rain Industries Ltd intimated its shareholders that the cement
business of the company has had a low utilization over the years. In 2019, the capacity utilization was 62%
whereas it was 56% in 2018.
The Cement business segment operated at an improved average capacity utilization of

approximately 62% during CY2019 compared to approximately 56% in CY2018.
In light of such low capacity utilization, it comes as a surprise to the investor when she notices that the
company has announced an expansion of cement manufacturing capacity at its Kurnool plant.
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We have initiated an upgrade of the line 1 cement mill at the Kurnool plant, which will facilitate
an increase in production from 50 tonnes per hour to 155 tonnes per hour.
This expansion plan comes as a surprise to the investor because, in a fair market scenario, a company will
make investments in any plant only when it is running at near full capacity. In the case of plants where the
capacity utilization is low like 55%-60%, then the manufacturers attempt to first fully utilize the existing
manufacturing capacity before they put more money in the plant towards expansion.
However, when investor reads more about the cement industry and its continuous history of capacity
expansions while its capacity utilization has been low for the entire last decade, then she realises that
somehow, fair market principles do not work for cement industry.
Upon further reading about the cement industry, the investor gets to know that the cement industry has
acted like a cartel that deliberately kept the capacity utilization low to create an artificial scarcity of cement
in order to increase prices and earn higher profits.
The failure of normal market forces of supply and demand and their impact on the price of cement was
noticed many years back by the Builder Association of India (BAI), which primarily consisted of the
consumers of the cement industry. When BAI noticed that despite significant underutilized capacity, the
cement manufacturers are not producing cement in sufficient quantities. As a result, there was an artificial
shortage situation for cement in the market, which has led to an increase in the price of cement.
Therefore, the BAI complained against the cement industry to the Competition Commission of India (CCI)
about the cement manufacturers acting as a cartel by producing a lower amount of cement and keeping the
prices higher. CCI asked the Director General (DG) to conduct an investigation. After the investigation,
CCI found that indeed, the cement manufacturers were coordinating with each other to restrict supply and
keep the prices higher.
As a result, CCI held the cement companies guilty of acting in collaboration with each other to distort the
market and in turn hurting the consumers, the market, and the economy. CCI put a steep penalty of about
₹6,700 cr on various cement manufacturers as well as their industry body, Cement Manufacturers’
Association (CMA). CMA was held guilty of providing the platform where the cement players met and
coordinated their production and pricing strategies in order to keep the prices higher.
Competition Commission of India’s order on the Cement Manufacturers:
The CCI order August 31, 2016, downloadable from the CCI website (click here) is very interesting
reading. We have incorporated the key aspects from the order below, as the order is a very important
resource to understand the cement industry and its dynamics.
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Key aspects of the complaint by the Builders’ Association of India (BAI):
 Page 10: Cement manufacturing units had deliberately reduced their production and produced much
less than their installed capacity to create an artificial scarcity and raise the prices of cement in
order to earn abnormal profits.
Key findings of the investigation conducted by the Director General (DG)
 Page 22: The nature of product being almost homogeneous in nature facilitates oligopolistic
pricing. Further, the cement industry has witnessed a lot of consolidation and concentration of
market in the last decade. However, in terms of market power, none of the companies has the
strength to operate independently. The DG has submitted that the price of cement charged by all
the companies is not at competitive levels and the cement manufacturers have been operating at
a profit margin of more than 25%.
 Page 22: there has been a continuous divergence between the cement price index and the index
price of various inputs like coal, electricity and crude petroleum and the gap has widened since
2000-01. The price of cement is rising faster than input prices.
 Page 23: It has been noted by the DG that the price of cement has been on rise since 2004-05 from
about Rs.150/- per bag to close to Rs.300/- in March 2011, whereas during the same period, the cost
of sales has only increased about 30%. As such, the price of cement has been independent of the
cost of sales. The price of cement is changed frequently by all the companies. Sometimes, the price
changes are made twice a week.
 Page 27: The Opposite Parties were not able to substantiate reasons for low capacity utilisation
even during the period when the demand was high.
 Page 27: According to the DG, reduction in capacity utilisation is not in line with the overall growth
of Indian Economy. Further, as far as consumption is concerned, whatever is produced
by the cement manufacturers is consumed in the market. Therefore, the
argument of cement manufacturers that the capacity utilisation has been lower in recent years
because of low demand is not tenable.
 Page 29: Hence, the DG has concluded that the reduction in capacity utilisation during 2009-10
and 2010-11 was deliberate in order to limit the supply of cement in a concerted manner to charge
a higher price.
The DG, during the investigation found instances where the prices of cement were increased after the
cement manufacturers met in their industry body (CMA) meetings. Page 106:
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Key parts of the order by CCI:
 Page 144: The Commission notes that evidently the growth rate in production lagged substantially
in 2010-11 as against the growth rate of capacity additions. Installed capacity witnessed an increase
in growth rate by 06%, but the production grew marginally by 2.85% only. In comparison, in
the year 2009-10, the growth rate in capacity addition was 19.80% and growth rate in production
was 12.87%.
 Page 151: From the data tabulated above, it is evident that during November 2010, all the cement
companies including the Opposite Parties had reduced production, although in 2009, in some cases,
there was drop in production and in many cases there was increase also.
 Page 161: The Commission further observes that the third and fourth quarter of 2010-11 witnessed
a GDP growth rate of 8.3% and 7.8% at factor cost respectively and
the construction industry witnessed a growth of 9.7% and 8.2% in Q3 and
Q4 of 2010-11 respectively. However, the cement industry registered a negative
growth rate of 5.43% and 3.41% in cement production in November and December of
2010-11, respectively.
 Page 161: Thus, the Commission observes that the cement companies reduced production and
dispatches of cement in a period when the demand from the construction sector was positive during
November and December, 2010 and thereafter raised prices in the months of January and February,
2011,
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 Page 161: Thus, it is evident that the cement companies have been limiting and controlling supply
in periods just before the peak demand season to create artificial scarcity in the market in order
to sell cement at higher prices in the peak season.
As a result, the CCI observed that:
 Page 175: The Commission notes that the impugned action of the Opposite Parties was not
only detrimental to the interests of the consumers but the Opposite Parties also earned huge profit
margins by acting in concert and co-ordination upon prices, production and supplies. Such
conduct deprives not only the consumers but the economy also from
exploiting the optimal capacity utilisation and thereby reducing prices.
Further, the act of the Opposite Parties is also detrimental to the whole economy since cement is a
critical input in construction and infrastructure industry vital for economic development of the
country.
From the above order of CCI on the cartelization of the cement industry, an investor notices that:
 The cement manufacturers reduced production even when there was a demand. After all, whatever
they were producing was getting completely sold in the market.
 Cement manufacturers reduced cement production even at times when the India GDP as well as
the construction industry was growing at a fast pace.
The cement companies appealed against the CCI order in National Company Law Appellate Tribunal
(NCLAT). However, the NCLAT dismissed their appeal in July 2018. (Source: Cement firms lose
cartel case: The Telegraph).
Currently, the cement companies have appealed against the CCI order in the Supreme Court of India
(Source: SC stays CCI penalty of ₹6300 crore on cement firms: Livemint)
Investors would notice that the CCI order explains the unique situation observed in the cement industry
where there was continuously a low capacity utilization. However, still, the cement manufacturers were
adding new capacities. This goes against the normal market behaviour where any company first attempts
to utilize its existing manufacturing capacities fully before it puts up a new manufacturing plant.
Therefore, while assessing the future of the cement business of Rain Industries Ltd, an investor should keep
in mind the above action taken by regulators on the cement players. In case, the Supreme Court of India
upholds the CCI order and the cement industry starts following the fair market principles, then it is expected
that the capacity utilization of cement industry will go up and it may lead to a decline in the price. This, in
turn, can bring down the profitability of the cement manufacturers.
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8) Environmental impacts of business of Rain Industries Ltd:

While reading the annual reports of the company, an investor comes across multiple instances where Rain
Industries Ltd has highlighted that it focuses a lot on the preservation and protection of the environment
while running its manufacturing operations. The company has repeatedly highlighted that it has taken
initiatives that have led to its plants becoming the most environment-friendly plants of its kind in the world.
In addition to making the shaft calciner the most environment-friendly plant of its kind in the world,
the liquid-ammonia scrubbing system will convert the gases into ammonium sulphate, which will
be supplied to Indian farmers as fertiliser.
An investor may note that the company may be absolutely right in its claims that its plants are the most
environmentally friendly in the world and it is making a lot of effort and investments to preserve and protect
the environment from its manufacturing operation. However, still, the process of converting GPC into CPC
and converting coal tar into coal tar pitch (CTP) is pollution causing activity.
Over time, the company has faced many lawsuits in the localities of its plants that the company’s operations
have damaged the environment.
In 2016 annual report, page 182, Rain Industry Ltd disclosed that in the USA a case has been filed against
the company alleging that its manufacturing operations have caused “bodily injury and property damage”.
One of the Group company in United States, along with other co-defendants, is involved in mass
tort lawsuits whereby plaintiffs, in different cases, allege bodily injury and property damage
caused by alleged exposure to by-products from the calcining process at the Moundsville facility.
In 2018 annual report, on page 289, the company disclosed that a case has been filed against the company
in Minnesota alleging that its manufacturing operations have contaminated the storm-water-drainage ponds
of the locality.
During December 2018, several Group Companies, along with four other third party defendants,
was named in a lawsuit filed in federal court in Minnesota.The Plaintiffs, comprised of 9
municipalities in the Minneapolis and St. Paul metropolitan area, and sought a court order
directing the defendants to remove sediment contaminated with Polycyclic Aromatic
Hydrocarbons (PAHs) from their municipal storm water drainage ponds which they claimed
was caused by runoff from the defendants’ products.
Again, in the 2018 annual report, page 289, the company disclosed that in Canada, the manufacturing
operations of the company led to “product discharge and release of vapour emissions” that might have
damaged the environment. Currently, an investigation by the Environment Ministry of Canada against the
company is underway and it may face fines and penalties in future.
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One of the Group Companies in Canada may face certain fines or penalties under Section 14 of
the Environmental Protection Act arising from an investigation by the Ministry of the
Environment, Conservation and Parks into incidents involving product discharge and release of
vapor emissions at one of our facilities during 2017.
In the 2019 annual report, page 308, Rain Industries Ltd intimated the shareholders that during the year in
Canada, the company had two instances of product spills and the Ontario Ministry of Environment
Conservation and Parks (MECP) is investigating these product spills along with an allegation of improper
disposal of hazardous wastes from its distillation plant.
The MECP has initiated separate investigations related to two separate product spills and
the alleged improper disposal of hazardous waste that occurred in connection with activities
undertaken at the Group’s distillation facility in Ontario, Canada on or about July 29, 2019 and
December 17, 2019, respectively.
An investor would appreciate that the concerns related to the impact of manufacturing plants on the
environment demand special attention. This is because there have been numerous instances where the
manufacturing plants that damaged the environment has been ordered to shut down by the authorities.
An investor would remember the case of Graphite India Ltd, which manufactured graphite electrodes from
needle pet coke at its facility in Whitefield, Bengaluru. The facility was ordered to shut down by the
authorities in April 2019 as it caused environmental pollution. (Source: Graphite plant shut,
whitefield breathes easy: Economic Times)
In another such incidence, the largest copper manufacturing plant in India by Vedanta’s Sterlite Copper in
Tuticorin, Tamil Nadu was shut down in May 2018. It was claimed that the plant polluted the environment
and as a result, the local population started protesting against the operations of the plant. The protest
escalated to such an extent that the police had to open fire and as a result, 13 protestors lost their lives.
(Source: Tuticorin protest: Tamil Nadu government orders permanent closure of
Sterlite plant: Economic Times)
Therefore, while assessing the companies whose manufacturing processes cause pollution of the
environment, an investor should be extra cautious. This is because, all of a sudden, the investor may wake
up to the news that the plant’s operations are shut down as the local people realised that the plant is affecting
their health.
In addition, the environment-conscious governments keep on making the environmental regulations tighter
that demand additional investments by the companies to make their manufacturing processes environment
friendly. Many times, these additional investments make the operations of the plant economically unviable
and the company may have to shut down the operations of its plants.
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In the past, Rain Industries Ltd has faced such situations where it had to close one of its plants in the USA
and another plant in China as it could not meet the new stricter environmental regulations.
In 2014, Rain Industries Ltd shut down one of its manufacturing facility in the USA.
In 2015, the company closed its manufacturing facility in China.
Effective January 1, 2015, Rain Group closed the 20,000 Tons capacity Vertical Shaft Calcining
Petroleum Coke (“CPC”) plant in China due to new Environmental regulations applicable from
January 2015 which would require additional investment.
Moreover, the current restrictions imposed by India on the import of green pet coke (GPC) and calcined pet
coke (CPC) in the country are due to harmful impacts of pet coke processing on the environment.
Therefore, investors need to be cautious in their due diligence of the companies that have manufacturing
processes affecting the environment. This becomes especially important when the manufacturing operations
of the company are based in countries where the penalties for any harm caused to the people or the
environment may reach very high levels.
While reading the 2017 annual report of Rain Industries Ltd, an investor notices that one of the employees
of a contractor of the company suffered a leg injury while working. Thereafter, the employee claimed
damages of about ₹12.8 cr. The amount of damages claimed is very high when compared to the
compensation paid in India by companies and govt. to people who sustain bodily injuries at work or in
accidents.
In February 2016, an employee of a Contractor responsible for securing barges at a facility of a

Group Company in the United States allegedly suffered a leg injury while attempting to secure a
barge. The employee is claiming damages of approximately USD 2 million (INR 127.86).
Therefore, an investor should be aware of the extent to which a company’s operations can be impacted if
its operations affect the local people and the environment.
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9) Acquisition of Tarlog GmbH by Rain Industries Ltd; a case of throwing good

money after bad money?
In 2017 annual report, an investor notices that Rain Industries Ltd increased its stake in Tarlog GmbH from
earlier 50% to now 100%.
Tarlog GmbH is a 50% owned which is involved in logistic services located in Germany. On July
1, 2017, the Group acquired the balance 50% resulting to 100% subsidiary for a consideration of
INR 7.62
(Please note that the monetary amounts mentioned in the disclosure above are in ₹ millions.)
However, while reading the previous annual reports, an investor notices that even before the increase in
stake from 50% to 100% in 2017, Rain Industries Ltd in the previous years, had already written down its
entire 50% investment in Tarlog GmbH, due to its poor existing performance as well as its expected poor
performance in the future as well.
Therefore, acquiring 100% stake in a business where one has already written down its existing 50%
investment looks like throwing good money after bad money. When Rain Industries Ltd already knew that
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the business of Tarlog GmbH is very poor, then its decision to put more money to buy out the other partner
holding balance 50% stake seems more like a bailout to the other counterparty.
In addition, an investor notices from the above section from 2016 annual report that the amount of
“Aggregate provision for diminution in value of investments” is mentioned as ₹3.45 million, which is the
amount of investment of Rain Industries Ltd for its existing 50% stake in Tarlog GmbH. However, when
the investor reads the amount paid by Rain Industries Ltd to acquired balance 50% stake, then she notices
that the company paid ₹7.62 million to the other counterparty. It looks like Rain Industries Ltd paid more
than its own investment’s worth to the other counterparty to buy it out.
Nevertheless, in the next year, 2018, the entire investment; the ₹3.45 million relating to existing 50% stake
of Rain Industries Ltd in Tarlog GmbH as well as the additional ₹7.62 million put in by the company to
acquire balance 50% in 2017 is written down to zero.
Looking at the above data, it appears to an investor that the acquisition of balance 50% stake by Rain
Industries Ltd in Tarlog GmbH looks like throwing good money after bad money when it had already
written down its existing 50% stake due to poor existing business performance as well as poor expected
business performance in future.
10) Strange incident where a contractor of Rain Industries Ltd had to file a
lawsuit to recover its dues:
While reading the 2015 annual report, an investor comes to know about an incident where one of the
contractors of Rain Industries Ltd who had worked on the waste heat recovery power plant of the company
in the USA had to file a case against the company to recover its dues. It seems that the court upheld the
claim of the contractor and ordered the company to pay the contractor. Thereafter, the company entered
into a settlement with the contractor and paid the dues of about ₹42 cr.
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Exceptional items include loss on Litigation settlement by US subsidiary of R. 428.80. The

subsidiary was a defendant in a law suit regarding capital works carried out by one of the EPC
contractor for construction of a waste heat recovery power generation unit (“Unit”) in Calcasieu
Parish, Louisiana. During the year, the said subsidiary received an adverse order for claim of
damages and penalties to be paid by the Subsidiary to the contractor. On February 4, 2016,
the parties entered into a confidential settlement agreement to fully and finally resolve this dispute.
When an investor comes across such cases where the suppliers have to raise court cases against any
company to recover their legitimate dues, then it does not reflect well on the reputation of the company as
well as its corporate culture. An investor may note that the dues seem legitimate, as Rain Industries Ltd did
not file any appeal in any higher court of law against the said “adverse order”, which it might have done if
it had felt that the demand is non-genuine. In addition, an investor would note that the amount under dispute
of about ₹42 cr is not a small amount to let go if the company feels that the decision of the lower court of
law is not correct.
11) Loans & advances, inter-corporate deposits to “others” by Rain Industries

Ltd:
While reading the annual reports of the company, an investor comes to know about instances where Rain
Industries Ltd has given significant amounts of money to “others”, which is not classified under advance
to suppliers, capital advance etc.
In 2014, the amount of such advances was about ₹75 cr and in 2015, it was about ₹44 cr.
In the past as well, Rain Industries Ltd had provided advances of ₹60 cr to “others” in 2010 and 2011.
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Looking at these loans & advances of significant size, which do not seem like advance to suppliers,
customers and govt. authorities etc., an investor wishes to know the details of the counterparties who are
benefiting from the economic value of these loans, which ideally belongs to the shareholders of Rain
Industries Ltd.
Going ahead, an investor should keep a close watch on such loans and advances in the financial statements
of the companies and for any clarification contact the company directly for more details. This is because
there have been instances in the corporate world where such loans and advances to “others” have turned
out to be loans to friends & family and those entities that are not classified as related parties as per the
definition of the law.
The Margin of Safety in the market price of Rain Industries Ltd:

Currently (June 14, 2020), Rain Industries Ltd is available at a price to earnings (PE) ratio of about 5.79
based on the last four quarters’ consolidated earnings from April 2019 to March 2020. The PE ratio of 5.79
provides some margin of safety in the purchase price as described by Benjamin Graham in his book The
Intelligent Investor.
However, we recommend that an investor may read the following articles to assess the PE ratio to be paid
for any stock, takes into account the strength of the business model of the company as well. The strength
in the business model of any company is measured by way of its self-sustainable growth rate and the free
cash flow generating the ability of the company.
In the absence of any strength in the business model of the company, even a low PE ratio of the company’s
stock may be signs of a value trap where instead of being a bargain; the low valuation of the stock price
may represent the poor business dynamics of the company.
Further advised reading: 3 Principles to Decide the Ideal P/E Ratio of a Stock for
Value Investors
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Read: How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
Further advised reading: Hidden Risk of Investing in High P/E Stocks
Analysis Summary
Overall, Rain Industries Ltd seems a company that has been growing its business at about 10-15% year on
year for the last 10 years (2010-2019). However, the business performance of the company over this period
has been cyclical, alternating between good periods and poor performance periods. The company witnessed
the upcycle during 2010-2011, which was followed by a long period of subdued performance until 2015.
Thereafter, the company witnessed another uptrend, which reached its peak in 2017. Thereafter, the
performance of the company has again come down until now in 2020.
At the customers’ end, the business performance of the company is closely linked with the phases of the
aluminium industry whereas, at the raw material end, the business performance of the company is dependent
on steel manufacturing and crude oil refining industries. The other industries that affect the demand for
products of Rain Industries Ltd are housing, construction, infrastructure, and automobiles etc. All these
industries behave cyclical in their performance due to their dependence on general economic activities. As
a result, the business performance of Rain Industries Ltd has also followed the cyclical patterns of good
performance and poor performance periods.
The company faces oversupply in most of its product segments along with intense competition from
countries like China in other segments. As a result, the impact of down cycles of the industry in the form
of lower demand and low profitability margins have a significant impact on the company. At times, it had
to cut down the production and even permanently close down its poorly performing plants.
The business of Rain Industries Ltd is capital-intensive with low-profit margins. As a result, to generate
any growth, the company has to rely on debt/external sources of funds because its internal return generation
ability is low.
Over the years, the company has achieved significant growth in its business size by acquiring the world’s
second-largest CPC manufacturer (CII Carbon) in 2007 and the world’s second-largest CTP manufacturer
(Rutgers) in 2013. Both these acquisitions were debt-funded. As a result, Rain Industries Ltd has witnessed
its total debt increase significantly. However, the company is relying on refinancing as a strategy to meet
its debt repayments, which looks like a risky strategy because any event leading to a freeze in credit markets
when its repayment of existing debt is due, can push the company to the brink of survival. In addition, if
the interest rates increase, then the interest expense would consume its already low-profit margin.
The business landscape of Rain Industries Ltd is tough where the shareholders of even the world’s largest
manufacturers of CPC and CTP had to sell their companies or close their manufacturing facilities (e.g.
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Koppers). At times, many of the customers of Rain Industries Ltd go bankrupt, close down their plants, or
reduce production in operating plants in order to survive the down phases of commodity business cycles.
The corporate structure of Rain Industries Ltd is very complex and as a result, frequently, the auditors are
not able to complete the audit of its subsidiaries by the time its consolidated financial statements are
published. As a result, frequently, the consolidated financial statements include unaudited financial
statements of many subsidiaries. This might be one of the reasons that at times an investor notices that some
of the transactions with the related parties in a year (e.g. 2017), which are presented in the subsequent
annual reports (say 2018 annual report) as a part of previous years’ (2017’s) records are not found in the
annual report of the previous year (2017).
In addition, it seems that due to the complex corporate structure of numerous subsidiaries, the management
is not able to provide details of many of its corporate decisions. As a result, frequently, an investor notices
that the company has purchased stakes in some subsidiaries, sold a stake in others, reduced shareholding in
other subsidiaries etc. about which the annual report does not provide any meaningful explanation. As a
result, the investor is left to make her own interpretations of such corporate decisions.
At one such occasion, the company raised compulsorily convertible cumulative debentures (CCCDs) of 20
years duration in one of its subsidiaries, which were subsumed into “other equity” on the transition to the
new Indian Accounting Standards (IndAS). However, the investor is not able to extract any meaningful
information from the annual reports like which subsidiary had raised these compulsorily convertible
cumulative debentures (CCCDs) or who was the counterparty that had subscribed to them and what is their
status now.
While reading the annual reports, an investor notices many transactions with the promoter owned entities
(related parties), where an investor needs to do additional due diligence like payment of advances to a
company, Rain Entertainments Pvt. Ltd, which supposedly runs cinema screens. Other related party
transactions like large advances and their refunds with Rain Enterprises Pvt. Ltd seem like money given to
the related party to meet its short-term funds’ requirements.
The plants acquired by Rain Industries Ltd while taking over the Rutgers Group, which led the company to
enter into chemicals/advanced materials business, seem to face disruptions year after year. It questions the
quality of the assets purchased by the company from Rutgers. In addition, over the years, the company has
faced many lawsuits and investigations regarding the damage to the environment done by its plants in terms
of product spills, improper disposal of hazardous waste, damage to stormwater drainage, bodily injury and
property damage etc. in USA and Canada. An investor should keep a close watch on developments related
to these environmental matters because there have been numerous instances of local authorities closing
down those manufacturing plants that damage the environment.
While assessing the capital allocation decisions of the management, an investor comes across an instance
where the company purchased an additional stake in a company where it had already written off its own
existing investment due to poor business performance and poor future prospects of its business. Such
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instances look like throwing good money after bad money or an attempt to bail out the other counterparties
by buying them out in a poorly performing business.
An investor also comes across an instance where a contractor that had worked on one of the projects of the
company had to resort to a lawsuit in order to recover its due, which the company paid after a court order.
At other instances, an investor notices that the company had paid large loans and advances to “others” who
do not qualify as suppliers or customers or govt. authorities. Due to these instances, it becomes essential
that an investor keep a close watch on the fund flow in the company to assess where the money is coming
from and where it is going.
Going ahead, an investor should keep a close watch on the sales & profit margins of the company to assess
the phase of the industry cycle it is in. In addition, the investor should focus on the debt levels of the
company, its interest costs and ascertain whether the company is able to refinance its debt at the time of
need. Moreover, the investor should monitor the related party transactions as well as loans & advances to
“others”. In addition, the investor should keep a track of the developments on the lawsuits and investigations
related to the alleged environmental issues damages done by the plants of the company.
These are our views on Rain Industries Ltd. However, investors should do their own analysis before making
any investment-related decisions about the company.
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2) Ashok Leyland Ltd

Ashok Leyland Ltd is a part of the Hinduja Group, is one of the leading manufacturers of commercial
vehicles in India. Ashok Leyland Ltd specializes in medium & heavy commercial vehicles and buses.
While analyzing the past financial performance data of Ashok Leyland Ltd, an investor would notice that
the company has many subsidiaries and associate companies. As a result, Ashok Leyland Ltd provides both
standalone financials as well as consolidated financials in its annual reports.
Ideally, we believe that while analysing any company, an investor should always look at the company as a
whole and focus on financials, which represent the business picture of the entire group. Consolidated
financials of any company present such a picture.
However, in the case of Ashok Leyland Ltd, one of the subsidiaries is Hinduja Leyland Finance Ltd, which
is a non-banking finance company (NBFC).
An investor would appreciate that the business model of a manufacturing company and an NBFC are
entirely different. Whereas a manufacturing company primarily relies on generating business value from
its fixed assets and minimizing debt, the NBFCs treat cash as raw material and therefore, raise significantly
high debt to increase their business operations.
Therefore, merging the financials of a manufacturing company and an NBFC is not a good proposition for
an analysis.
As a result, in the case of Ashok Leyland Ltd, we have opted to analyse its standalone financials instead of
the consolidated financials in our analysis.
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Moreover, as per the FY2019 financial position, the standalone sales of the company are ₹29,055 cr against
the consolidated sales of ₹33,197 cr i.e. representing 87.5% of total sales. Similarly, the standalone net
profit after tax (PAT) is ₹1,983 cr against the consolidated PAT of ₹2,079 cr i.e. representing 95.4% of the
total PAT.
Therefore, in the case of Ashok Leyland Ltd, if an investor analyses the standalone financials of the
company, then she is able to analyse about 90% of the overall operations of the company. Nevertheless, an
investor should appreciate that despite covering about 90% of the group operations, the standalone
financials leave out about 10% of the business for which she should analyse the NBFC (Hinduja Leyland
Finance Ltd) separately to supplement her analysis.
Such a piecemeal approach is essential because merging the financials of the manufacturing divisions of
the Ashok Leyland Ltd with its NBFC operations leads to the creation of such consolidated financials,
which are not meaningful to interpret.
With these assumptions in our mind, let us analyse the financial and business performance of the company
over the last 10 years
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Financial and Business Analysis of Ashok Leyland Ltd:

While analyzing the financials of Ashok Leyland Ltd, an investor would note that in the past, the company
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₹7,407 cr. in FY2010 to ₹29,055 cr in FY2019. However, the sales have declined to ₹22,475 cr in the 12
months ending Dec. 2019 (i.e. Jan 2019-Dec. 2019).
In the last 10 years (FY2010-2019), the sales growth of the company has been highly fluctuating.
The company witnessed an increase in sales initially from ₹7,407 cr to ₹13,380 cr in FY2010-FY2012.
However, then the sales declined to ₹10,301 cr by FY2014. Afterward, the sales increased to ₹29,055 cr in
FY2019 only to decline again to ₹22,475 cr in the 12 months ending Dec. 2019 (i.e. Jan 2019-Dec. 2019).
Such kind of sales performance indicates to an investor that the business performance of the company is
exposed to cyclical factors.
While analysing the profitability of the company, an investor would notice that the operating profit margin
(OPM) of Ashok Leyland Ltd has also fluctuated significantly over the years.
The OPM of the company improved from 10% to 11% over FY2010-FY2011. Subsequently, the OPM
declined sharply to 1% by FY2014. Thereafter, the profitability of the company started improving and the
OPM improved to 13% in FY2016. However, the fluctuations in the OPM continued with a decline to 9%
in FY2017, increase to 11% in FY2019, and now again decline to 9% in the 12 months ending Dec. 2019
(i.e. Jan 2019-Dec. 2019).
When an investor notices such kind of cyclical performance in both the sales as well as profitability, then
she acknowledges the need for a deeper understanding of the business of Ashok Leyland Ltd to understand
the factors influencing the business performance of the company. This is because, once an investor has
understood the key factors for Ashok Leyland Ltd, then she would be able to have a view about the expected
In the case of the commercial vehicle industry, an investor would appreciate that it is cyclical in nature.
This is because the sales of commercial vehicles are primarily dependent on the state of the economy, govt.
spending on infrastructure etc., which usually follow a cyclical pattern of demand increase and decline.
The credit rating agency, CARE Ltd., has highlighted this cyclical aspect of the business of Ashok Leyland
Ltd in its credit rating report for the company in April 2020.
The automotive industry is cyclical in nature as it derives its demand from the investments and
spending by the Government and individuals. Domestic CV Industry experienced poor demand
between FY13-15 in the backdrop of slow economic growth. Post FY15 the business sentiments
showed signs of revival. The domestic Commercial Vehicle industry registered 17.6% growth
during FY19 after reporting growth of 20% in FY18. However, growth has witnessed moderation
significantly since the second quarter of FY20 on account of different factors…
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CARE Ltd has highlighted that the automotive business is dependent on the spending and investment by
Govt. and individuals, which results in its cyclical nature of the automotive industry including the
commercial vehicle industry.
Ashok Leyland Ltd also intimated its shareholders about the cyclical nature of the commercial vehicle
industry in its various annual reports. For example, the FY2003 annual report, page 20:
Business risks include cyclical nature of demand for CVs due to economic slowdown, risks
of technological obsolescence due to stricter emission/safety norms and more intense competition.
The inherent cyclical nature of the commercial vehicle industry helps an investor understand the
fluctuations in the sales growth of Ashok Leyland Ltd, which saw phases of increase and decrease in its
sales over the last 10 years.
However, to understand more about the business model of the company and its fluctuating profit margins,
an investor needs to analyse its annual reports.
An investor would acknowledge that annual reports of any company are the best resource to understand its
business dynamics. Ashok Leyland Ltd has provided its annual reports for the past 18 years (from FY2002
to FY2019) on its website. An analysis of these annual reports highlights the key factors influencing the
performance of the company over the years.
An investor would appreciate that fluctuating profit margins of Ashok Leyland Ltd indicate that it is not
able to pass on the impact of the increase in its raw material costs to its customers. Ashok Leyland Ltd has
faced this situation of inability to pass on the increase in input costs for a very long time. One of the key
reasons for the inability to pass on the increased costs to the customers is the intense competition faced by
the company in its business.
In the 2006 annual report, the company highlighted its inability to pass on the increased costs to the
customers due to competition.
FY2006 annual report, page 37:
Concerns on input cost increases due to commodity price movements, coupled with cost increases
arising out of improvements in product designs and upgradation to meet emission norms
continue. Due to competitive pressures, these cost increases have not been fully passed on to the
customers. The commercial vehicle industry in India will witness a higher level of competition
following the proposed plans announced by automotive companies both Indian and foreign.
The company highlighted the intense competition in the industry to its shareholders again in 2007 when it
said that many international competitors have entered the Indian market and opening up of the trade barriers
has further increased the competition and custom duty is no longer protecting Indian players.
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Competition in the domestic CV market has increased significantly with many multi-national
companies setting up manufacturing base. Consequent to the policy of opening up the
market, customs duty, as a trade barrier, is likely to lose its influence.
The company also highlighted to the shareholders that it is not able to pass on the increase in its costs to its
customers.
The current year witnessed increase in commodity prices and consequent price increase claims by
suppliers. In addition, there were cost increases on account of compliance with statutory
regulations, which has not been fully passed on to the customers. The margin also suffered due to
full impact of previous year’s input cost increases.
The precarious position of Ashok Leyland Ltd indicating its inability to pass on the increase in input costs
to its customers, which is reflected in its annual reports of 2006 – 2007, is continuing in recent times.
In the conference call conducted by the company in February 2020 to discuss its Q3-FY2020 result, the
company expressed helplessness at the extent of the cutthroat competition in the commercial vehicle
industry.
While answering a question about the situation of prevailing discounts in the industry, the chief financial
officer & whole-time director of the company, Gopal Mahadevan replied that the competitors of the
company are willing to go to any extent of discounting to gain market share.
February 2020 conference call, page 21:
The discount levels are still high. So these are very average numbers. They defy any logic, to be
honest with you, and they are at 5.25 lakhs on an average on a vehicle, and it is very, very difficult,
they are about 5.25 lakh on a vehicle. They have gone by about 25000 on an average. But this
quarter, we have witnessed some deals being taken off as which are going at 7 lakhs, etc. It is
ridiculous to, I mean they are selling at 24 lakhs, 22 lakhs, 23 lakhs and say, “I will give a 7 lakhs
discount.” I mean I do not make that kind of money.
So it is very desperate. I do not understand the game, I think competition is in the game of acquiring
market share at any cost.
From the above discussion, an investor would appreciate that the commercial vehicle industry in India has
been intensely competitive for long. The competition levels increased further in the last decade when the
multi-national players entered in India.
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An investor would appreciate that in the presence of the cutthroat competition, it is very difficult for the
manufacturers to pass on the increase in raw material costs to the customers without the fear of losing
market share. The importance of market share for the management of any company, including Ashok
Leyland Ltd is reflected in the following comment by Mr. Gopal Mahadevan in the February 2020
conference call, page 21:
And for us, so let me tell you, market share is very, very important as the company. I mean that is
why it is one of the most important metrics for our bonuses also. If we do not achieve market share,
we do not get bonus. So for us, market share is very, very important. We want to grow. We want
to be in a leading position. But we have to ensure that we are doing it in a methodical manner.
That is all.
Therefore, an investor would notice that if a company in the commercial vehicle segment decides to pass
on all the increases in the input costs, then it would lose its market share to its competitors who are willing
to give higher discounts to gain customers.
As a result, investors would notice that during down-cycles phases, the companies bear the increased costs
themselves and their profit margins fall. Only when the industry enters the up-cycle phase and the demand
of the commercial vehicles increases, then the manufacturers are able to increase prices and in turn enjoy
higher profits.
Therefore, investors would appreciate that due to the cyclical nature of the commercial vehicle industry and
the intense competition to gain market share, the commercial vehicle manufacturers witness repeated
periods of high sales growth with increasing profit margins followed by periods of declining sales with poor
profit margins.
It is the basic nature of the commercial vehicle industry and therefore, an investor should always keep this
aspect of the industry in mind whenever she analyses any commercial vehicle manufacturer. If she notices
that the commercial vehicle manufacturers have witnessed a period of good sales growth with high-profit
margins, then she should keep in mind that soon the industry would face the down-cycle and the sales
growth, as well as profit margins, would decline.
While looking at the tax payout ratio of Ashok Leyland Ltd., an investor notices that for most of the last 10
years (FY2010-2019), the tax payout ratio of the company has been less than the standard corporate tax
rate prevalent in India.
One of the key reasons for the lower tax payout ratio is the availability of the tax incentives available to the
company due to the location of its manufacturing plants. The plant of the company located at Pant Nagar
in Uttarakhand has exemptions for both excise duty as well as income tax on the profits.
July 2014 placement document for the Qualified Institutional Placement (QIP), page 132 (Source: BSE)
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The Pant Nagar facility also benefits from certain fiscal incentives from the state government and
the GoI, e.g. we are exempt from excise duties levied on vehicles manufactured in the Pant Nagar
facility until March 2020. In addition, 100% of the profits at the Pant Nagar facilities are tax
exempt until Fiscal 2014 and 30% of its profits are tax exempt from Fiscal 2015 until Fiscal 2019.
As a result, of the tax incentives available to Ashok Leyland Ltd, the company has reported a lower tax
payout ratio in most of the last 10 years (FY2010-2019).
Operating Efficiency Analysis of Ashok Leyland Ltd:
a) Net fixed asset turnover (NFAT) of Ashok Leyland Ltd:

When an investor analyses the net fixed asset turnover (NFAT) of Ashok Leyland Ltd in the past years
(FY2010-19), then she notices that the NFAT of the company has seen the following trends:
 FY2010-FY2012: Increase
 FY2013-FY2014: Decrease
 FY2015-FY2019: Increase
An investor notices that the NFAT of any company represents how efficiently it uses its fixed assets to
generate sales.
When an investor analyses the manufacturing capacity of Ashok Leyland Ltd, then she notices that the last
major capacity addition was done by the company in FY2010, when its manufacturing capacity increased
to 150,500 vehicles per annum.
With the commissioning of the modern, fully integrated plant at Pantnagar (Uttarakhand) in
March 2010, additional capacity for 75,000 vehicles/year has been created. Overall annual
capacity for the Company is now 1,50,500 vehicles (on a two-shift basis).
After almost 10 years, in 2020, the manufacturing capacity of the company is still the same 150,500.
Credit rating report of Ashok Leyland Ltd by CARE, April 2020, page 3:
ALL has seven manufacturing plants (total manufacturing capacity of 1,50,500 units) across five
different locations, with the parent plant at Ennore….
Therefore, an investor would notice that over the last 10 years, the vehicle manufacturing capacity of Ashok
Leyland Ltd has stayed constant at 150,500 vehicles per annum.
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With a fixed manufacturing capacity, the NFAT of any company will depend on capacity utilization. In the
years, when the company produces and sells a higher number of vehicles, then its NFAT increases. On the
contrary, during the years in which it sells a lower number of vehicles, then its NFAT decreases.
The following chart from the FY2019 annual report of Ashok Leyland Ltd indicating the number of vehicles
sold by the company in the last 10 years provides a good glimpse to the investor about the changing
utilization levels of the manufacturing capacity of the company.
When an investor analyses the data of the vehicle sales by Ashok Leyland Ltd over the last 10 years with
the data of the NFAT of the company over the last 10 years, then she notices that there is a direct correlation
between the two.
 FY2010-FY2012: Vehicle sales: Increase | NFAT: Increase

 FY2013-FY2014: Vehicle sales: Decrease | NFAT: Decrease
 FY2015-FY2019: Vehicle sales: Increase | NFAT: Increase
Therefore, looking at the above data, an investor can understand the reasons behind the fluctuating NFAT
of Ashok Leyland Ltd over the last 10 years (FY2010-2019).
b) Inventory turnover ratio of Ashok Leyland Ltd:

While analysing the inventory turnover ratio (ITR) of the company, an investor notices that the ITR of
Ashok Leyland Ltd had been witnessing an increasing trend from 5.9 in FY2010 to 12.5 in FY2016 when
it suddenly witnessed a sudden decline in FY2017 to 9.5.
After FY2017, the ITR of the company has again improved to 13.1 in FY2019.
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When an investor reads the annual reports of the company to understand the reason for the decline of ITR
in FY2017, then she gets to know that in this period, India has transitioned in vehicle emission norms from
BS-III to BS-IV. As a result, Ashok Leyland Ltd was stuck with an inventory of BS-III vehicles that it
could not sell before the deadline of March 31, 2017.
Therefore, the company had to modify some of the BS-III vehicles to BS-IV and export the rest of the
vehicles to countries where such vehicles could be sold. For this interim period, the company had to keep
those vehicles as an inventory, which resulted in an increase in inventory of the company from ₹1,625 cr
in FY2016 to ₹2,631 cr in FY2017.
The company explained this situation to the shareholders in its FY2017 annual report, page 51-52:
Out of 9572 BS III vehicles identified for disposal, 2449 vehicles have been earmarked for export
markets and balance 7123 vehicles have been identified for conversion from BS III to BS IV…..
….Since these vehicles are not saleable in India, pending conversion to BS IV these were classified
as WIP in the accounts.
Therefore, in FY2017, due to the transition from BS-III to BS-IV, the presence of a large inventory of
vehicles led to a decline in the inventory turnover ratio of the company.
c) Analysis of receivables days of Ashok Leyland Ltd:

While analysing the receivables days of the company, an investor notices that the receivables days of the
company used to about 30-35 days during FY2010-2012, which deteriorated to 48 days in FY2014. An
investor would remember from the discussion above that FY2014 was one of the toughest periods for the
company in which it reported a sharp decline in the profit margins.
An investor can appreciate that during the tough business phase (industry down-cycle); the company might
have had to give incentives to buyers in terms of a higher credit period for selling vehicles. In addition, the
customers would have delayed payments on existing sales due to a tough business environment.
As a result, an investor would notice that in FY2014, the receivables days of the company deteriorated to
48 days. However, afterward, as the business environment for the commercial vehicle industry improved
then the receivables days of the company declined to 20-22 days until FY2019.
Looking at the inventory turnover ratio as well as at receivables days of Ashok Leyland Ltd, an investor
would notice that the company has been able to keep its working capital position under control. As a result,
it has not witnessed a lot of money being stuck in the working capital.
cash flow from operations (cCFO) of the company for FY2010-19.
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Over FY2010-19, Ashok Leyland Ltd Limited reported a total cumulative net profit after tax (cPAT) of
₹7,732 cr. During the same period, it reported cumulative cash flow from operations (cCFO) of ₹15,009 cr.
An investor notices that the company has very high cCFO when compared to the cPAT over the last 10
years (FY2010-2019).
the situations in which companies tend to have the CFO lower than their PAT and the situations when the
companies tend to have the CFO higher than the PAT.
Learnings from the above-shared article will indicate to an investor that the cCFO of Ashok Leyland Ltd is
 Interest expense of ₹2,390 cr (a non-operating expense) over FY2010-2019, which is deducted

while calculating PAT but is added back while calculating CFO.
 Depreciation expense of ₹4,224 cr (a non-cash expense) over FY2010, which is deducted while
Therefore, an investor would appreciate that during FY2010-2019, Ashok Leyland Ltd has kept its working
operations.
The Margin of Safety in the Business of Ashok Leyland Ltd:

target growth.
While analysing the SSGR of Ashok Leyland Ltd, an investor would notice that the company has
consistently had a low SSGR (negative to 0%) over the years. Only in recent years (FY2019), the SSGR
has improved to 7%, which is primarily due to a recent increase in the net profit margin (NPM) of the
company in FY2019 and the increase in NFAT of the company to all-time high levels of 5.21.
depends on the NFAT and net profit margin (NPM) of a company.
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Where,

An investor would notice that in FY2019, the NPM has increased to 7% and the NFAT has increased to
5.21, which is the highest level for the company over the years. It indicates that the company is making
more money and using it efficiently. As a result, the SSGR has increased to 7% in FY2019.
However, an investor would appreciate that the company has been growing at a rate of 15-20% over the
years. The historical low SSGR indicates that the company does not seem to have the inherent ability to
grow at the rate of 15-20% from its business profits. As a result, investors would think that Ashok Leyland
Ltd would have to raise money from additional sources like debt or equity to meet its investment
requirements.
An investor would appreciate that in the first half of the last 10 years, the company was relying on debt to
meet its growth requirements. As a result, it witnessed its debt levels increase from ₹2,280 cr in FY2010 to
₹4,690 cr in FY2014.
The debt of the company was increasing fast and in turn, was becoming disproportionate to the level
promised by the company to its stakeholders like its lenders. As a result, the company had to raise equity
money by way of a qualified institutional placement (QIP) in FY2015 to repay its debt and bring the
leverage level under control.
During the year under review, your Company successfully placed 185,200,000 equity shares
through the process of Qualified Institutional Placement (QIP) and raised an amount of ₹666.72
crore. The proceeds received through QIP were utilised for the purpose for which it was raised.
While reading the placement document for the above-mentioned QIP of Ashok Leyland Ltd
(source: BSE), an investor notices that the debt levels of the company had breached the covenants
(financial conditions) put by its lenders indicating that the debt position of Ashok Leyland Ltd was getting
out of control.
QIP placement document of Ashok Leyland Ltd, July 2014, page 39-40:
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The Company has breached certain covenants under some of its financing arrangements. The
lenders may declare a default and enforce their remedies under these financing documents, and
lenders under our other financing agreements that contain cross-default provisions could take
similar actions. If such remedies are exercised, our financial condition and results of operations
could be adversely affected.
(1) Bank of America Facility Agreement: The Company had breached the financial covenant on
total gross borrowings to tangible net worth for the testing period ended March 31, 2012,…..
(2) DBS Bank Facility Agreement: The Company had breached the financial covenants being total
debt to EBITDA and EBITDA to interest expense for the testing period ended March 31, 2014;
(3) Mizuho Corporate Bank Facility Agreement: The Company had breached the financial
covenants on total debt to EBITDA (on consolidated basis) and EBITDA to interest expense (on
consolidated basis) for the testing period ended March 31, 2014;………..
Similarly, as per the placement document, Ashok Leyland Ltd had also breached the covenants put by (4)
Barclays Bank Facility Agreement, (5) Nova Scotia Asia Facility Agreement, and (6) Bank of Tokyo
Facility Agreement as well.
An investor would appreciate that breaching the covenants (financial conditions) put in by the lenders is a
serious situation and the company had to do something to rectify it. If the company continues to be in a
position of breach of these covenants, then the lenders could declare a default by the company and in an
extreme case, could ask the company to return the money that it had taken from them.
As a result, the fast increasing debt beyond the levels permitted by the lenders made Ashok Leyland Ltd
raise money from equity and in turn, bring the debt & the leverage levels under control.
Nevertheless, since FY2015 onwards, the company has been able to keep its debt levels under check and
in turn, has brought the debt levels down from ₹4,690 cr in FY2014 to ₹632 cr in FY2019.
An investor may believe that the debt level of the company in FY2019 (₹632 cr) is lower than the FY2010
levels (₹2,280 cr); however, as per the latest available balance sheet of Sept 30, 2019, the debt level of the
company has increased again to ₹2,585 cr. (= 1,168 + 1,417)
Q2-FY2019 results of Ashok Leyland Ltd, page 4:
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Nevertheless, if an investor only compares the debt level of Ashok Leyland Ltd from FY2010 to FY2019,
then she notices that the company has managed to reduce its debt level over the last 10 years.
company over the last 10 years (FY2010-2019).
b) Free Cash Flow (FCF) Analysis of Ashok Leyland Ltd:

While looking at the cash flow performance of Ashok Leyland Ltd, an investor notices that during FY2010-
19, the company had a cumulative cash flow from operations of ₹15,009 cr. During this period it did a
capital expenditure (capex) of ₹5,481 cr. As a result, an investor would note that over FY2010-2019, Ashok
Leyland Ltd had a free cash flow (FCF) of ₹9,528 cr. ( = 15,009 – 5,481).
In addition to the above FCF, the company has also had non-operating income (other income) of ₹1,715 cr
over the last 10 years and inflow from QIP of about ₹666 cr.
Therefore, in the last 10 years (FY2010-2019), Ashok Leyland Ltd had total surplus funds of ₹11,909 cr (=
9,528 + 1,715 + 666)
An investor notices that the company has used these surplus funds in the following manner:
 Reduce debt by ₹1,648 cr from ₹2,280 cr in FY2010 to ₹632 cr in FY2019 (2,280 – 632 =
1,648)
 Interest expense as per the profit and loss statement: ₹2,390 cr
 Dividends to equity shareholders: ₹3,355 cr (without dividend distribution tax) and
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 About ₹3,165 cr as an increase in cash & investments. The cash & investments has
increased from ₹845 cr from FY2010 to ₹4,010 from FY2019 (4,010 – 845 = 3,165). The increase
in cash & investments primarily represents the money invested by Ashok Leyland Ltd in its
subsidiaries, joint ventures, and associate companies etc.
It is advised that investors should always try to analyse the surplus cash generation by companies in the
past along with its utilization so that they may trace the funds generated by the company over the years
from its business.
any company.
Additional aspects of Ashok Leyland Ltd

On analysing Ashok Leyland Ltd and reading its publicly available past annual reports of 18 years (from
FY2002 to FY2019), and reading other public documents an investor comes across certain other aspects of
the company, which are important for any investor to know while making an investment decision.
1) Management Succession of Ashok Leyland Ltd:

An investor notices that the Hinduja group took over Ashok Leyland Ltd in 1987. Currently, Mr. Dheeraj
Hinduja, aged 48 years, is the non-executive Chairman of the company.
As on March 31, 2019 the Board comprised of ten Directors. Of the ten directors, nine (90%) are
non-executive directors and eight (80%) are independent directors including a woman director,
with Mr. Dheeraj G Hinduja as Non-Executive Chairman
An investor would notice that the member of the promoter, Hinduja family is a non-executive member of
the board of directors, therefore, the executive leadership of the company has been in the hands of
professional managers.
Mr. R. Seshasayee handled the executive leadership of the company as the managing director of the
company from April 1998 to March 2011 (Source: LinkedIn profile of Mr. R. Seshasayee)
Since April 2011 to March 2019, Mr. Vinod Dasari led the company as the managing director (MD) and
chief executive officer (CEO) of the company (Source: LinkedIn profile of Mr. Vinod Dasari)
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As Mr. Dasari left Ashok Leyland Ltd to join Royal Enfield, the company has appointed Mr. Vipin Sondhi
as MD & CEO of the company from December 12, 2019. Mr. Sondhi was MD & CEO of JCB India for
about 14 years before joining Ashok Leyland Ltd in November 2019.
December 12, 2019 press release:
12 December 2019, Chennai: Ashok Leyland, India’s leading commercial vehicles manufacturer
today announced that Vipin Sondhi has been appointed as MD & CEO of the Company with
immediate effect…
Vipin Sondhi formally joined the Hinduja Group in November 2019 from JCB, where he was the
MD & CEO – India, South East Asia & Pacific and a member of their Global Executive Leadership
Team. He was MD & CEO of JCB lndia for about 14 years…
Therefore, an investor would notice that over the years, Ashok Leyland Ltd has appointed non-promoters
as executive leaders of the company in the positions of MD & CEO and member of the promoter (Hinduja)
family is present on the board as a non-executive chairman.
2) Project Execution by Ashok Leyland Ltd:

While analysing the past performance of the company, an investor notices that Ashok Leyland Ltd has been
able to execute its capacity expansion projects at frequent intervals.
 FY2005: manufacturing capacity increased from 50,000 vehicles per year to 67,500 vehicles per
year. FY2005 annual report, page 36:
Productivity improvements, lean manufacturing initiatives and outsourcing strategies have

enabled the Company increase its vehicle build capacity to 67,500 units per annum with marginal
investments.
The Company has overcome production bottlenecks to a large extent and has achieved satisfactory
productivity levels in all plants, following the recent wage settlements. This has enabled the
Company to increase its vehicle manufacturing capacity to 77,200 units from 67,500 units.
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During the year, the Company incurred capital expenditure of Rs.6,135 million. This expenditure
covers investments in capacity expansion / upgradation and R&D. During the year, the capacity
increased from 77,200 vehicles to 84,000 vehicles.
With the commissioning of the modern, fully integrated plant at Pantnagar (Uttarakhand) in
March 2010, additional capacity for 75,000 vehicles/year has been created. Overall annual
capacity for the Company is now 1,50,500 vehicles (on a two-shift basis).
Similarly, the company could complete the plants for:
 Manufacturing bus bodies in UAE in December 2010

 Manufacturing construction equipment with JCB in October 2010
 Manufacturing plant for high pressure die casting components under Ashley Alteams India Private
Ltd in FY2010
 Manufacturing plant for light commercial vehicles in a joint venture with Nissan.
Therefore, an investor would appreciate that the company has been able to complete its capacity expansion
projects at frequent intervals to support its growing business.
3) Capital allocation decisions by Ashok Leyland Ltd:

While analysing the history of the company, an investor comes across many instances where Ashok Leyland
Ltd invested shareholders capital into different ventures in order to generate returns for the shareholders.
An analysis of some of these decisions provides an insight into the capital allocation efficiency of the
management of Ashok Leyland Ltd.
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A) Investments in Optare Plc. UK:
In the FY2011 annual report, the chairman of Ashok Leyland Ltd intimated its shareholders that the
company has bought out a 26% stake in Optare Plc. UK, which is a bus manufacturer.
Your Company acquired a 26% controlling stake in Optare plc, U.K. a reputed bus
manufacturer with a proven experience in hybrid and electric vehicles. They manufacture a range
of urban buses with integral architecture including the iconic Solo midi bus range. The acquisition
will further strengthen the leadership position of your Company in the domestic market and is also
expected to open up new frontiers in the developed markets.
The management of the company seemed very optimistic about the acquisition and expected that it would
help them in both Indian and overseas markets.
Ashok Leyland invested about ₹50 cr to acquire 26% of Optare Plc in FY2011.
The next year, in FY2012, Ashok Leyland Ltd increased its stake in Optare Plc from 26% to 75.1%.
During the year, your Company along with the investment arms have increased their stake to
75.1% (from earlier 26%) in Optare plc UK.
An investor would think that if Ashok Leyland Ltd had paid about ₹50 cr to acquire a 26% stake last year
(FY2011), then now in FY2012, to increase the stake to 75%, it would have to pay roughly double the
money spent to buy 26% stake. This is assuming that the value of the business of Optare is not changed
over this period.
However, as the company disclosed that it has taken an additional stake in Optare along with its investment
arms (separate subsidiaries) and it did not publish consolidated financials until FY2014; therefore, an
investor is not able to determine the amount of money invested by the company to purchase total 75.1%
stake in FY2012.
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In FY2012, an investor can only get to know from the standalone financials that Ashok Leyland Ltd invested
only ₹8 cr additional in Optare. This is because, as per the FY2012 annual report of Ashok Leyland Ltd, its
investment in Optare stood at about ₹58 cr.
Further analysis of the FY2012 annual report, reveals that the additional stake to Ashok Leyland Ltd seems
to be allotted by Optare as a part of some restructuring exercise.
In lieu of 19,55,57,828 Ordinary Shares in Optare plc of face value of British Pence 1 each, the
Company was allotted an equal number of New Ordinary Shares with face value of British Pence
0.1 each and Deferred Shares with face value of British Pence 0.9 each pursuant to a restructuring
exercise by Optare plc. The value of shares received has been recorded at lower of cost and fair
value.
Moreover, upon looking at the details of further transactions between Ashok Leyland Ltd and Optare in
FY2012, it seems clear that the company was taking over many of the liabilities of previous shareholders
of Optare.
As per the FY2012 annual report, page 86, Ashok Leyland Ltd gave loans of ₹37 cr to Optare.
In addition, Ashok Leyland Ltd gave guarantees of about ₹97 cr to/on behalf of Optare Plc.
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As a result, an investor would note that by FY2012, Ashok Leyland Ltd had invested ₹58 cr in equity, ₹37
cr in loan to Optare, and given an additional guarantee of ₹97 cr to Optare.
Due to the absence of consolidated financials in FY2012, an investor is still not able to understand the
complete picture of the transaction.
The investor gets a better picture of this transaction with Optare Plc in FY2014 when Ashok Leyland Ltd
merged its investment arms with itself.
FY2014 annual report, page 23-24:
Your Company wanted to merge its investment arms, and as the first step these entities viz., Ashley
Holdings Limited, Ashley Investments Limited and Ashok Leyland Project Services Limited were
merged into one of the group operating entities viz., Ashley Services Limited. The appointed date
of the merger was from 1 st April 2013 and it was approved by the Honourable High court of
Madras on 15 th July 2013. In a subsequent development, Ashley Services Limited (ASL), which
became a Wholly Owned Subsidiary of Your Company was merged with the Company itself.
Therefore, the investment arms of Ashok Leyland Ltd were merged with the company and as a result, the
standalone financials now could reflect the total investment done by Ashok Leyland Ltd along with its
investment arms in Optare.
FY2014 annual report indicates that until then, Ashok Leyland Ltd had invested a total amount of ₹329 cr
in its equity shares and ₹50 cr as loans.
FY2014 is also an important year in the history of Ashok Leyland Ltd because, from FY2014, the company
started reporting consolidated financials. As a result, the investors could now assess the performance of
subsidiaries of the company. (Please note that the website of Ashok Leyland Ltd provides the annual reports
of its subsidiaries only from FY2015 onwards. Until FY2014, only the annual report of Ashok Leyland Ltd
is provided).
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Investors noticed that in FY2014, the three Optare group companies disclosed in the annual report has
reported net losses. FY2014 annual report, page 118 (₹ Lac):
 Optare plc* (183.57)

 Optare UK Limited (303.64)
 Optare Group Limited (3,589.95)
Put together, the three Optare companies had reported a loss of about ₹40 cr in FY2014.
In FY2015, Optare Plc and its subsidiaries reported a net loss of ₹30 cr (FY2015 annual report, page 144).
An investor realizes that despite high hopes on the acquisition in FY2011 and subsequent additional
investments in Optare via equity and loans as well as guarantees, the Optare group companies were
reporting losses until FY2015.
In FY2016, Optare Plc along with its subsidiaries reported a loss of ₹92 cr (FY2016 annual report, page
147).
As a result, it does not come as a surprise to the investor that when she notices that in FY2016, Ashok
Leyland Ltd acknowledged the poor fate of this investment and in turn, provided about ₹150 cr for
impairment/loss on its investments in Optare.
Your Company, after studying its intrinsic value of investments in Joint Ventures
(JV)/Associates/Subsidiaries has made an impairment provision of ₹ 107 Crores towards Albonair
Germany, ₹ 150 Crores towards Optare Plc, UK and ₹ 5 Crores towards Albonair India.
The impairment provision done by Ashok Leyland Ltd serves as an acknowledgment that the investment
in Optare has turned bad and it is not working out as planned. This seems normal as businesses need to
invest in growth opportunities and many times, these decisions may not work as expected. Whether the
acknowledgment of impairment would have taken 5 years (from FY2011 to FY2016) or it should have
come earlier all the while when Optare was making losses, can be a subject of debate. However, it is better
late than never.
However, what comes as a surprise to the investor that despite acknowledging that the investment in Optare
has turned bad, Ashok Leyland Ltd put an additional ₹169 cr in Optare in FY2016 in the form of loans.
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This looks like a situation of throwing good money after bad money, which is not good capital allocation.
In FY2017, Optare Plc along with its subsidiaries reported another loss of ₹100 cr. (FY2017 annual report,
page 201).
As a result, Ashok Leyland Ltd had to make provisions/acknowledgment of loss of additional ₹526 cr for
its investments/loans/obligations for Optare Plc.
(JV)/Associates/Subsidiaries has made an impairment provision of ₹121 Crores towards Albonair
GmbH and Albonair India, in addition, ₹526 Crores has been provided towards Optare Plc. for
the loans and obligation.
page 179.
By this time, an investor would acknowledge that the losses in Optare year after year, stop looking
surprising to the investor now. However, what comes as a surprise that in FY2018, Ashok Leyland Ltd
further invested ₹248 cr in Optare Plc.
Your Company has invested in cash ₹ 248 Crores in Optare Plc., ₹ 494 Crores in Hinduja Leyland
Finance and ₹ 4 Crores in Ashok Leyland Defence Systems. Thus, in all your Company had
invested ₹ 746 Crore in cash in Joint Venture (JV) / Associates / Subsidiaries during the year.
This again seems like a situation of throwing good money after bad money. Despite a continuous streak of
losses of Optare Plc, in FY2018, Ashok Leyland Ltd instead of attempting to recover its investments had
put in additional commitment in Optare and increased its stake in the company from 75.11% to 99.08%.
During the year under review, the Company has increased its stake in Hinduja Leyland Finance
Limited from 57.20% to 61.85% and in Optare PLC from 75.11% to 99.08%.
The increase in the stake of Ashok Leyland in Optare Plc in FY2018 seems to be due to the conversion of
the loan worth ₹263 cr into equity.
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page 246).
However, an investor notices that in FY2019, Ashok Leyland Ltd invested an additional ₹18 cr in Optare
Plc.
Your Company has invested ₹124 Crores in Hinduja Leyland Finance Limited, ₹43 Crores in
Ashok Leyland (UAE) LLC, ₹18 Crores in Optare Plc, ₹10 Crores in Albonair (India) Private
Limited, ₹6 Crores in Ashley Aviation Limited, ₹1 Crore in Ashley Alteams India Limited and ₹1
Crore in other Companies. Thus, your Company has invested ₹203 Crores in cash in Joint
Venture/Associates/Subsidiaries during the year.
By now, an investor realizes that what started in FY2011 as a small investment of ₹50 cr in Optare Plc for
taking 26% stake has by FY2019, ballooned into losses of about ₹1,000 cr for the shareholders of by Ashok
Leyland Ltd. The shareholders have lost almost all the money put by Ashok Leyland Ltd in Optare Plc by
way of equity or loans and are now holding 99.08% of the company.
Despite a significant amount of investment of money and management time, Optare Plc has never reported
profits at least since FY2014 when Ashok Leyland Ltd started reporting consolidated financials and the
shareholders started to know the performance of its subsidiaries.
However, instead of cutting down their losses and attempting to recover whatever little can be done from
Optare; the management is continuously putting in more money in Optare year after year. It seems like a
case of continuously throwing good money after bad money.
Moreover, when the investor analyses the February 2020 conference call of Ashok Leyland Ltd to discuss
the results of Q3-FY2020, then she notices that the management of the company is looking to throw an
additional ₹80-90 cr after Optare. The management of Ashok Leyland Ltd is still trying to turnaround the
company.
Q3-FY2020 results conference call, February 2020, page 9:
Gopal Mahadevan: Yes. The investments in subsidiaries is the main subsidiary where we have
a challenge is in Optare, and there, we spent about £10 million per annum approximately. So, that
is about 80 Crores, 90 Crores. Now we are trying to turn around the company.
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To an investor, Optare Plc seems like a case where the previous shareholders of Optare have handed over
the bag to the shareholders of Ashok Leyland Ltd and exited the company.
It remains to be seen whether the management of Ashok Leyland Ltd is now able to turnaround Optare Plc
despite spending & losing hundreds of crores of rupees and about a decade of management’s time. Or how
much more time and investment, the management of Ashok Leyland Ltd throws behind Optare Plc before
they realize that sometimes, it is better to cut your losses and move ahead.
B) Investments in Albonair GmbH:
While reading the FY2008 annual report, an investor notices that Ashok Leyland Ltd acquired 100% shares
of Albonair GmbH, Germany.
Your Company has made an investment in Albonair GmbH for development of vehicle emission
treatment / control systems and products..…… Over the longer term, these cost effective systems
are also expected to find application in Europe and the USA. The venture has already commenced
operations……
In FY2008, Ashok Leyland Ltd invested ₹0.16 cr in the equity shares of Albonair GmbH (FY2008 annual
report, page 63):
Cash flows from Investing activities includes acquisition of 100% shares in Albonair GmbH (cost
Rs. 1.59 million)
In addition, in FY2008, Ashok Leyland Ltd gave a loan of about ₹4.7 cr to Albonair GmbH (FY2008 annual
report, page 82).
In FY2009, Ashok Leyland Ltd gave an additional loan of ₹25 cr to Albonair GmbH (FY2009 annual report,
page 52).
An investor would remember from the above disclosure of Ashok Leyland Ltd that Albonair GmbH was
acquired primarily to serve Europe and USA markets. Therefore, in FY2010, Ashok Leyland Ltd
incorporated a new company Albonair (India) Private Limited to cater to China and India markets.
During 2007, your Company established Albonair GmbH for development of vehicle emission
treatment / control systems and products. In order to cater to the emerging markets in China and
India, Albonair (India) Private Limited was incorporated during the year.
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Moreover, in FY2010, Ashok Leyland Ltd gave additional loans of about ₹50 cr to Albonair GmbH
(FY2010 annual report, page 57).
During FY2011, Ashok Leyland Ltd invested an additional ₹60 cr in equity shares of Albonair GmbH and
₹4 cr in shares of Albonair (India) Private Limited.
In FY2012, Ashok Leyland Ltd gave additional loans of about ₹48 cr to Albonair GmbH (FY2012 annual
report, page 84).
In FY2013, Ashok Leyland Ltd gave additional loans of about ₹60 cr to Albonair GmbH (FY2013 annual
report, page 86).
An investor would note that Ashok Leyland Ltd did not use to report consolidated financials until FY2014.
As a result, investors were unaware of the financial performance of its subsidiaries before FY2014.
In FY2014, when Ashok Leyland Ltd reported its consolidated financials for the first time, then the investor
got to know the financial performance of Albonair GmbH and Albonair (India) Private Limited.
While reading the FY2014 annual report, the investor realizes that during the year, Albonair GmbH had
made a loss of ₹70 cr whereas Albonair (India) Private Limited had reported a loss of ₹0.6 cr. (FY2014
annual report, page 118.
In addition, in FY2014, Ashok Leyland Ltd reported that it had given additional loans of about ₹28 cr to
Albonair GmbH. Moreover, Ashok Leyland Ltd also disclosed that it has invested about ₹150 cr in the
equity shares of Albonair GmbH whereas it has repaid ₹150 cr of loans to Ashok Leyland Ltd. The impact
of the last transaction of loan repayment and investment into equity shares seems like conversion of loans
given by Ashok Leyland Ltd to Albonair GmbH into equity shares of Albonair GmbH. (FY2014 annual
report, page 65-66).
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The impact of the above transactions seems that in FY2014, Ashok Leyland Ltd gave additional ₹28 cr to
Albonair GmbH whereas previous loans of ₹150 cr were converted from loan to equity, indicating that that
₹ 150 cr of loan is probably not going to come back.
In addition, in the FY2014 annual report, Ashok Leyland Ltd made another important disclosure. It said
that it has not included Albonair companies along with some other subsidiaries in the consolidated
financials because; it is keeping them under “held for sale” segment.
In doing so, three of the subsidiaries viz., Avia Ashok Leyland Motors Limited s.r.o, Albonair
GmbH and Albonair India Pvt. Ltd. India have been excluded from the consolidation, as these
entities are “held for sale” viz., these entities are kept for sale within the next 12 months.
This disclosure indicated that the management of Ashok Leyland Ltd had decided that it is going to sell
both Albonair GmbH and Albonair (India) Pvt. Ltd within the next 12 months.
This may be due to the losses reported by Albonair GmbH despite a significant amount of investments done
by Ashok Leyland Ltd in it. Albonair GmbH was acquired by Ashok Leyland Ltd in FY2008, the company
has made investments of hundreds of crores of rupees in Albonair and invested almost 6 years of
management time, and it was still making losses.
The conversion of loans of ₹150 cr given by Ashok Leyland Ltd to Albonair GmbH into the equity of the
company in FY2014 may be an attempt to clean up the balance sheet to present a better picture to the
prospective buyer.
However, it seems that Ashok Leyland Ltd could not find any buyer for Albonair Gmbh.
In FY2015, Ashok Leyland Ltd invested another ₹25 cr in the equity shares of Albonair GmbH (FY2015
annual report, page 133).
Ashok Leyland Ltd did not consolidate Albonair companies in its consolidated financials in FY2015 as
well, as it kept them under “held for sale” segment.
Albonair GmbH and Albonair (India) Private Limited (subsidiaries of the Holding Company) have
been “held for sale” and therefore, not considered for the preparation of the Consolidated
Financial Statements.
It seems that Ashok Leyland Ltd could not find any buyer for Albonair GmbH again and therefore, in
FY2016, it reclassified it from “held for sale” to “held for use” and included it in the consolidated financial
statements.
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Albonair GmbH and Albonair (India) Private Limited are classified from ‘Held for sale’ to ‘Held
for use’.
However, in FY2016, Albonair GmbH along with its subsidiaries reported a loss of about ₹18 cr. (FY2016
As a result, of the poor financial performance, after almost 8 years of the initial investment, Ashok Leyland
Ltd acknowledged that its investment in Albonair GmbH is not producing expected results. Therefore, it
recognized an impairment/acknowledgment of loss of ₹107 cr on its investments in Albonair GmbH. It also
recognized a loss of ₹5 cr for its investment in Albonair India Pvt. Ltd.
(JV)/Associates/Subsidiaries has made an impairment provision of ₹ 107 Crores towards Albonair
Germany, ₹ 150 Crores towards Optare Plc, UK and ₹ 5 Crores towards Albonair India.
However, an investor noticed that in FY2016, Ashok Leyland Ltd invested an additional ₹40 cr in Albonair
GmbH.
Your Company has invested in cash ₹ 46 Crores in AL John Deere, ₹ 40 Crores in Albonair
Germany, ₹ 6 Crores in Gulf Ashley Motor, ₹ 5 Crores in Ashok Leyland Defence Systems and ₹
3 Crores in Ashley Alteams. Thus in all your Company had invested ₹ 100 Crores in cash in Joint
Venture (JV)/Associates/Subsidiaries during the year.
Thereafter, in FY2017:
Albonair GmbH reported a further loss of ₹21 cr (FY2017 annual report, page 201).
Ashok Leyland Ltd recognized additional impairment/loss of ₹121 cr on its investments in Albonair GmbH.
(JV)/Associates/Subsidiaries has made an impairment provision of ₹121 Crores towards Albonair
GmbH and Albonair India,..
However, Ashok Leyland Ltd invested an additional ₹29 cr in Albonair GmbH and ₹5 cr in Albonair India.

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Your Company has invested in cash ₹144 Crores in Hinduja Leyland Finance Limited, ₹29 Crores
in Albonair GmbH, ₹25 Crores in Ashok Leylend John Deere Construction Equipment Company
Private Limited, ₹5 Crores in Albonair (India) Private Limited…..
In FY2018, Ashok Leyland Ltd gave financial guarantees of ₹72 cr to/on behalf of Albonair GmbH
In FY2019, Albonair GmbH made a loss of ₹0.46 cr and Albonair India Pvt. Ltd made a loss of ₹2.23 cr
Moreover, in FY2019, Ashok Leyland Ltd, invested ₹10 cr in Albonair India Pvt. Ltd.
Limited….
In the conference call in February 2020, while discussing the Q3-FY2020 results, the management of the
company indicated that it is still looking at investing about 3-4 million pounds (i.e. about ₹27-36 cr) per
annum in Albonair.
Q3-FY2020 results conference call, February 2020, page 9:
But the company is still far from being profitable. But what we are trying to do is to reduce the
cash inflow. Other than that, I do not see any investment happening in Albonair as of now, maybe
3 million, 4 million. But other than that, I do not see any of our other subsidiaries taking any cash.
Therefore, in the case of Albonair companies as well, it may seem to an investor that the management of
Ashok Leyland Ltd is continuing with a loss-making acquisition where it has invested hundreds of crores
of rupees and about 12 years of management time. However, even after all these investments, the company
is not able to generate any return to the shareholders of Ashok Leyland Ltd and is making losses.
The management of Ashok Leyland Ltd acknowledged in the past that the investments in Albonair are not
working as per expectations. The management has already provided for/acknowledged losses on its
investments in Albonair. It tried to sell Albonair by keeping it in “held for sale” for two years in FY2014
and FY2015. However, it could not find any buyer for Albonair.
Nevertheless, instead of cutting its losses, Ashok Leyland Ltd is throwing good money after bad money
and is looking forward to investing more money in Albonair every year.
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C) Investment in a joint venture with John Deere, USA:
In FY2009, Ashok Leyland Ltd entered into a joint venture with John Deere, USA to manufacture
construction equipment.
A Joint Venture Agreement was signed on September 30, 2008 with John Deere, USA
for manufacture and marketing of Construction Equipment. The Joint Venture is scheduled
to commence production by early 2010 and will initially roll out backhoes and four-wheel-drive
loaders.
In FY2010, the company invested ₹29 cr in the joint venture and a 48-acre land was acquired on the outskirts
of Chennai.
Subsequent to the incorporation of the company, 48 acres of industrial land has been acquired at
Gummidipoondi on the outskirts of Chennai. Initial start up plan has been prepared and activities
are proceeding as per the plan. Construction of the first shop has started and initial products are
expected to roll out by February 2011.
In FY2011, the manufacturing facility was completed and the plant was inaugurated.
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A 48-acre manufacturing facility at Gummidipoondi, on the outskirts of Chennai was inaugurated

in October 2010. The first product – the backhoe loader — is undergoing field trials and is
expected to be launched by third quarter of 2011-12.
By FY2011, the company has invested incremental ₹13 cr in the JV and the total investment stood at ₹42
cr.
Then the sequence of making additional investments in the JV started.
 In FY2012, Ashok Leyland Ltd invested ₹18 cr in the JV (FY2012 annual report, page 84).
 In FY2013, the company invested ₹50 cr in the JV (FY2013 annual report, page 47).
While looking at the business performance of the JV in the annual reports of the company, an investor
notices that the JV never made a profit since the day it had started operations. Every year, in its annual
reports, Ashok Leyland Ltd declared that its shares of expenses from the JV are higher than its share of the
revenue.
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As a result, it does not come as a surprise that in FY2016, the company decided to stop all the activities in
the JV and proceeded for its liquidation.
The financial statement of Ashok Leyland John Deere Construction Equipment Company Private
Limited (‘Entity’) used for consolidation has been prepared based on liquidation basis considering
the fact that there is a significant curtailment of business operations impacting its continuity and
thereby adversely affecting the appropriateness of “ Going concern “ as an assumption.
Subsequent to the year end, an agreement has been executed on 21st April, 2016 amongst the joint
venture partners and the entity for business liquidation subject to approval of the Board and
Shareholders.
In addition, Ashok Leyland Ltd acknowledged the loss of the money invested in the JV and as a result, it
acknowledged that it had to suffer a loss of ₹233 cr on the investment in the JV.
Thus in all, your Company has impaired ₹ 558 Crores during the year. Further, your Company
has disposed off the shares in Ashok Leyland John Deere at a loss of ₹ 233 Crores.
However, the series of losing money in the JV did not end there.
Ashok Leyland Ltd invested more money in the JV:
In the FY2019 annual report, Ashok Leyland Ltd intimated its shareholders that the JV with John Deere
has initiated voluntary liquidation.
During the year, Ashok Leyland John Deere Construction Equipment Company Private Limited
(ALJD) reduced its paid-up capital from ₹5,150,363,000 to ₹355,842,460 and returned the money
to the shareholders. Further, ALJD has initiated voluntary liquidation process and has appointed
a liquidator under Insolvency and Bankruptcy Code, 2016.
Therefore, an investor would acknowledge that the joint venture of Ashok Leyland Ltd with John Deere to
manufacture construction equipment proved a failure from the start as the JV could never make money
from the start and finally after losing hundreds of crores of rupees of the shareholders, Ashok Leyland Ltd
decided to wind it up.
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Losing money in construction equipment business should not come as a surprise to investors as in the
analysis of another manufacturer of construction equipment (Escorts Ltd); we learned that the construction
equipment division of Escorts Ltd despite being in existence since 1971 still goes through long periods of
continuous losses. In 2017, Escorts Ltd intimated its shareholders that its construction equipment division
turned EBITDA positive for the first time after suffering losses for consecutive 22 quarters.
D) Joint venture with Nissan for light commercial vehicles:
Ashok Leyland Ltd entered into a joint venture with Nissan Motor Co. Ltd in FY2008 to manufacture light
commercial vehicles (LCV). The company expected to start selling LCVs by FY2011.
To become a full range player, the Company has entered into a joint venture with Nissan
Motors Co. Ltd., Japan to develop and produce light commercial vehicles for both the domestic
and export markets. The two organizations have been working closely over the past few months
and the alliance is expected to roll out its first product by 2010-11.
In FY2009, the Ashok Leyland Ltd invested about ₹11 cr as equity in the three companies formed as JV
with Nissan (FY2009 annual report, page 40) and in addition, provided advances of about ₹12 cr (FY2009
However, during this period, the world was facing a global financial meltdown and it was not a wonder that
both Nissan and Ashok Leyland Ltd had a relook on their plans.
In FY2010, the companies decided to postpone the plans to create a new manufacturing plant for LCV and
instead, decided to produce LCVs from their existing manufacturing facilities. In any case, due to low
demand, the existing manufacturing capacities had spare capacity.
Due to the slowdown in the economy and in the commercial vehicle industry, the JV modified its
manufacturing strategy to optimise investments. This new strategy helped leverage the surplus
capacities available at the two parent companies, with the ability to increase JV production
capacity at the appropriate time. The JV is expected to roll out its first LCV product in April 2011.
In FY2010, Ashok Leyland Ltd invested an additional ₹63 cr in the Nissan JVs.
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In FY2011, Ashok Leyland Ltd invested a significant amount of ₹174 cr in Nissan JVs.
In FY2012, Ashok Leyland Ltd invested about ₹57 cr in the Nissan JVs.
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After deferring the creation of a dedicated manufacturing plant for LCV in FY2010, now in FY2013, the
companies finally decided to create a dedicated plant for LCVs.
The Joint Venture Company, in which your Company is an equal partner with Nissan, is preparing
for a new manufacturing facility near Chennai dedicated for LCV.
As a result, Ashok Leyland Ltd had to invest an additional ₹80 cr in the JV.
During the year, your Company invested ₹80 Crores in AL-Nissan JV and ₹50 Crores in AL-John
Deere JV.
In FY2014, Ashok Leyland Ltd invested another ₹107 cr in the Nissan JV (FY2014 annual report, page
65).
Simultaneously, the management communicated to the shareholders in the annual report that the JV with
Nissan is going strong and adding great value.
Your Company’s joint venture with Nissan Motors continues to go strong, creating value for our
customers through contemporary, superior products.
However, it was a different story that the JV has never made a profit until now. Every year, as per the details
disclosed by Ashok Leyland Ltd in the annual reports about its share of revenue and expenses from the JV,
it turned out that the expenses were always higher than the revenue.
More importantly, in the FY2014 annual report, the company declared its consolidated financials for the
first time and an investor came to know that in FY2014, Nissan JV had made a lost ₹174 cr. (FY2014 annual
report, page 118).
Ashok Leyland told its shareholders about the intense competition present in the LCV market. An investor
could get the impression that the competitive intensity in the LCV market has reached unsustainable levels.
In the Light Commercial Vehicle (LCV) segment, ‘DOST’ model suffered decline in sales volume
due to aggressive discounting and unsustainable finance schemes offered by the competition.
Nevertheless, all the positive talks of the management about the JV seemed contrary to the actual financial
position of the JV when the investor noticed that in FY2015, the JV had a loss of whopping ₹791 cr.
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It seemed that Nissan had had enough in the JV and did not see any future.
Disputes arose between the Ashok Leyland Ltd and Nissan. (Source: The Hindu)
 Nissan alleged that one of the JV companies has not paid it a sum of ₹2.3 cr and therefore, it served
a termination notice.
 Ashok Leyland Ltd filed a court case again Nissan alleging that Nissan was producing its own
branded cars from the JV manufacturing facilities instead of the light commercial vehicles (LCVs).
Despite the allegations and counter-allegations, one thing was sure that the JV is not creating the value that
it was supposed to do.
Therefore, it did not come as a surprise that in FY2015, Ashok Leyland Ltd acknowledged that the
investments in the JV have performed poorly. As a result, Ashok Leyland Ltd recognized a loss of ₹214 cr
on its investments in the JV.
Your Company, after studying its intrinsic value of investments in Nissan JV using independent
valuer has made an impairment provision of ₹ 214 crore out of total investment of ₹ 509 crore in
the three Nissan JV entities.
In fact, the situation of the underperformance of the investments in the JV was such that while Ashok
Leyland Ltd recognized a loss of only 42% of its investments in the JV (214/509 = 42%), Nissan took a
complete 100% loss on its equal investments (it was an equal investment JV).
Nissan thought it better to cut its losses and sold its entire stake in the JV to Ashok Leyland Ltd for ₹1
(ONE RUPEE).
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Consequent to the purchase of the stake from the JV partner at a purchase consideration of ₹1 for
all the three said entities and the subsequent finalisation of business strategy for LCV business……
The sale of the entire stake by Nissan in the LCV joint ventures at ₹1 to Ashok Leyland Ltd when it had
invested more than ₹500 cr in the JV seemed like a step where Nissan acknowledged the futility of putting
more good money after bad money. Instead, Nissan thought it better to cut its losses and move out from a
JV, which was not producing any value to its shareholders.
We had seen in multiple above cases that Ashok Leyland Ltd seems to drag its feet on the investments that
had not generated any significant value to its shareholders. Instead, we noticed that Ashok Leyland Ltd
keeps on putting additional money in those failed ventures in the hope that it may create some value at some
time in the future.
This is in complete contrast to the response of Nissan that we saw in the case of LCV joint venture with
Ashok Leyland Ltd where it did not put more money in the JV when it realized that the JV is not generating
any value after putting a significant amount of investments of money and management time.
Nevertheless, in FY2015, when the JV had made a loss of ₹791 cr, Ashok Leyland Ltd put in additional
₹37 cr in the JV. FY2015 annual report, page 29:
Your Company has invested in cash ₹37 crore in the AL-Nissan JV, ₹ 12 crore in Albonair
GmbH….
In FY2016, the LCV company made a loss of ₹61 cr. (FY2016 annual report, page 161)
In FY2017, Ashok Leyland Ltd acquired the stake of Nissan at ₹1 and renamed the LCV entity from Ashok
Leyland Nissan Vehicles Limited to a new name Ashok Leyland Vehicles Limited.
In FY2017, the LCV entity reported a loss of ₹2.5 cr. (FY2017 annual report, page 242).
In FY2018, the LCV business reported a profit of 134 cr for the first time, almost 10 years after its
conception in FY2008. (FY2018 annual report, page 214).
However, subsequently, Ashok Leyland Ltd merged the LCV companies with itself. As a result, from
FY2018, it is not possible to ascertain whether the LCV segment is making profits or losses. This is because,
in its segmental result, Ashok Leyland Ltd clubs all the commercial vehicles in a single segment and does
not provide a separate break-up for light commercial vehicles.
As a result, the results of the LCV division will be clubbed with the medium & heavy commercial vehicles
division and an investor would find it difficult to ascertain the financial performance of the LCV division.
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E) Avia Ashok Leyland Motors s.r.o:
In FY2007, Ashok Leyland Ltd intimated its shareholders that it has acquired the truck business unit of
AVIA a.s. in Prague, Czech Republic. Ashok Leyland Ltd wished to use this acquisition to enter into
European markets.
During the year under review, Ashok Leyland acquired Avia Truck Business Unit (TBU) in Czech
Republic, formerly owned by the Daewoo Group and later by Odien Capital Partners, a private
investment firm. Rechristened AVIA Ashok Leyland Motors s.r.o. (AALM), this associate company
marks the first significant instance of establishing an overseas presence through the acquisition
route. AALM is a strategic beachhead and will drive the Company’s growth wide and deep into
Eastern Europe, Western Europe and other second hemisphere markets.
An investor notices that the Avia truck business unit had changed many hands. It had been with the Daewoo
group at one point in time. After that, it was owned by Odien Capital. Investors would notice that many
times, the business units that change so many hands are the ones that are very difficult to run. As a result,
in the past, different owners had bought these units, tried their hand at running them and if failed, then they
sell it to some other willing investor who wishes to try her luck.
Therefore, after changing multiple owners, the truck business unit of Avia now landed in the hands of
shareholders of Ashok Leyland Ltd.
By FY2009, Ashok Leyland Ltd had made the following additional investments in the Avia unit:
 Loans & advances: ₹217 cr (FY2009 annual report, page 52),

 Financial guarantees of ₹212 cr (FY2009 annual report, page 53)
By FY2011, the company increased its commitment to Avia unit further by putting in about ₹130 cr in its
equity shares. (FY2011 annual report, page 66).
However, all the great hopes with the business came crashing down in FY2012, when Ashok Leyland Ltd
recognized losses of ₹145 cr on its investments in Avia unit.
By FY2014, the losses/provisions for the Avia unit had reached almost ₹250 cr.
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*The carrying value of ownership interest in Avia Ashok Leyland Motors s.r.o. is net of diminution
in its value aggregating ₹24,996.46 lakhs (including ₹744.32 lakhs provided upto March 31,
2013).
Moreover, when Ashok Leyland Ltd presented its consolidated financials for the first time in FY2014, then
investors got to know that in FY2014, the Avia unit had reported a loss of ₹84 cr. (FY2014 annual report,
page 118).
Therefore, it does not come as a surprise when investors notice that in FY2014, Ashok Leyland Ltd put
Avia unit up for sale.
In doing so, three of the subsidiaries viz. Avia Ashok Leyland Motors Limited s.r.o, Albonair
GmbH and Albonair India Pvt. Ltd. India have been excluded from the consolidation as these
entities are “held for sale” viz., these entities are kept for sale within next 12 months.
4) Intra-group transactions of Ashok Leyland Ltd:

While analysing the financial performance of the company, an investor notices that Ashok Leyland Ltd has
been involved in transactions with other entities of the Hinduja group (i.e. its associate and fellow
subsidiaries).
We believe that an investor should focus on some of these transactions.
A) The merger of Hinduja Foundries Ltd with Ashok Leyland Ltd:
While analysing the FY2017 and FY2018 annual report, an investor gets to know about the merger of
Hinduja Foundries Ltd (HFL) with Ashok Leyland Ltd.
During the year under review, the Board of Directors of the Company at their meeting held on
September 14, 2016, approved the draft scheme of amalgamation of Hinduja Foundries Limited
(HFL) with the Company and their respective shareholders and creditors, under Sections 391 to
394 of the Companies Act, 1956 subject to regulatory approvals. The Appointed Date for the
scheme of amalgamation was October 1, 2016.
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In FY2018, the amalgamation of Hinduja Foundries Ltd with Ashok Leyland Ltd was completed when
Ashok Leyland Ltd granted its shares to the previous shareholders of Hinduja Foundries Ltd.
During the year under review, the Share Allotment Committee at their meeting held on June 13,
2017 had issued and allotted 80,658,292 fully paid equity shares of ₹1/- each to the equity
shareholders of the erstwhile Hinduja Foundries Limited (Transferor Company)…
As per the closing share price of Ashok Leyland Ltd on BSE on June 13, 2017 (₹95.10), the company paid
a price of about ₹767 cr to acquire the equity stake in HFL. Alongside, Ashok Leyland Ltd took over all
the liabilities of HFL including its debt of about ₹460 cr it had at the end of FY2016.
Thereby, an investor would acknowledge that effectively, the shareholders of Ashok Leyland Ltd paid an
enterprise value of ₹1,227 cr to acquire the business of Hinduja Foundries Ltd (767 + 460 = 1,227).
When an investor looks at the financial performance of Hinduja Foundries Ltd until March 2016, then she
notices that the company has not made any profits for the last 5 years (after FY2011). From FY2012 until
FY2016, the company had reported a total loss of ₹1,052 cr. In addition, during H1- FY2017, the company
reported another loss of ₹61 cr.
Moreover, an investor realizes that the business of HFL does not seem to have the ability to repay its debt
on its own. An analysis of the FY2016 annual report of HFL indicates that it had raised equity of about
₹400 cr in the year to meet its urgent obligations like repayment of the debt, capital expenditure, working
capital requirements etc.
FY2016 annual report of Hinduja Foundries Ltd, page 86:
During the current period the Company has raised equity share capital of ₹39,984
Lakhs (comprising 134,400,000 equity shares of ₹10/- each at a premium of ₹19.75/- per equity
share) through issue of 11,200 Global Depositary Receipts (GDR)….… have been utilized
for repayment of a portion of its outstanding debt, for capital expenditures, for working capital and
for general corporate purposes as may be permissible under applicable law.
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Even before FY2016, in FY2013, Ashok Leyland Ltd had to support Hinduja Foundries Ltd (HFL) by
investing in ₹300 cr.
Further your Company invested ₹300 Crores in Hinduja Foundries Ltd. and another ₹187 Crores
in Hinduja Energy (India) Ltd. In all, your Company invested ₹862 Crores by way of investment
in Associate / Group / Joint Venture Companies.
Overall, HFL seems like a business that seems to have lost its ability to make profits, is reporting large
losses every year, and has a debt of ₹460 cr yet to be repaid to the lenders that it has no ability to repay
from its business operations.
HFL seemed to be surviving by taking money from its shareholders including Ashok Leyland Ltd and other
Hinduja group companies.
In such a scenario, an investor may feel that the equity value of ₹767 cr to such a business is high. (Please
note that valuation of any business is highly subjective and different investors may use different ways to
value a business).
An investor may believe that HFL may have certain assets that can be sold by Ashok Leyland Ltd to recover
some of its investment.
While reading FY2017 annual report, an investor notices that Ashok Leyland Ltd had put a land parcel
owned by HFL located at Hyderabad, under the category “held for sale” at a value of ₹123 cr.
The freehold land at Hyderabad has been vested with the Company during the year pursuant to
business combination of erstwhile Hinduja Foundries Limited (Refer Note 3.21). The
Company intends to dispose off the surplus freehold land, and has estimated its fair value (less
cost to sell) based on present market prices, which is more than the carrying amount. The Company
expects to complete the sale in the next few months.
However, analysis of subsequent annual reports indicates that Ashok Leyland Ltd was not able to find any
buyer for the land. As a result, it reclassified the land from “held for sale” to fixed assets of the company.
Freehold land at Hyderabad of ₹12,300 lakhs was vested with the Company during the previous
year pursuant to business combination of erstwhile Hinduja Foundries Limited. This has
been reclassified to Property, Plant and Equipment as the Company is in the process of
identification of a potential buyer.
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In addition, an investor would appreciate that HFL had been in a tough financial position for at least the
last 5 years, as it had not made any profits after FY2011. The company had to raise equity to repay its
lenders and run its operations. If the land at Hyderabad were an easily saleable property, then HFL would
have itself sold it before the merger to improve its financial position.
As per shareholding details of HFL on March 31, 2017 (Source: BSE), the total promoters shareholding
of 53.25% is comprised of:
 20.74% Hinduja Automotive Limited (Also the promoter entity of Ashok Leyland Ltd),
 24.94% Hinduja Foundries Holding Limited
 7.57% Ashok Leyland Ltd
Looking at the above information, an investor may believe that the key promoters of HFL (Hinduja
Automotive Limited and Hinduja Foundries Holding Limited) were tired of managing the tough foundry
business and in turn, handed it over to the shareholders of Ashok Leyland Ltd. In return, the promoters of
HFL got shares of Ashok Leyland Ltd, which is an overall much profitable business than the foundry
business.
Moreover, after reading the history of Ashok Leyland Ltd, an investor may note that the company has got
itself rid of the tough foundry business in FY2006 when it sold its casting unit to Ennore Foundries Limited
(previous name of HFL).
The Company sold its castings unit at Hyderabad (Ductron Castings Unit) to Ennore Foundries
Limited for a consideration of Rs. 620 million. The gain on sale amounting to Rs. 302 million is
shown as extraordinary income for the year 2005-06. Ductron Castings Unit, now part of Ennore
Foundries Limited, continues to supply castings to the Company.
Therefore, a minority shareholder of Ashok Leyland Ltd would feel that a tough business that her company
has already got rid of in the past, which was a very profitable decision, is now again being thrust upon her
after 10 years and in a much worse shape (accumulated of more than ₹1,000 cr and a large debt to be repaid).
No wonder that many minority shareholders were not happy with this amalgamation and voted against this
proposal.
As per the FY2017 annual report, page 33, about 21% of total shareholder voted against the amalgamation
proposal.
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However, as is common in the corporate world, most of the time, the promoters are able to push through
their proposals despite significant opposition from minority shareholders.
Therefore, we believe that whenever investors analyse any company that is a part of a large business house
with many operating companies, then she should be aware that she might have to face such situations where
the promoters will keep on doing corporate restructurings.
Such restructurings may be related to moving cash/funds from one group company that has surplus funds
to another that urgently needs funds. Other restructurings may be related to shifting business divisions from
one company to another as they deem fit.
An investor should understand that the promoters have the tendency to look at the entire group of companies
as their one possession. They tend to move around money and assets as they deem fit to produce maximum
value for themselves. Many times, their decisions may not present the best opportunities for the minority
shareholders of individual businesses.
However, the minority shareholders do not have a lot of say to control these decisions of the promoters.
As a result, it is advised that the investor while analysing and investing in the companies of large business
houses, should keep her eyes open to the possibilities of such movement of funds and assets from one group
company to another.
B) Increasing stake in Hinduja Leyland Finance Ltd:
In the recent past, investors faced another instance where Ashok Leyland Ltd attempting to buy out the
promoters of the Hinduja group from another group company, Hinduja Leyland Finance Ltd (HLFL).
On March 18, 2020, Ashok Leyland Ltd intimated stock exchanges that it plans to buy out about 19% stake
in HLFL from existing shareholders for up to ₹1,200 cr (Source: BSE)
…we wish to inform you that the Board of Directors of the Company, at the meeting held today,
have approved to acquire upto 19% additional equity shares in Hinduja Leyland Finance Limited
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(“HLFL”), from the existing shareholders, in tranches, for a consideration not exceeding Rs.1200
Crores…
As per the credit rating rationale of ICRA for HLFL dated February 4, 2020 (page 3), on September 30,
2019, Everfin Holdings (an affiliate of Everstone) held a 7.0% stake in HLFL and the balance is majorly
held by Hinduja group entities (92.4%).
As of September 2019, Ashok Leyland Limited (ALL) and other Hinduja Group entities held a stake
of 92.4% in HLF while Everfin Holdings (private equity) held a stake of 7.0%.
Therefore, when Ashok Leyland Ltd announced that it plans to buy 19% stake from existing shareholders
of HLFL whereas the private equity investor held only about 7% stake, then it became clear to the
market/investors that Ashok Leyland Ltd is giving exit to other Hinduja group entities (probably the
promoters) by buying out their stake too from HLFL.
Moreover, this transaction comes at a point of time in March 2020 when the commercial vehicle industry
has been in down-cycle for about a year as represented by a sharp decline in sales and profits of the company
in last 12 months (Jan. 2019 to Dec. 2019) when compared to previous periods. In addition, the ongoing
disruption in business and general life due to the Coronavirus pandemic, the business environment were
expected to take some time to recover.
In such a situation, investors expected Ashok Leyland Ltd to conserve cash and not to spend it for buying
out promoters from HLFL.
As a result, the market gave a strong negative response to the announcement by Ashok Leyland Ltd.
(Source: Economic Times)
The decision resulted in significant fall in the stock price of the company the day after the March
18 announcement, with the shares crashing more than 26 per cent to hit one year lows. On Friday,
the stock fell a further 9 per cent to Rs 44. During the conference call held on March 19, investors
raised several questions on the timing of acquisition given the need to conserve cash, valuations
of the deal, and the rationale to buy partial stake of the promoters.
As a result, on March 21, 2020, the management of Ashok Leyland Ltd reacted with reducing the size of
the buyout of HLFL stake from 19% to 6.99%. (Source: BSE)
However, in a meeting held today, the Board of Directors of Ashok Leyland, after considering the
feedback on the proposal from minority stakeholders, decided to restrict the acquisition of shares
by Ashok Leyland to 6.99% of the paid-up capital of HLFL at a price of Rs.119/- per share
aggregating to Rs.390.49 Crores from Everfin Holdings (an affiliate of Everstone Capital) and
Hinduja Group who had purchased the initial tranches of HLFL shares from Everfin.
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An investor would appreciate in the previous case where Ashok Leyland Ltd had bought out promoters
from Hinduja Foundries Ltd (HFL), many minority shareholders had voted against the deal; however, the
buyout of promoters from HFL could not be prevented and the company went ahead with the merger.
However, in the current episode related to Hinduja Leyland Finance Ltd (HLFL), the minority shareholders
could prevent Ashok Leyland Ltd from buying out promoters’ stake in HLFL by showing strong resentment
to the decision by first selling shares in the market and questioning the management in the conference call.
Nevertheless, an investor notices that in the announcement on March 21, 2020, Ashok Leyland Ltd stated
that it would still buy shares of HLFL from the Hinduja group who had purchased the initial tranches of
HLFL shares from Everfin.
…from Everfin Holdings (an affiliate of Everstone Capital) and Hinduja Group who had
purchased the initial tranches of HLFL shares from Everfin.
The management of the company had explained the reason for the same in February 2020 conference call
with investors on page 10:
But the reason we did that was only because we wanted to be committed to Everstone, and we have
acquired the shares. At the moment, Hinduja Group London has offered to bail us out even
though they did not want to. So they have taken the first 2 tranches, I do not remember the number
of shares. But that is all that is to the transaction. I hope this clarifies.
In February 2020 conference call, the management said that they had a commitment to Everstone to buy
out their shares. The further response of the management indicates that Ashok Leyland Ltd did not have
money to buy out shares from the Everstone. The Hinduja group did not want to help Ashok Leyland Ltd.
However, they finally relented and helped Ashok Leyland Ltd in fulfilling its commitment to Everstone by
buying the first 2 tranches of HLFL shares from Everstone. As a result, Ashok Leyland Ltd included buying
these shares of HLFL from the Hinduja group in its March 21, 2020 announcement.
An investor acknowledges the commitment given by Ashok Leyland Ltd to Everstone as the company had
disclosed its obligation/commitment to in relation to the shares of HLFL held by a third party in the
placement document for QIP in 2014 (page 43):
In relation to an agreement relating to the subscription of the shares of its subsidiary HLFL,
the Company has given an undertaking pursuant to which, the Company is required to provide the
counter-party an exit option within 54 months from the date of subscription by the counter-party
to the shares of HLFL, at a particular price in accordance with the terms agreed between the
parties.
However, when an investor analyses the response of the management of Ashok Leyland Ltd in the February
2020 conference call, then it seems that Ashok Leyland Ltd was facing a cash crunch to meet its obligations
and the Hinduja group had to pitch in to save it despite being unwilling to do so initially.
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An investor notes that such a situation of cash crunch and taking help from others to meet its contractual
obligations goes completely against the impression of a position of very high liquidity strength presented
by Ashok Leyland in its annual reports by presenting a net cash position after adjusting all the debt in its
annual reports.
While reading the recent annual reports of Ashok Leyland Ltd, an investor notices that both in FY2018 as
well as in FY2019, the company had presented a net cash position. In FY2018, the company said that after
adjusting all the debt, it had surplus cash of ₹2,915 cr and in FY2019; the company had surplus cash of
₹731 cr.
An investor is surprised when a company reporting a net cash position of hundreds of crores of rupees in
the annual reports mentions that it had to be bailed out by the promoter group against their initial willingness
to help it in meeting its contractual obligations.
In such a situation, it becomes natural for an investor to question the financial strength represented in the
annual report.
An investor would remember from the numerous instances in the corporate world where the supposedly
strong balance sheets were suddenly found to be lacking in the acclaimed fundamental strength.
 Cox & Kings defaulted despite having high cash & investments: An
investor may also recollect the case of Cox & Kings, which defaulted recently on repayments of a
few hundred crores rupees despite having cash & investments of thousands of crores rupees.
(Source Moneycontrol: Defaults raise a curious case of mismatch at Cox &
Kings)
 Instances of Yes Bank, DHFL, IL&FS etc. where the annual report/balance sheet never showed
any weakness whereas the actual position was companies was near bankruptcy.
Therefore, it is advised that an investor should be cautious and increase the level of her due diligence when
she hears the management of the company that originally claims strong liquidity position but later says that
they had to be bailed out by the promoter group to meet their contractual obligations.
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In addition, going ahead, an investor should keep a close watch on the investments done by Ashok Leyland
Ltd in HLFL both by way of additional infusion of capital as well as buying out existing shareholders.
C) The merger of investment arms of Ashok Leyland Ltd:
From the above discussion on Optare Plc, an investor would remember that in FY2012, Ashok Leyland Ltd
along with its investment arms had increased its stake in Optare Plc from 26% to 75.1%.
During the year, your Company along with the investment arms have increased their stake to
75.1% (from earlier 26%) in Optare plc UK.
An investor would also remember that in FY2014, Ashok Leyland Ltd merged its investment arms with
itself.
Your Company wanted to merge its investment arms, and as the first step these entities viz., Ashley
Holdings Limited, Ashley Investments Limited and Ashok Leyland Project Services Limited were
merged into one of the group operating entities viz., Ashley Services Limited. The appointed date
of the merger was from 1 st April 2013 and it was approved by the Honourable High court of
Madras on 15 th July 2013. In a subsequent development, Ashley Services Limited (ASL), which
became a Wholly Owned Subsidiary of Your Company was merged with the Company itself.
An analysis of these investment arms and their merger provides some insights to the investor.
An investor notices that until the merger of these investment arms, Ashok Leyland Ltd used to classify them
as “Associate” indicating that it had less than 50% holding in these companies. In addition, Ashok Leyland
Ltd used to provide a large amount of funds to these companies so that these companies can make
investments/acquire a stake in other companies.
From the above table, an investor would notice that Ashok Leyland Ltd has classified its investment arms:
Ashley Holdings Limited and Ashley Investments Limited as associates.
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 In FY2012, it invested about ₹350 cr in these investment arms and

 In FY2013, it invested ₹304 cr in these entities.
As these investment arms are classified as associates (<50% shareholding), therefore, an investor might be
right to assume that the remaining shareholding of these investment arms may be with other entities of the
Hinduja group or with some entities that have strong confidence of Hinduja group.
As mentioned earlier, these investment arms were used by Ashok Leyland Ltd to make investments on
behalf of the Hinduja group like the one in Optare Plc, which is discussed above.
When these investment arms were merged with Ashok Leyland Ltd in FY2014, then an investor notices the
following sequence of corporate actions:
 Ashley Holdings Limited, Ashley Investments Limited, and Ashok Leyland Project Services
Limited were merged into one of the group operating entities viz., Ashley Services Limited
 In a subsequent development, Ashley Services Limited (ASL), which became a Wholly Owned
Subsidiary of Your Company
 was merged with the Company itself
Therefore, an investor would notice that in the first step, the investment arms were merged with a group
company, Ashley Services Limited (ASL). The fact that ASL is a group company of the Hinduja group,
therefore, an investor is not able to ascertain what would be the shareholding of ASL. However, she may
be safe to assume that it would definitely have other additional shareholders apart from Ashok Leyland Ltd.
This is also true because these other additional shareholders would represent the stake of other group entities
in the investment arms (Ashley Holdings Limited and Ashley Investments Limited).
The second step when Ashley Services Limited (ASL), which became a wholly-owned subsidiary of Ashok
Leyland Ltd, is the most important step in this transaction.
When ASL became a wholly-owned subsidiary of Ashok Leyland Ltd., it effectively meant that Ashok
Leyland Ltd bought out the “other additional shareholders” from the investment arms.
The following section from the financials of Ashley Services Ltd up to June 30, 2013 (page 9), provided
by Ashok Leyland Ltd on its website under the scheme of amalgamation section ( Source) provides the
details of the investments held by Ashley Services Ltd.
(P.S. the quality of the scan copy of the document uploaded by Ashok Leyland Ltd could have better).
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The above data shows that the investment arms, now a part of Ashley Services Ltd, held investments in
Optare Plc., Albonair GmbH, Ashok Leyland Wind Energy Ltd, Hinduja Leyland Finance Ltd, LCV joint
venture entities with Nissan etc.
Looking at the above investments, an investor may assume that the merger of investment arms with Ashok
Leyland Ltd meant giving an exit to the “other additional shareholders” by buying out their stake from
investments like Optare Plc, Albonair GmbH etc. that they had participated in by being shareholders in the
investment arms (Ashley Holdings Limited and Ashley Investments Limited).
An investor gets an impression of the money paid by Ashok Leyland Ltd for buying out “other additional
shareholders” from the investment arms when she notices that in FY2014, the company had given an
advance of ₹237 cr to Ashley Services Ltd (ASL) for purchase of share capital.
An investor would notice that when this merger transaction took place in FY2014 when the Optare Plc
group companies had reported losses of ₹40 cr. An investor would remember that in the subsequent years,
Optare Plc kept on reporting large losses. Ashok Leyland Ltd had to continuously keep on investing
additional money in Optare Plc, which is continuing even to this day.
Therefore, an investor may consider the merger transaction of investment arms with itself as a transaction
in which Ashok Leyland Ltd gave an exit to the other group companies of the Hinduja group from their
investments in companies like Optare Plc., Albonair GmbH etc.
In addition, in these maze of transactions, an investor finds it very difficult to assess whether the above
mentioned ₹237 cr was the effective value at which Ashok Leyland Ltd ended up buying out stakes of these
other group entities in Optare, Albonair or there was more to this transaction.
When an investor assesses the disclosure about the increase in investments done by Ashok Leyland Ltd in
FY2014, then she notices that the increase in investments due to merger of Ashley Services Limited (ASL)
is only ₹189 cr instead of the advance of ₹237 cr given by Ashok Leyland Ltd.
In total, investments have gone up by ₹452 Crore during the year. Out of this amount, ₹189 Crore
is on account of merger with Ashley Services Limited.
It may be a case that Ashok Leyland Ltd has paid ₹237 cr to acquire investments worth ₹189 cr.
Alternatively, there might be more angles to this merger transaction.
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It may be that these other group entities could recover their invested value or even made a profit depending
upon how much money/value Ashok Leyland Ltd paid to them for making Ashley Services Limited (ASL)
its wholly-owned subsidiary.
It may be a possible scenario that these other group entities could safely exit the investment in Optare,
Albonair GmbH and other such investments at a profit or at no loss, whereas the shareholders of Ashok
Leyland Ltd ended up bearing the loss of hundreds of crores of rupees in Optare Plc., which is continuing
even till this day.
It is advised that an investor may contact the company directly to get further clarifications about who were
the other investors in the investment arms and what was the consideration paid to them to buy them out for
making Ashley Services Limited (ASL) a wholly-owned subsidiary company of the company. Investors
may also seek additional clarifications from the company to assess whether these “other shareholders” made
profits on their investments done via the investment arms.
D) Large investments in Hinduja Energy (India) Ltd:
While reading the past annual reports of Ashok Leyland Ltd, an investor comes across the name of Hinduja
Energy (India) Ltd (HEIL) for the first time in FY2013 annual report, when the company disclosed that it
has invested ₹187 cr in HEIL.
Further your Company invested ₹300 Crores in Hinduja Foundries Ltd. and another ₹187 Crores
in Hinduja Energy (India) Ltd. In all, your Company invested ₹862 Crores by way of investment
in Associate / Group / Joint Venture Companies.
As per the FY2018 annual report, HEIL is classified by Ashok Leyland Ltd as a “fellow subsidiary”,
indicating that Ashok Leyland Ltd does not have any direct control over the management of HEIL.
Fellow subsidiaries
 Gulf Oil Lubricants India Limited

 Hinduja Energy (India) Limited
 DA Stuart India Private Limited
Upon reading other annual reports, an investor notices that Ashok Leyland Ltd provided more financial
assistance to HEIL after FY2013.
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An investor notices that over the years, Ashok Leyland Ltd acted as a banker to HEIL where it could take
large amounts of loans from Ashok Leyland Ltd whenever it wanted.
While reading the FY2018 annual report, an investor notices that in FY2017, Ashok Leyland Ltd had given
a loan of ₹615 cr to HEIL and in FY2018, it gave a loan of ₹463 cr.
What comes as a surprise to the investor is that the loan of ₹615 cr given by Ashok Leyland Ltd to HEIL
in FY2017 appears in the FY2018 annual report, but it is not present in the FY2017 annual report in the
related party transactions.
An investor notices that in the FY2017 annual report, such a large amount of loan appears as an inter-
corporate deposit in the cash flow from investing activities with a similar behavior that the loan was taken
and repaid during the year.
An investor may seek clarifications from the company directly to ascertain whether the inter-corporate
deposits shown in the above cash flow for ₹706 cr in FY2017 and ₹501 cr in FY2016 were to Hinduja
Energy India Ltd (HEIL).
If yes, then what was the reason that HEIL was not shown as a group entity/fellow subsidiary in FY2016
and FY2017. Whether it is a situation, where HEIL became a fellow subsidiary only in FY2018 or it was a
case of oversight where the team in charge of preparing the annual report missed including the name of
HEIL in the list of related parties.
Alternatively, if these loans are not to HEIL, then the investor may seek details of the counterparties who
are benefiting at the cost of shareholders of Ashok Leyland Ltd by taking the economic benefits of these
loans.
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An investor would notice that similar large inter-corporate deposits of ₹780 cr have appeared in FY2019
annual report in the cash flow from investing activities at page 164:
An investor would note that these inter-corporate deposits are present in the consolidated financials of
Ashok Leyland Ltd. It indicates that these are not to the subsidiaries of the company like Hinduja Leyland
Finance Ltd. These inter-corporate deposits are given by Ashok Leyland Ltd to entities that are outside its
subsidiary structure.
An investor would acknowledge that Ashok Leyland Ltd carries loans from banks on its books on which it
pays interest every year. As a result, these inter-corporate deposits to third parties indicate that the
shareholders of Ashok Leyland Ltd are themselves bearing the costs to give these loans/deposits to third
parties who in turn enjoy the economic benefits of these loans/deposits.
An investor may argue that these inter-corporate deposits may not be interest-free and Ashok Leyland Ltd
may be getting interest on these loans from the third parties. In such a case, an investor should acknowledge
that Ashok Leyland Ltd should direct its focus on the core activities of its business instead of earning
interests on inter-corporate deposits.
In case, the investor finds out that Hinduja group is using these inter-corporate deposits to transfer the
money available with Ashok Leyland Ltd for the benefit of other group companies that are in urgent need
of the money, then an investor would remember that it is similar to the case of National Peroxide Ltd (a
Wadia group company).
In the case of National Peroxide Ltd, the Wadia group used lending and investment transactions to shift
money from National Peroxide Ltd to its other group companies that needed cash like Go Airlines (India)
Limited, Bombay Dyeing Limited etc. In the analysis of National Peroxide Ltd, an investor would learn
that the Wadia group made National Peroxide Ltd take debt from lenders and then made the company lend
it further to other Wadia group companies.
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E) Ashley Aviation Ltd:
While reading the FY2019 annual report, an investor comes to know about a transaction in which Ashley
Leyland Ltd has acquired shares from other individual shareholders in Ashley Aviation Ltd to make it a
wholly-owned subsidiary of the company.
During the year under review, in pursuance to the approval received from the Ministry of Civil
Aviation, the Company has acquired the balance shares from individual shareholders of Ashley
Aviation Limited making it a wholly-owned subsidiary (100%) of the Company.
In the FY2019 annual report, on page 52, an investor notices that during the year, Ashok Leyland Ltd has
invested an amount of ₹6 cr in Ashley Aviation Ltd
Limited, ₹6 Crores in Ashley Aviation Limited….
An investor would appreciate that Ashok Leyland Ltd would have used part or the full amount of this
investment of ₹6 cr to buy out the individual shareholders of Ashley Aviation Ltd.
On the same page in the FY2019 annual report, an investor notices that Ashok Leyland Ltd has impaired
its investments in Ashley Aviation Limited.
There had also been impairments to the tune of ₹7 Crores during the year Ashok Leyland (Chile)
SA ₹4 Crores, Ashley Aviation Limited ₹3 Crores.
From the above disclosure, an investor would notice that the company has realized that its investment in
Ashley Aviation Ltd have lost its value and as a result, it is recognizing a loss of ₹3 cr on its investments
in Ashley Aviation Ltd.
However, in the face of this acknowledgment of loss on the investments of the company in Ashley Aviation
Ltd, the additional investment of ₹6 cr by Ashok Leyland Ltd to buy out individual shareholders of Ashley
Aviation Ltd seems very counter-intuitive.
In the face of it, it may seem that Ashley Aviation Ltd has done poor business performance resulting in loss
of investment of its shareholders. However, now, Ashok Leyland Ltd is taking over this poorly performing
company by putting in more money.
This seems like an attempt to bail out the individual shareholders of Ashley Aviation Ltd.
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Before becoming the wholly-owned subsidiary in FY2019, as per the FY2018 annual report, Ashley
Aviation Ltd was an associate company of Ashok Leyland Ltd with 49% shareholding (FY2018 annual
report, page 215).
An investor may assume that if Ashok Leyland Ltd has less than 50% shareholding in Ashley Aviation Ltd
but still the company is named after prevalent Hinduja names of “Ashley”, then most probably, the other
shareholders in Ashley Aviation Ltd might be from Hinduja group.
An investor may contact the company directly to understand the dynamics behind the transactions of the
company with Ashley Aviation Ltd. She may also seek details of the individual shareholders of Ashley
Aviation Ltd who have been bought out by Ashok Leyland Ltd using shareholders’ money so that she may
arrive at her conclusions.
On a similar note, an investor while reading the annual reports notices in the fixed assets details table that
Ashok Leyland Ltd has purchased an aircraft worth ₹60 cr and given it on lease to someone.
An investor may seek clarifications from the company about the need to purchase the aircraft and then give
it on lease to someone. The investor may seek details of the counterparty to whom the aircraft has been
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given on lease as well as what value this transaction of purchasing the aircraft is adding to the shareholders
of Ashok Leyland Ltd.
F) The curious case of treatment of Hinduja Tech Ltd and Rajalakshmi Wind Energy Ltd:
While reading the FY2018 annual report, an investor notices a strange disclosure by Ashok Leyland Ltd
about Hinduja Tech Ltd (HTL) in which it had a 62% stake. The company told its shareholders that Hinduja
Tech Ltd (HTL) is not considered its subsidiary despite holding a 62% stake in HTL as per some contractual
arrangement between the shareholders. Instead, HTL is considered a joint venture.
An investor may seek further details about Hinduja Tech Ltd from the company and the details about the
contractual arrangements between the shareholders that allow the other shareholder who has put in only
38% (100-62) of the equity investment but is enjoying equal (50%) stake in the management control of
HTL (treatment as a joint venture).
Whereas, the shareholders of Ashok Leyland Ltd despite investing 62% of the equity money, are
controlling 50% of the management control.
Similarly, in the case of Rajalakshmi Wind Energy Limited (previously named Ashok Leyland Wind
Energy Limited), the company disclosed that it is not including its transactions with the company in the
annual report despite holding 26% stake in it because the company does not have a significant influence on
it.
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Rajalakshmi Wind Energy Limited (erstwhile Ashok Leyland Wind Energy Limited) where
the Parent Company holds 26% (with effect from October 1, 2016) is not treated as associate under
Ind AS as the Group does not exercise significant influence over the entity.
Investors may seek clarifications about the same from the company.
Moreover, while reading the annual reports, an investor notices that Ashok Leyland Wind Energy Ltd is
the company in which Ashok Leyland Ltd had incurred a loss of about ₹43 cr when it sold its stake in
FY2015.
5) Managerial remuneration of Ashok Leyland Ltd:

While reading the FY2019 annual report, an investor notices that the CEO & MD of the company took
home a total remuneration of about ₹137 cr. (= 131.21 + 5.81).
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An investor notices that the biggest part of the remuneration is stock options of about ₹110 cr.
Among the stock options, an investor notices that the maximum number of the stock options (7,454,000) is
priced extremely generously at an exercise price of ₹1/- per option.
Stock options at an exercise price of ₹1/- per option, is almost the most generous proposition that can be
offered by any company to its employees next only to handing over free shares to them.
In addition, when an investor analyses the details of the options available to the employees of Ashok
Leyland Ltd, then she gets to know the total number of options and their respective exercise prices.
From the above table, an investor notices that in the ESOPs plan of Ashok Leyland Ltd, the different
tranches of options are put at different exercise prices.
5,845,875 options are available to employees for exercise prices of ₹80/-, ₹83.5, and ₹109/-. However, a
very large portion of options, (7,454,000, 56% of all the options) are available at an exercise price of ₹1/-.
Moreover, an investor notices that all the generously prices options (7,454,000 at ₹1/-) are allotted to one
single person, the CEO & MD of the company. Whereas all the remaining employees of the company have
been competing for the balance 44% of options that too priced at ₹80/- to ₹109/-.
Then, then investor realizes that the company has treated its CEO exceptionally generously.
From one perspective, it does not come as a surprise to the investor when she notices that in 2019, many of
the minority shareholders had voted against the remuneration of CEO & MD when the proposal was put to
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the vote of the shareholders. In total, 14.16% of shareholders had rejected the proposed remuneration of the
CEO for FY2019.
While discussing the management succession planning above, an investor notices that the CEO & MD of
the company, Mr. Vinod Dasari, was in this position from April 2011 to March 2019 after which he left
Ashok Leyland Ltd to join Royal Enfield.
An investor may look at the capital allocation, merger, amalgamation, buyout, investment decision and
business performance of the company during FY2011 to FY2019 to make her conclusions about the
managerial remuneration paid by Ashok Leyland Ltd to its CEO & MD during this period.
6) Using accounting assumptions to show higher profits:
While reading the past annual reports of Ashok Leyland Ltd, an investor comes across certain instances
where the company used some accounting assumptions and conventions to report higher profits than the
actual financial position.
These instances relate to adjusting the loss in the value of assets etc. directly in the balance sheet instead of
charging it to the profit and loss statement (P&L) and changing policies related to depreciation and
amortization.
In FY2003, the company disclosed that with the permission of Honorable Madras High Court, it has
adjusted losses up to ₹160 cr due to loss of value of investments, fixed assets, work-in-progress (WIP) and
other expenses directly against its reserves, in effect, bypassing the P&L.
Adjustment against Securities (Share) Premium Account:
Shareholders, at the Extraordinary General Meeting held on January 18, 2003, had approved the
Board’s proposal to adjust against the Company’s Securities (Share) Premium Account, a sum not
exceeding Rs.160 crores representing Miscellaneous Expenditure not written off, the
estimated future diminution in the value of certain investments, and estimated future diminution in
value of certain fixed assets and capital work-in-progress. This proposal was confirmed by the
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Hon’ble Madras High Court, and the other procedures have been fully completed. The necessary
adjustments have been incorporated in the accounts for the year ended March 31,2003.
An investor would note that the company may not be legally wrong in bypassing these losses/expenses
from the P&L as it has done the same with due permission of the court of law. However, practically, an
investor would appreciate that a loss incurred by the company is the loss of value of the money of the
shareholders irrespective of the manner in which the company represents it.
As a result, in FY2003, the company bypassed the expenses of about ₹160 cr from the P&L and adjusted
them directly in the balance sheet.
If the company had followed the convention of charging the loss of investments/fixed assets/WIP and other
expenses in the profit & loss statement, then its profits would have been lower to that extent. However,
Ashok Leyland Ltd decided to bypass the impact of these expenses on the P&L by taking legal approval.
As a result, an investor would acknowledge that the net profits of the company reported by the company in
its P&L show a higher value to the extent of these expenses charged directly to the balance sheet (securities
premium account).
In FY2010, Ashok Leyland Ltd changed its accounting policy for depreciation/amortization that led to a
higher net profit of about 21 cr due to this policy.
The Company has, during the year, changed its accounting policy to charge depreciation /
amortisation on straight line method on a pro-rata basis in respect of additions to / deletions from,
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the fixed assets in the manner prescribed in Schedule XIV to the Companies Act, 1956. This is
different from the basis hitherto followed of charging depreciation / amortisation for the full year
on additions made in the first half of the year, for six months on additions made during the second
half of the year and not charging depreciation in respect of assets disposed off during the year.
The impact of the said change for the year is a higher net profit of Rs.2,080.59 lakhs and a
corresponding lower charge of depreciation / amortisation reflected in Schedule 2.4 to the Profit
and Loss Account.
It is advised that whenever an investor comes across such instances where the profits of any company are
higher due to accounting assumptions, then she may adjust the reported profits of the company in her
assessment to ascertain the financial position of the company.
7) Instances of lack of compliance with the statutory norms:
While reading the placement document released by Ashok Leyland Ltd for its QIP in 2014 (Source: BSE),
an investor notices that there have been instances from the end of the company as well as the promoters
(Hinduja group) where they missed on complying with the applicable statutory norms.
A) Violations under Companies Act, entering related party transactions without Govt.
approval:
As per the QIP placement document, page 203, Ashok Leyland Ltd had violated a few provisions of the
Companies Act including entering into related party transactions without government approval.
The MCA noted certain violations of Companies Act including delays in share allotments in certain
of our Joint Ventures and delays in the filing of certain statutory forms and reporting certain events
to the MCA. The MCA also noted that certain related party transactions were entered into without
requisite government approval.
B) Promoters did not intimate the pledge of shares of the company:
QIP placement document, page 51:
Further, under the Listing Agreements and regulations issued by the SEBI, our Promoter is
required to intimate the Company in case of any change in the number of shares held by the
Promoter in the Company or creation of pledge on the shares held by the promoter in the
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Company. The Company had submitted the initial disclosure to the stock exchanges regarding the
equity shares of the Company pledged by the Promoter in February 2009. Thereafter,
the Promoter had pledged additional shares of the Company, in 2011, but inadvertently failed to
inform the Company about the change in the number of shares of the Company pledged by the
Promoter.
C) Part of the land on which the factory of the company is built in Bhandara is classified
“Forest Land”:
Ashok Leyland Ltd disclosed in its QIP placement document that a part of the land on which its factory in
Bhandara is constructed is still classified as “Forest Land”.
A portion of our manufacturing facility located at Bhandara, Maharashtra, is built on land,

the title of which is yet to be transferred to us. Pursuant to two lease deeds dated March 22, 1982
and August 3, 1982, respectively, approximately 231 acres of land was transferred by the MIDC
to us. A portion of the surrounding land remained classified as “forest land” in revenue records
(“Forest Land”). In 1985, we constructed a building on approximately 16 acres of such Forest
Land.
It seems that it is due to land still being classified as “Forest Land” that the part of the factory land at
Bhandara is yet to be transferred in the name of the company even in 2019 despite the factory being
constructed there in 1985.
A portion of the Buildings in Bhandara valued at ₹950 lakhs is on a land, the title for which is yet
to be transferred to the Company
An investor may contact the company about any progress on the conversion of the land from “Forest Land”
to industrial/commercial and the transfer of the same in the name of the company.
In addition, the QIP placement document also mentions an instance where the Central Bureau of
Investigation (CBI) has filed a charge sheet in a criminal case involving five employees of the company for
fabricating the quality standard reports for supplying buses to Delhi Transport Corporation.
A charge sheet has been filed by the Central Bureau of Investigation (the “CBI”) against five
employees of the Company, accusing such employees of conspiring with a laboratory to fabricate
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certain quality standard reports in connection with the supply of buses to the Delhi Transport
Corporation.
An investor may contact the company for updates on the investigation and legal proceedings in this case.
8) Error in the annual report:

While reading the annual report of Ashok Leyland Ltd for FY2019, an investor notices that while presenting
the data of shareholding of the promoters in the annual report, the company had made an error in calculating
the change in the percentage shareholding of the promoters during the year.
In the above table, an investor would notice that during FY2019, as disclosed by the company, the
shareholding of the promoters had declined from 40.02% to 39.91% i.e. a decline of 0.11%.
However, in the column for the “% change during the year” the company has mentioned “0.00” indicating
as if there has not been any change in the percentage of shareholding of the promoters during the year.
The Margin of Safety in the market price of Ashok Leyland Ltd:

Currently (May 10, 2020), Ashok Leyland Ltd is available at a price to earnings (PE) ratio of about 13.95
based on the last four quarters standalone earnings from Jan 2019 to Dec 2019. The PE ratio of 13.95
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provides a little margin of safety in the purchase price as described by Benjamin Graham in his book The
 Further advised reading: 3 Principles to Decide the Ideal P/E Ratio of a Stock
for Value Investors
 Read: How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
 Further advised reading: Hidden Risk of Investing in High P/E Stocks
Analysis Summary
Overall, Ashok Leyland Ltd seems a company that has been growing its business at a rate of 15-20% year
on year for the last 10 years (FY2010-2019). However, the business performance of the company over this
period has been cyclical. The company’s performance has alternated between good periods and poor
performance periods.
The dependence of the commercial vehicle industry on the general economic environment and govt.
expenditure along with intense competition between the domestic and multinational players has led to
cyclically fluctuating business performance of the company.
Despite intense competition, the company has been able to keep its capital expenditure and working capital
under control. As a result, it has seen its profits convert into cash flow from operations. Moreover, the
company has reported a free cash flow over the last 10 years.
At times, the capital expenditure and investment requirements of the company increased and it ended up
breaching the debt-related covenants put by its lenders. Then in FY2014, the company resorted to raising
equity via a QIP. However, since then, the debt level of the company has been under control.
Ashok Leyland Ltd has been led by professionals where the promoter family-member has assumed the role
of non-executive chairman of the company. The company has been able to source talent in-house as well
as from outside to lead the company.
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The management of Ashok Leyland Ltd has shown good project execution abilities, as they are able to
complete the frequent capacity expansion programs for the core medium & heavy commercial vehicles as
well as the light commercial vehicles. In addition, the management has been able to execute multiple other
plants like construction equipment plant, die-casting plant etc.
When an investor analyses the capital allocation decisions of the management of Ashok Leyland Ltd, then
she notices that at times, the company has shown sub-optimal capital allocation.
In multiple cases, the company kept on continuing with certain business initiatives, which seem to have lost
their appeal many years ago. These businesses are running into losses year on year and a few of them have
never made profits since their inception. However, the company has continued with them and has been
infusing precious capital of shareholders in these businesses year after year. Businesses like Optare Plc and
Albonair GmbH are such examples.
At other times, the ventures have failed to create value to the shareholders like the construction equipment
joint venture (JV) with John Deere, USA, or Avia truck business unit. In the case of the light commercial
vehicles joint venture, the JV partner quit the business by foregoing all of its investment of about ₹500 cr
by selling its stake to Ashok Leyland Ltd for a token ₹1. One of the reasons for Nissan leaving the venture
is the high losses run by the JV due to intense competition in the LCV industry, which seems to have
increased to unsustainable levels.
Ashok Leyland Ltd is a part of the Hinduja group and as is commonly seen in large business group houses
with many operating businesses, in the case of Ashok Leyland Ltd as well, investors notice quite a few
intra-group transactions of investments and business division transfers.
There have been instances where the group entities pushed their loss-making investments by merging them
with Ashok Leyland Ltd. It included the foundry business of Hinduja Foundries Ltd and various
investments done through the investment arms like Ashley Holdings Limited and Ashley Investments
Limited.
Recently, there was a big hue & cry from minority investors when the group attempted to off-load its stake
in Hinduja Leyland Finance Ltd (HLFL) to Ashok Leyland Ltd. As a result, the company had to reduce the
proposal of the purchase of shares of HLFL and limited it to the stake owned by the third-party private
equity firm.
There have been instances where an investor questions the judgment of the management of putting more
money in an associate company, Ashley Aviation Limited to make it a wholly-owned subsidiary by buying
out other individual shareholders when it is simultaneously recognizing a loss on its previous investments
in Ashley Aviation Limited.
Ashok Leyland Ltd has also purchased an aircraft and given it on lease to somebody. An investor may wish
to know the reasons for the company buying an aircraft and leasing it to other parties and the value it has
been adding to the shareholders to Ashok Leyland Ltd.
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The company seems to have taken exceptionally good care of its CEO & MD as it allotted more than half
of all the ESOPs to the CEO at a generously low exercise price of ₹1/- per option. An investor notices that
rest all the employees of the company have to compete for the remaining 44% of the options, which are
priced at a much higher price ranging from ₹80-109/-.
No wonder that about 14% of the shareholders had voted against the proposal of remuneration of the CEO
& MD of the company in 2019.
Previously, on occasions, Ashok Leyland Ltd has resorted to accounting assumptions and conventions to
show higher profits. These are primarily related to bypassing expenses and diminution of assets/investments
from the P&L and directly adjusting it to the balance sheet by taking the approval of shareholders and the
court of law. At times, the company has changed its accounting policies related to depreciation/amortization
that has led to higher profits in the P&L.
In the past, there have been occasions where the company could not comply with certain provisions of the
Companies Act including entering into related party transactions after seeking relevant govt. approvals. On
one occasion, it seems that the promoters did not intimate the company about the pledge on the shares
created by them. At one instance, the CBI has charge-sheeted the employees of the company for fabricating
the quality standard reports with the laboratory. An investor may keep a close watch to follow the
developments related to these instances.
Going ahead, an investor should monitor whether the company is able to revive from its currently declining
sales and profitability. The investor should watch for the investments done by the company in its
subsidiaries, joint venture, and group entities. The investor should monitor the managerial compensation
paid by the company to its senior-most employees.
An investor should keep a close watch on all the intra-group transactions that the company may enter with
the promoter group.
These are our views on Ashok Leyland Ltd. However, investors should do their own analysis before making
P.S:
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3) Honeywell Automation India Ltd

Honeywell Automation India Ltd is a part of Honeywell group, USA, is its Indian subsidiary working in
automation and control systems in industries, buildings, automobiles etc.
Honeywell Automation India Ltd was initially set up as a joint venture between Honeywell and Tata group
in 1987 as Tata Honeywell Ltd. In July 2004, Honeywell group acquired the stake of Tata group in the
company and changed the name to Honeywell Automation India Ltd. At the same time, the company
changed its reporting year from April-March to Jan-Dec. As a result, in 2004, the company reported only 9
months financials to align its reporting practices with the international Honeywell group, which follows
Jan-Dec reporting year.
On 9 th July 2004, Tata’s and Honeywell announced their decision to end the joint venture of your
Company by Honeywell Asia Pacific Inc. acquiring the entire stake of the Tata group,…….. name
change of the Company from Tata Honeywell Limited to Honeywell Automation India Limited.
The Directors have taken the decision to change the financial year to end on 31 st December every
year to be in line with Honeywell year ending.
The company followed the Jan-Dec reporting period until 2013 when it again changed its reporting period
to April-March to comply with the provisions of the Companies Act 2013. As a result, in FY2015, the
company reported financial results for a 15 months period (Jan. 2014 – March 2015).
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Consequent to the change in the financial year of the Company from January – December to April
– March with effect from the current year, the current year’s financial statements are for 15
months from January 1, 2014 to March 31, 2015. The previous year’s figures relate to the 12
months ended December 31, 2013
Therefore, an investor should keep this aspect in mind while she compares the financial performance of
FY2015 with either FY2013 or FY2016. Thereafter, the company has continuously reported its results with
April-March reporting period.
With this background, let us analyse the financial performance of the company since 2009.
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Financial and Business Analysis of Honeywell Automation India Ltd:

While analyzing the financials of Honeywell Automation India Ltd, an investor notices that the sales of the
company are consistently growing at a pace of about 10% year on year from ₹1,175 cr in FY2009 to ₹3,290
cr in FY2020.
However, when an investor notices the operating profit margins (OPM) of the company over FY2009-2020,
then she notices that the OPM of Honeywell Automation India Ltd declined from 16% in FY2009 to 7% in
FY2012. Thereafter, the OPM of the company has increased consistently to 19% in FY2020.
While assessing the reasons for a sharp decline in the OPM during FY2009-2012, an investor needs to study
the annual reports of the company to understand its business. An investor notices that the business of
Honeywell Automation India Ltd comprises of many different business divisions. An investor needs to
study each of these divisions is necessary to understand the factors influencing the business of Honeywell
Automation India Ltd.
Let us try to understand the business divisions of the company.
i) Honeywell Process Solutions business (HPS):
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As per the company, the HPS divisions provides automation solutions in the industries like emergency
shutdown system and other self-controlling systems, which reduce the manual interventions in the
processes.
HPS’ offerings include distributed control systems, field instruments, programmable logic
controllers, emergency shutdown systems (ESD), quality controls systems (QCS), process and
business performance improvement solutions and various value added services.
As per the company, HPS division serves some of the core infrastructure and manufacturing industries like
oil & gas, power, chemicals, metals & mining etc.
We have the expertise and breadth of resources to execute projects of every size and complexity in
the oil and gas, refining, pulp and paper, industrial power generation, chemicals and
petrochemicals, biofuels, pharma/ life sciences, and metals, minerals and mining industries.
Therefore, an investor would notice that the business of HPS division of the company is primarily dependent
on increasing automatic system controls in core infrastructure & manufacturing industries.
ii) Honeywell Building Solutions business (HBS):

The HBS business operates in commercial buildings and provides systems like access control (e.g. in
offices), emergency response systems (e.g. fire control), security systems (e.g. CCTV) etc.
Building Solutions business provides automation and control technologies that help make
buildings green, safe, and productive. As part of its intelligent buildings suite, it provides building
management systems, fire detection and alarm systems, access control systems, video
surveillance systems, integrated security systems, and integrated building management systems
based on Honeywell’s Enterprise Buildings Integrator™
Therefore, an investor would appreciate that the HBS business unit depends primarily on the commercial
real estate industry for its business.
iii) Building Management Systems business (BMS):

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This business unit primarily works on automating the functioning of buildings, which operate as key
locations of people’s movements like airports, metro stations, hotels, offices etc.
The solutions and products of this business are already present across multiple verticals in India,
which include large mission-critical facilities, government infrastructure like airports, stadiums,
metro stations, IT, residential, industrial and hospitality buildings.
Therefore, an investor would notice that the business of HBS unit is primarily dependent on the
infrastructure sector (transportation) and commercial real estate.
iv) Sensing and Internet of Things (IOT):

Previously, this unit was known as Sensing and Control (S&C) unit. This unit primarily works on various
sensors that provide inputs for controlling the units like an automobile, construction equipment, railway,
any machine etc.
The Electronic Sensing portfolio which includes board mount Pressure Sensors, Airflow Sensors,
Hall ICs, Temperature Sensors etc. helped the business to win in Medical, EVs segment.
This business unit is highly dependent on the automobile, construction equipment, military, aerospace and
medical equipment sectors.
Your Company will continue to remain focused on verticals such as industrial, transportation,
military, aerospace and healthcare.
Therefore, an investor would notice that the business of sensing & control unit is highly linked to the
prospects of the automobile & transportation sector among others.
v) Global Services and Global Manufacturing business:

In this business, Honeywell Automation India Ltd primarily helps the overseas entities of Honeywell group
in executing their contracts by either providing them services like project construction & management
services or supply of electrical components
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FY2020 annual report, page 49 (Global Services business):
It provides project engineering services, product customisation, and software development,

driving productivity and cost competitiveness to several global Honeywell entities. This
includes complete project management, systems design, engineering, sourcing, manufacturing,
and testing undertaken at your Company’s Pune facility.
The Global Manufacturing business, Honeywell Automation India Ltd builds instruments, which are used
primarily in its flagship process solutions business. The company has a manufacturing unit in Pune, which
it uses to manufacture products used in Honeywell’s projects in India and aboard.
With Honeywell’s support and sponsorship, Pune became one of the four regional factories for
Honeywell Process Solutions. This regional factory enables Pune to supply to the Middle East and
Europe.
Therefore, an investor would notice that the Global Services and Global Manufacturing business is
primarily a support business for Honeywell’s global and India operations where it provides manufacturing
& project management services. From the business dynamics perspective, it depends on other Honeywell
business units and the industries that determine the fate of other business units of Honeywell, in effect,
determine the fate of Global Services and Global Manufacturing business as well.
From the above discussion on each of the business divisions of Honeywell Automation India Ltd, an
investor would notice two things.
The first aspect that an investor would notice from the above discussion is that the business divisions of the
company are dependent on core infrastructure, manufacturing, automobile, commercial real estate
industries, which are highly influenced by the levels of general economic activity in the country. From one
perspective, Honeywell Automation India Ltd seems like a company, which provides support services,
value-enhancing proposition to the above-mentioned industries like oil & gas, commercial real estate,
hospitality etc.
If these industries are not doing well, then Honeywell Automation India Ltd in itself may not be able to do
anything to generate economic value. After all, to automate and add value to the functioning of a building,
you need the construction of a commercial building. If the commercial real estate is going through a bad
phase and there is no construction/up-gradation of commercial buildings, then the business of Honeywell
Automation India Ltd is going to suffer.
In a similar fashion, the fate of Honeywell Automation India Ltd is linked to its various other customer
industries, which primarily belong to the infrastructure, manufacturing, real estate etc. that, in turn, depend
on the stage of the economic cycle of the country.
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The company has continuously highlighted this dependence on the level of economic and investment
activity in the country on its operations.
Your Company’s operating results are influenced by macro-economic trends such as industrial
production, capital spending on process and building automation, commercial and infrastructure
construction, commodity prices, and foreign exchange variations.
The growth in your Company’s business is dependent on the sustaining momentum of the
economy – especially continued investments in infrastructure, manufacturing and construction.
In addition, the second aspect that the investor would notice from the above discussion on the features of
different business divisions of the company is that most of the above industries like core infrastructure, oil
& gas, power, commercial real estate, transportation etc. are project-based businesses. In such businesses,
winning a project may not give a sustained growth opportunity and the company needs to keep winning
orders for new projects to sustain its growth.
During the period of FY2010-2012 when Honeywell Automation India Ltd faced a sharp decline in its
operating profit margins from 16% in FY2009 to 7% in FY2012, then the company highlighted that the key
reason for the decline was the tough business conditions faced by its consumer industries and the govt.
spending on infrastructure.
Government spending is critical for development of core infrastructure like Roads, Ports, Airports,
Mass Transportation Systems, Energy Conservation, Safety and Electronic Security Systems etc.
Such spending supports volume growth of Buildings Solutions business group of your Company,
and such spending has declined.
The project nature of company’s business affected its future as Honeywell Automation India Ltd
highlighted that the projects are getting delayed and witnessing cost escalations.
the industrial and infrastructure sectors served by your Company saw significant slow-down
during the year, which impacted both, new order inflow and also revenue recognition due to slow
progress on existing backlog of long-cycle projects won in previous years. This was coupled with
continued cost escalation on delayed projects.
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While reading the history of Honeywell Automation India Ltd from FY2004 (the earliest available annual
report on its website), an investor makes one more observation. An investor notices that during the global
meltdown of FY2008-09, the company did not witness any business slowdown.
In FY2008, the company reported sales of ₹974 cr, an increase of 11% over the sales of ₹871 cr in FY2007.
The company reported a net profit after tax (PAT) of ₹81 cr in FY2008, an increase of 24% over PAT of
₹65 cr in FY2007.
In FY2009, the sales of the company increased by 17% to ₹1,181 cr and its PAT increased by 62% to ₹132
cr.
From the above discussion on the project nature of its business, an investor may appreciate that during
FY2008-2009, the company was executing the work on the projects won by it in previous years where the
customers did not stop the construction/execution. However, the signs that new projects are not being
announced by customers was evident in FY2009 itself.
Growth in volumes were driven by exports business which had an upcycle in large global project
execution….. The proportion of Greenfield project revenue was, however, lower, due to
purely cyclical reasons.
Therefore, it seems that the continued execution of previously announced projects of customers helped
Honeywell Automation India Ltd report good financial performance during the height of global slowdown
of FY2008-2009. Nevertheless, it seems that the new project announcements were down and even the
previously announced projects that took a long time to complete were delayed by the customers.
As a result, it looks like Honeywell Automation India Ltd faced the impact of FY2008-2009 recession;
however, it was not during the same period. It faced the impact in a delayed period when the existing good
projects were finished and the long-drawn projects were delayed with cost escalations. In addition, the
customers of the company delayed payments to Honeywell Automation India Ltd.
In FY2011 and FY2012, the company reported cash flow from operating activities (CFO) of negative
₹18 cr and negative ₹17 cr respectively. The company highlighted that the customers are delaying
payments to it due to delays in the projects.
Pressure due to delayed payments from customers and increased working capital cycles
for delayed projects. These were driven by tight money market conditions and a very challenging
business and economic environment, which caused the Company to take higher charge on account
of Provision for doubtful debts and Bad debt by 26% year on year.
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During the year your Company was under severe pressure due to tight money market conditions
and a very challenging business, economic environment, which caused the company to take higher
charge on account of Liquidated Damages, Provision for Doubtful Debts and Bad Debt by
83% year on year.
From the above discussion, an investor may notice two things about the business of the company. First is
that due to the nature of the company’s project-based business, the continued work on existing projects
delays the impact of economic slowdown on its business. Second, as the company executes projects for
many different industries, therefore, at times, the diversification helps it and the company does not face a
severe hit on its business.
While your Company has diversified products and operates within varied industries,
major macroeconomic developments pose some risks to growth which can have an impact on the
performance. Diversification and strong industrial relations is helping manage these trends.
Moreover, the company seems to be one of the best in its job as the list of clients of the company includes
many large corporates. In the past, the company could even win a contract to work on Rashtrapati Bhavan.
Major wins / customers include Bharti Airtel, Cognizant Technology Solutions, Delhi
International Airport, IOCL, Kolkata Airport, Leighton Welspun, Reliance Industries, Tata
Consultancy Services.
As a mark of recognition of our Performance Contracting business, a prestigious order was

received from BEE (Bureau of Energy Efficiency, Government of India) for Rashtrapati Bhavan.
Therefore, an investor may appreciate that Honeywell Automation India Ltd does project-based work for
many diverse industries, which to some extent help the company to mitigate the impact of the general
economic slowdown. However, the economic slowdown does have an impact on the company’s business,
which is usually apparent in a delayed period.
Honeywell Automation India Ltd is one of the best in its job of implementing automation & control systems.
This helps it win prestigious large clients. However, it does not protect the company from the competition.
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The company has highlighted that many of its competitors have developed technologies, which are put cost
pressures on its products. As a result, the company had to reduce prices of its products leading to a decline
in the margins.
..maturing engineering strategies of competition in low-cost geographies, particularly in the

process automation space put margins under pressure
With prevailing economic and competitive scenario in rest of the world, GS are under tremendous
pressure to meet productivity targets and meet competitive pricing. Your Company has reviewed
the billing rates and consequently lower billing rates are agreed to with effect from January, 2012.
Net Income at Rs 105,05 Lakhs, down 21% over the corresponding previous period primarily due
to an unfavourable revenue mix, competitive pressure on margins,
Competitive pressure on margins in the project and product businesses driven by lower selling
prices as a result of the competitive market environment,
Overall geographic mix of global business is also shifting from North America and Western
Europe earlier, to other countries in Asia, Middle-east, South America and Eastern Europe – these
changes significantly reduce the cost benefit of sourcing services from India by Honeywell
entities. Competitive pressures especially from developing nations in Eastern Europe and Central
Asia are ever increasing with comparable options available to customers closer to their
geographies.
Therefore, an investor would notice that despite being one of the best entities to do its job in the automation
segment, Honeywell Automation India Ltd is not immune to competition and slowdown.
A decline of operating profit margin from 16% in FY2009 to 7% in FY2012 is a significant event in the
financial history of the company. Even though in recent times, the OPM has improved to 19%; nevertheless,
an investor should study the FY2010-2012 period in detail to understand whether the current high-profit
margins are immune to competitive challenges.
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Investors should study FY2010-2012 period in depth to assess the susceptibility of the profit margins of
Honeywell Automation India Ltd to future events.
While looking at the tax payout ratio of Honeywell Automation India Ltd., an investor notices that for until
FY2013, the tax payout ratio of the company has been below the standard corporate tax rate prevalent in
India. The tax payout ratio until FY2013 was in the range of 24%-30%. It seems that the lower tax rate was
primarily due to the tax benefits available to it under Software Technology Parks of India and Special
Economic Zone schemes.
Provision for taxation has been made after considering the various allowances /
deductions available and after excluding profits derived from undertaking registered
with Software Technology Parks of India under section 10A and unit registered under Special
Economic Zone under Section 10AA of the Income Tax Act, 1961.
In FY2017, the tax payout ratio increased to 45%, about 10% more than the standard tax payout ratio
primarily due to tax proceedings with authorities making the company provide a higher amount for taxes.
Additional tax provision for earlier years arising out of proceedings with the authorities during
the current year: -9.47%
The tax payout ratio has declined in FY2020 primarily as the company has opted for the new corporate tax
rate scheme.
The applicable Indian statutory tax rate for financial year ended March 31, 2020 is 25.17% and
March 31, 2019 is 34.94%. During the year, the Company exercised the option available under
section 115BAA of the Income Tax Act, 1961.
Operating Efficiency Analysis of Honeywell Automation India Ltd:
a) Net fixed asset turnover (NFAT) of Honeywell Automation India Ltd:

When an investor analyses the net fixed asset turnover (NFAT) of Honeywell Automation India Ltd in the
past years (FY2009-20), then she notices that the NFAT of the company has consistently increased from
18 in FY2010 to 37 in FY2019. The NFAT has declined in FY2020 to 23; however, it is primarily due to
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change in accounting methods where the company had to include the office buildings taken on lease in its
fixed assets.
Accordingly, as a lessee, the Company carried forward the historical classification of leases
and recognized a ‘right-of-use asset’ and a corresponding ‘lease liability’ for its leasing
arrangements on its balance sheet.
Therefore, an investor would notice that first, the NFAT of Honeywell Automation India Ltd is very high
in the range of 20 or more and second the NFAT is further improving year on year.
An investor would notice that the high NFAT of 20 or more characterize primarily service businesses where
the cost of the physical product delivered by the company may be very low than the value it provides. E.g.
in a software sale, the cost of the CD may be minuscule when compared to the value of the software. In
such companies, the main value is by the way of the intellectual capital added by the company. Therefore,
the key determinant of value for such companies is the human capital and not fixed asset capital.
As a result, the investment in the fixed assets may not be the best determinants of the growth of the
company. This is because the company can squeeze in more employees in the same building to generate
additional business without incurring a high cost on fixed assets. Similarly, relatively small capital
expenditure on a new building can add working space of many more employees who can lead to a significant
increase in business than indicated by the investment amount in the building.
Therefore, in the case of companies like Honeywell Automation India Ltd where the major value addition
to the customer is by way of intellectual capital, NFAT may not be the best parameter of the operating
efficiency. Nevertheless, it can indicate to an investor that if the company has to grow its business in future,
then it may not need a lot of capital investment in its assets because the business model of the company is
very asset-light.
b) Inventory turnover ratio of Honeywell Automation India Ltd:

Honeywell Automation India Ltd has increased from 10 in FY2010 to about 30 in FY2020.
The company carries some inventory due to its manufacturing operations that produce instruments that are
used in its automation and control system implementations across industrial units and buildings. However,
from the above discussion, an investor would notice that the key value addition by the company is not the
physical products but the intellectual capital that it brings to the customer. As a result, the company has
been able to generate much higher sales than the value of the inventory on its books.
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c) Analysis of receivables days of Honeywell Automation India Ltd:

While analysing the receivables days of the company, an investor notices that over the years, the receivables
days of Honeywell Automation India Ltd have been continuously in the range of 70-80 days.
An investor would notice that the receivables collection period of 70-80 days is high when compared to the
normal practice of an average of about 45 days prevalent across multiple industries.
From the above discussion on the business of Honeywell Automation India Ltd, an investor would notice
that the primary nature of the work undertaken by the company is project-specific. In the project-oriented
work, there are different milestones that determine when it would receive money from the customers.
In almost all the cases where the payments are linked to the achievement of milestones, we notice that the
instances of disagreements between the customers and the suppliers related to proper achievements of
milestones are very frequent. As a result, many times, the suppliers raise the bill; however, the customers
keep on stressing for more work being done to their satisfaction before releasing payments. Therefore, the
delay of payments in the normal course of business is very frequently seen.
This delay is in addition to the difficulties in realizing payments from the projects that are not doing well,
the projects that have seen long delays due to difficulties in funding, wrong strategic direction, improper
execution etc. In such delayed projects that witness time and cost overruns, the payments to all the suppliers
are under problem. Many times, suppliers do not receive the payments for their work at all and it leads to
bad debt i.e. non-recoverable receivables.
When an investor notices the breakup of the receivables of Honeywell Automation India Ltd, then she
notices that almost all the time, a large portion of the company’s receivables are significantly delayed from
the date they became due for payment by the customer.
The following table shows the details of receivables for Honeywell Automation India Ltd that are overdue
for more than 90 days from the date they became payable by the customers. (Source: annual reports).
An investor may note that the overdue of 90 days means that it is over and above the normal credit period
given by Honeywell Automation India Ltd. So, if the company gives a normal time of 30 days for the
payment to the customers when it raises a bill, then more than 90 days overdue means that the customer
had not paid for more than 120 days (=30+90) from the day when the bill was raised.
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From the above table, an investor would notice that Honeywell Automation India Ltd has consistently had
a large portion of its receivables in the significant overdue segment.
From the above discussion on the business of the company, an investor would remember that during
FY2010-2012, when the company faced tough times, then it has highlighted that the company was under
server pressure, as the customers did not make payments on time.
Cash flow from operations was Rs. 45,63 lakhs, a decrease of 71% primarily due to large
infrastructure projects having extended cash milestones and constrained credit markets in the
overall commercial construction space resulted in increased working capital.
Pressure due to delayed payments from customers and increased working capital cycles
for delayed projects. These were driven by tight money market conditions and a very challenging
business and economic environment, which caused the Company to take higher charge on account
of Provision for doubtful debts and Bad debt by 26% year on year.
As a result, in FY2011 and FY2012, the company reported cash flow from operating activities (CFO)
of negative ₹18 cr and negative ₹17 cr respectively.
Tight money market conditions, as witnessed in some delayed payments from customers, caused
your Company to take higher charge on account of provision for doubtful debts and bad debts.
Whenever an investor notices that a company has its receivables overdue for a long time, then it is natural
that the investor would fear that the customer may not pay these receivables ever as the customer may
dispute the billing in terms of rates/prices or achievement of milestones etc. In such instances, the company
would not be able to collect the receivables and would report bad debt/non-recoverable receivables.
The following table shows that over FY2009-2020, Honeywell Automation India Ltd has acknowledged
that it would not be able to recover receivables for more than ₹100 cr (source: annual reports).
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An investor would notice that when a company faces challenges in collecting its dues from the customers
on time and faces large overdue, then it would face money continuously being stuck in its working capital.
This is because; the company ends up funding its customers by way of overdue receivables.
cash flow from operations (cCFO) of Honeywell Automation India Ltd for FY2009-20.
Over FY2009-20, Honeywell Automation India Ltd Limited reported a total cumulative net profit after tax
(cPAT) of ₹2,041 cr. During the same period, it reported cumulative cash flow from operations (cCFO) of
₹1,660 cr.
The Margin of Safety in the Business of Honeywell Automation India Ltd:

target growth.
While analysing the SSGR of Honeywell Automation India Ltd, an investor would notice that the company
has consistently had a very high SSGR of 100% to 300% over the years. One of the key reasons for very
high SSGR for the company has been its very high asset turnover. As discussed above, Honeywell
Automation India Ltd has consistently had a high NFAT of 20-30.
depends on the net fixed asset turnover (NFAT) of a company.
Where,

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Therefore, an investor would notice that Honeywell Automation India Ltd has continuously had a high
SSGR (100%-300%) over the last 10 years (FY2009-FY2020). However, an investor would appreciate that
the company had been growing at a rate of 10% year on year.
As a result, investors appreciate that Honeywell Automation India Ltd would not have to raise money from
additional sources like debt or equity to meet its investment requirements.
While analysing the past financial performance of Honeywell Automation India Ltd, an investor notices
that the company could grow its sales from ₹1,175 cr in FY2009 to ₹3,290 cr in FY2020 without raising
any additional money from debt or equity dilution. The company is debt-free ever since. The liability of
₹81 cr shown in FY2020 is due to changes in the accounting treatment of leased assets.
Right-of-use assets represent right to use an underlying asset during the reasonably certain lease
term, and lease liabilities represent obligation to make lease payments arising from the lease.
Therefore, an investor notices that Honeywell Automation India Ltd could grow its business over FY2009-
2020 without relying on outside sources of funds.
An investor arrives at similar conclusions when she analyses the free cash flow (FCF) position of
Honeywell Automation India Ltd over FY2009-2020.
b) Free Cash Flow (FCF) Analysis of Honeywell Automation India Ltd:

While looking at the cash flow performance of Honeywell Automation India Ltd, an investor notices that
during FY2009-2020, it generated cash flow from operations of ₹1,660 cr. However, during the same
period, it did a capital expenditure of about ₹308 cr. Therefore, during this period (FY2009-2020),
Honeywell Automation India Ltd had a free cash flow (FCF) of ₹1,192 cr (=1,660 – 308).
In addition, during this period, the company had a non-operating income of ₹299 cr. As a result, the
company total free surplus cash of ₹1,491 cr (=1,192 + 299).
The company seems to have used some of the cash to pay dividends to its shareholders (about ₹207 cr
excluding distribution tax over FY2009-2020) while the remaining amount has led to an increase in its cash
& investments from ₹106 cr in FY2009 to ₹1,514 cr. in FY2020.
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Self-Sustainable Growth Rate (SSGR) and free cash flow (FCF) are the main pillars of assessing the margin
of safety in the business model of any company.
Additional aspects of Honeywell Automation India Ltd:

On analysing Honeywell Automation India Ltd and after reading its publicly available past annual reports
from FY2004 and other public documents, an investor comes across certain other aspects of the company,
which are important for any investor to know while making an investment decision.
1) Management Succession of Honeywell Automation India Ltd:

The company was established in 1987 as a joint venture between Honeywell, USA and Tata group. In 2004,
Honeywell bought out Tata group from the venture. Since then, Honeywell group has been in charge of the
operations of the company.
While analysing the history of Honeywell Automation India Ltd, an investor notices that since then,
professionals from the ranks of Honeywell group have joined the company in the leadership position,
managing director, and have guided the company.
The current managing director of Honeywell Automation India Ltd, Mr. Ashish Gaikwad had joined the
company as a software engineer. He was appointed as managing director in 2016.
Mr. Ashish Gaikwad was appointed as Managing Director, Honeywell Automation India Limited
(HAIL) in 2016.
Mr. Ashish Gaikwad began his career as a software engineer with Honeywell Process Solutions
in Pune, India. Over the years, he has served Honeywell’s customers in multiple roles of increasing
responsibility in several geographies including India, Southeast Asia, Asia Pacific, and the U.S.A.
Before, Mr. Gaikwad, Mr. Vikas Chadha and Mr. Anant Maheshwari were in the roles of managing director
of the company. Both Mr. Chadha and Mr. Maheshwari had joined the company from Honeywell group
and later on left the company to take on other roles within Honeywell group.
Mr. Vikas Chadha has been with the Honeywell Group based at Delhi since the last 5 years and
has held various positions such as Director – South Asia Security System; Regional Director –
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South Asia Honeywell Security Systems, Honeywell International India; Regional General
Manager – Honeywell Building Solutions, Honeywell Automation India Ltd.
Mr. Anant Maheshwari has been with the Honeywell Group based at Delhi since the last 6
years and has held various important positions such as Director – Business Development,
Honeywell International India; Director, South Asia – Honeywell Security and most recently he
was Managing Director – ADI Asia Pacific.
Therefore, an investor notices that the Honeywell group has a vast pool of professional talent spread across
its multiple entities across geographies. The group keeps appointing these professionals in charge of its
different units for a certain tenure and then moves them after a few years to a different role in other entities.
Mr. Vikas Chadha resigned from the company in FY2020 to join a different role in Honeywell group.
Resignation of Mr. Vikas Chadha (DIN:06624266) and Mr. Brian Buffington (DIN:08060965)
(Non-Executive Directors) with effect from close of business hours on October 21, 2019 as
they moved to a different role within Honeywell Group Company.
Therefore, an investor would notice that Honeywell Automation India Ltd benefits from the vast talent pool
of Honeywell group for its leadership position. Such an arrangement seems to ensure constant availability
of professional talent to lead the company in future.
2) Global corporate overheads of Honeywell group:

While analysing the expenses of Honeywell Automation India Ltd, an investor notices that over time a
significant amount of expenses have been charged as “corporate overhead allocations”. The following table
shows that during FY2009-2020, the company has charged about ₹873 cr as corporate overhead allocations.
According to the company, these expenses pertain to the services of Honeywell group companies used by
Honeywell Automation India Ltd.
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With effect from previous year, the Company has accounted for corporate overhead allocation, in
respect of various services rendered by Honeywell group companies.
An investor would notice that in the absence of break-up/details of the services charged under “corporate
overhead allocations”, this expense becomes a black box. There is no means for an investor to assess
whether these expenses are justified. It looks like a case similar to transfer pricing, where companies use
products and services provided by their global entities in different regions. Transfer pricing has always
invited disputes because many times instead of fair market value, many other considerations enter into the
picture when companies allocate values to the products & services of one region utilized by other regions.
Under transfer pricing, companies may allocate a higher share of expenses to companies that are profitable
so that the other loss-making entities of the group may also show good financial performance. Other similar
consideration might go into deciding how much “corporate overhead” would be charged to Honeywell
Automation India Ltd.
Therefore, an investor may monitor “corporate overhead allocations” going ahead and may seek further
clarifications from the company to understand this expense properly.
3) Instances of wrongful allocation of costs to different projects by Honeywell

Automation India Ltd:
While analysing the financial history of the company, an investor notices that in FY2015, the auditor of the
company highlighted that Honeywell Automation India Ltd had done wrongful allocation of costs to its
projects, which has led to inflation of its revenues and profits. According to the auditor, the company’s
profits were inflated by about ₹67 cr.
During the period ended March 31, 2015, the Company determined that certain costs had been
recorded to incorrect projects and conducted a review to determine the impact of the same.
Following conclusion of the review, adjustments have been made in these financial statements
to reduce revenue by Rs.5,450 lakhs and profit before tax by Rs.6,729 lakhs.
The auditor highlighted that the internal controls of the company related to the purchase of inventory and
sales of goods and services in some of the projects were weak.
Except for deficiencies noticed during the year with regard to purchase of inventories and for sale
of goods and services in certain projects of the Company following the percentage of completion
method…
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The company acknowledged these its internal controls were weak, which needs strengthening.
The Company is in the process of enhancing internal controls to minimize the risk of such incorrect
recording of costs in the future
It is interesting to note that FY2015 was the year when Honeywell Automation India Ltd had changed its
statutory auditor from PWC to Deloitte.
M/s. Price Waterhouse & Co Bangalore LLP has completed 10 years as Statutory Auditors of your
Company…… It is, hence, proposed to appoint M/s Deloitte Haskins & Sells LLP (Firm
Registration No. 117366W/W-100018) as the Statutory Auditors for a period of 5 years
An investor would note that whenever there is a significant change in the supervision/auditor, that is the
crucial time when many otherwise unexpected things come out from the financials of companies.
Previously, in 2004, when Honeywell took over control of the company by buying out Tata group, then
after the takeover, Honeywell noticed that lot receivables were unrecoverable but still shown as good. In
addition, the company noticed that significant amount of inventory was non-usable; however, it was not
written off. This was despite the management of the company being in the hands of reputed groups like
Tata and Honeywell since 1987.
As a result, in FY2004-FY2005, Honeywell Automation India Ltd wrote off about ₹40 cr of receivables
and inventory.
EBIDTA has shown a rise from the previous year despite high provisions for bad debts and write
off of obsolete inventory, due to the Company moving towards a more conservative provisioning
regime. This transition took place from Dec 04 to Dec 05. Total provisions/write-offs made by the
company towards bad debt/inventory amount to Rs. 21.0 cr. (pr. full year – Rs.19 cr). While some
provisions are expected to be there in future as well, its extent is expected to be lower.
An investor would notice that many times, the key problems in the previously reported financials are
highlighted when there is a major change in management or auditors. In FY2004-2005, Honeywell
Automation India Ltd disclosed that it had to write-off a significant amount for bad receivables and obsolete
inventory, which was previously shown to be good. This was despite the company being under the
management by reputed business houses since its inception in 1987.
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Therefore, going ahead, an investor should be cautious. The company has been under the current
management for a long time and has consistently had significant delays in its receivables. Classification of
delayed receivables as good or doubtful is management’s choice. Investors may not have any credible
method of determining whether the classification by the management into good or doubtful receivables is
correct.
It is advised that an investor should do an in-depth study of all the sections of the annual reports of the
company so that she may get to know about anything out of ordinary in the financial reporting.
An investor would acknowledge that accounting is a complex field whereby changing a few assumptions,
companies can give a different picture to the reported financials. There have been instances in the past when
Honeywell Automation India Ltd changed its accounting assumptions, which directly led to an increase in
profits.
Revenue, that was hitherto recognized under Percentage of Completion method based on billing
milestones reached, is now recognized in the proportion that costs incurred on the contract bear
to the estimated total contract costs. Consequent upon the change, profit before tax for the year is
higher by Rs. 27,951 thousand as compared to the method of accounting followed till the previous
period.
In addition, an investor would appreciate that the previously discussed issue of transfer pricing is also one
such area where companies can change the reported financial position of their entities by shifting expenses
from one entity to another.
In the past, there have been instances where Honeywell group has utilized the funds of Honeywell
Automation India Ltd for the benefit of its other group companies.
4) Usage of funds of Honeywell Automation India Ltd by other group companies:

While reading the past annual reports of the company, an investor notices that at multiple instances
Honeywell Automation India Ltd gave inter-corporate loans to other Honeywell group entities.
In FY2007, Honeywell Automation India Ltd gave inter-corporate deposits to of ₹32.5 cr to group
companies (FY2007 annual report, page 30):
 Honeywell Turbo Technologies (I) Pvt. Ltd: ₹18.5 cr

 Honeywell Turbo (India) Pvt. Ltd: ₹14 cr.
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In FY2008, Honeywell Automation India Ltd gave inter-corporate deposits to of ₹509 cr to group
 Honeywell Turbo Technologies (I) Pvt. Ltd: ₹505 cr

 Honeywell Turbo (India) Pvt. Ltd: ₹4 cr.

 Callidus Technologies India Pvt. Ltd: ₹9.5 cr.
In FY2011, Honeywell Automation India Ltd gave inter-corporate deposits to of ₹3.8 cr to group companies
(FY2011 annual report, page 27):
 Honeywell Controls and Automation India Pvt. Ltd.: ₹3.5 cr

 Matrikon Industrial Solutions India Pvt. Ltd: ₹0.3 cr.
In recent years, Honeywell Automation India Ltd has not disclosed any such transaction of giving money
to other group companies. However, we believe that an investor should keep a close watch on the
transactions of the company with its group entities to ascertain whether the economic benefits are being
transferred from one company to another.
Many times, while investing in a company belonging to large conglomerates who have their businesses
spread across many group companies, investors would notice that the promoters keep doing resource
transfers between their group companies. They keep using the resources and assets of one company for the
usage of another group company. Many times, such intra-group transactions are due to the habit of
promoters to see their entire group with multiple companies as an entity with a “pool of resources”. In order
to get the best usage of the supposed “pool of resources,” the promoters keep moving money and assets out
of one group company to another group company that might be in urgent need of money or can use the
assets more efficiently.
In such instances of intra-group transfer of money or assets, the public shareholders of one company may
think that the resources belonging to their company are being used for the benefits of another company.
However, the promoters may not look at these transactions from this same perspective. For them, it might
be a question of shifting assets from one group company to another company that might use them more
efficiently. In the promoters’ mind, the thought process would be to get the best value of the “pool of
resources” spread across their multiple group companies.
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To understand more about such intra-group transfers of money & assets and to see live examples, an
investor may study our analysis of National Peroxide Ltd belonging to Wadia group, Ashok Leyland Ltd
belonging to Hinduja group, and Century Textiles & Industries Ltd belonging to B.K. Birla group.
In the case of National Peroxide Ltd, the Wadia group shifted money and equity shares of their group
companies from one entity to another to make the best use of it from the overall group perspective. It
involved taking loans in National Peroxide Ltd and then lending them further to other group companies like
GoAir.
In the case of Ashok Leyland Ltd, the Hinduja group shifted entire business divisions and other assets from
one company to another to make the best use of it. It involved shifting the foundry business first from Ashok
Leyland Ltd to Hinduja Foundries Ltd and then shifting it back to Ashok Leyland Ltd after almost 10 years.
In the case of Century Textiles & Industries Ltd, the B.K. Birla group hived off its entire business units like
cement division and rayon textile division to other Birla group companies: Ultratech Cement Ltd and
Grasim Industries Ltd respectively without any independent bidding for those assets. The promoter would
have the thought process that these units of Century Textiles & Industries Ltd would perform better under
other group companies. Therefore, they shifted these assets out from Century Textiles & Industries Ltd
even when many minority shareholders were not happy at the valuation.
Therefore, we believe that whether an investor likes it or not, when she invests in companies belonging to
large conglomerates, then she should be ready to witness intra-group transactions where assets like cash
and business units are moved by the promoters from one entity to another in the manner they seem best to
get the maximum value out of it.
5) Significant travelling expenses by Honeywell Automation India Ltd

While analysing the profit & loss statements of the company over the years, an investor notices that the
company is spending about 7%-8% of its revenue at travelling & conveyance expenses.
The below table shows the amount spent by Honeywell Automation India Ltd over FY2009-2020.
When an investor compares the travelling expenses as a percentage of sales for Honeywell Automation
India Ltd with other mid-size information technology companies (Persistent Systems and Mindtree) or
large-size IT companies (Infosys and TCS) or another high-tech electronics manufacturer (Bharat
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Electronics Ltd), then she notices that the travelling expenses of Honeywell Automation India Ltd are
definitely higher than these companies.
An investor notices that the travelling expenses of almost all other analysed companies are in the range of
1%-4% of sales, which is significantly lower than 7-8% of sales for Honeywell Automation India Ltd.
In FY2020, Honeywell Automation India Ltd, spent about ₹250 cr on travelling when it had a total of 3,310
employees.
As on March 31, 2020, the Company’s employee strength was 3,310….
Assuming all the employees travel throughout the year, then it amounts to about ₹7.60 lac of travelling
expenses per employee in FY2020. However, an investor may appreciate that the number of employees
travelling would be less. Assuming 20% of the employees travel to client/project sites, then the travelling
expenses per travelling employee in FY2020 come to about ₹38 lac, which looks high.
An investor may seek further details from the company about significantly higher expenses of Honeywell
Automation India Ltd when compared to other companies.
6) Impact of developments at Honeywell group-level strategies on Honeywell

Automation India Ltd:
An investor would appreciate that even though by buying shares of Honeywell Automation India Ltd, she
is taking exposure to the business model of the company; however, because of it being a part of the overall
Honeywell group, she is exposed to the strategic developments at the level of Honeywell global.
In the past, there have been instances where developments at the Honeywell global level affected the
business of Honeywell Automation India Ltd.
In FY2010, the company had to discontinue its distribution business of Automotive on Board (AOB) sensor
applications as Honeywell had sold the AOB business group at the global level. (Source: Sensata
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Technologies Completes Acquisition of Honeywell’s ‘Automotive on Board’

Sensors Business)
The Company’s product distribution rights in the Automotive on Board (AOB) sensor applications
have been discontinued from January 2011, pursuant to Sensata taking over the global S&C AOB
business.
In FY2012, Honeywell Automation India Ltd had to agree to share its expertise and infrastructure with
another Honeywell group entity as both of them targeted the same set of customers.
In 2012, this business also identified synergistic opportunities for a shared management and go-
to-market approach with another Honeywell India entity: Honeywell Electronic Devices and
Solutions (HEDS). Both these businesses target similar end markets in the commercial and
residential construction, and therefore can benefit by sharing their channels and support
infrastructure.
Therefore, an investor in the Honeywell Automation India Ltd should always keep her eyes open at the
developments related to the developments at the Honeywell global levels. This is because any development
at the Honeywell global level can have a significant impact on Honeywell Automation India Ltd that may
come as a surprise to the investor.
The Margin of Safety in the market price of Honeywell Automation India

Ltd:
Currently (August 2, 2020), Honeywell Automation India Ltd is available at a price to earnings (PE) ratio
of about 48 based on earnings of FY2020. The PE ratio of 48 does not provide any margin of safety in the
purchase price as described by Benjamin Graham in his book The Intelligent Investor.
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 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
 How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
 Hidden Risk of Investing in High P/E Stocks
Analysis Summary
Overall, Honeywell Automation India Ltd seems a company that is one of the best for its job and as a result,
the company has some very prestigious and large clients. The company has grown at a pace of 10% year
on year for FY2009-2020. Nevertheless, when an investor focuses on the profit margins of the company,
then she notices that it used to have high-profit margins in FY2009, which witnessed a sharp decline to 7%
in FY2012. Thereafter, the profit margins have improved to 19% in FY2020.
An analysis of different business units of the company indicates that Honeywell Automation India Ltd is a
supplier/value enhancer to the core infrastructure industries like oil & gas, power, automobile, commercial
real estate etc. As a result, its fate is dependent on various industries that are affected by the trend of general
economic activity in the country. The fact that Honeywell Automation India Ltd caters to many industries
results in diversification that protects the company to some extent.
In addition, the nature of the business of the company is project-based, which leads to delays in the effect
of economic slowdowns on the company. This is because; when the slowdown hits the economy, then the
existing projects, which continue their construction/execution, keep providing it with the revenue & profit
opportunities. It is only when the existing projects are complete or are halted due to time & cost overruns
that the business of Honeywell Automation India Ltd sees the effects of the slowdown. Then, the lack of
announcement of new projects due to slowdown affects the business of the company.
During the period of 2008-2009 global meltdown, Honeywell Automation India Ltd did not feel the impact
during FY2008 and FY2009. Its business continued to grow in terms of both revenues as well as
profitability. It was only after FY2010 that the company witnessed the impact on its projects under
execution when its customers started delaying payments and it witnessed its profit margins decline from
16% to 7% in FY2012.
The project-based nature of business has led to significant delays in the collection of money by the company
from its customers. As a result, Honeywell Automation India Ltd has written off more than ₹100 cr of
receivables over FY2009-2020. At any point of time, about 20%-35% of its receivables are more than 90
days overdue from the day they became payable. As a result, the company is not able to convert its profits
into cash flow from operating activities completely.
Nevertheless, the business of Honeywell Automation India Ltd is very asset light as relies primarily on the
intellectual power of human capital to add value to the customers. As a result, the growth of the company
over the years has come with minimal capital expenditure in fixed assets. The company has been able to
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report a large amount of surplus cash flow from its business activities, which has been shared with the
shareholders as dividend and the remaining is available with the company as cash & investments.
The business of Honeywell Automation India Ltd is deeply integrated with its global group entities.
Developments at the Honeywell global level have a direct impact on Honeywell Automation India Ltd. In
the past, there had been instances when the company had to support other group entities by giving them
inter-corporate deposits. Though in recent times, the company has not reported such transactions; however,
an investor should continuously keep a close watch on the intra-group transactions of the company.
Over the years, Honeywell Automation India Ltd has reported a significant amount of expense as global
corporate overhead allocation, which demands further assessment by the investors. Similarly, the company
has reported very high travelling expenses every year, which demand deeper due-diligence by the investor.
In the past, there have been instances where the company could report higher profits due to wrongful
allocation of costs to projects. The company acknowledged that these were due to weak internal controls.
An investor should keep a close watch and study the annual reports in-depth so that she may identify
anything out of ordinary in the reports.
Going ahead, we believe that investors should keep a close watch on the profit margins of the company.
The investor should closely track the intragroup transactions within Honeywell group as well as the
developments at Honeywell global level that may affect the business of Honeywell Automation India Ltd.
During economic downturns, an investor should keep in mind that it may take some time before its impact
becomes visible on the business of Honeywell Automation India Ltd.
These are our views on Honeywell Automation India Ltd. However, investors should do their own analysis
before making any investment-related decisions about the company.
P.S:
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4) Heidelberg Cement India Ltd

Heidelberg Cement India Ltd is a cement manufacturer in India, which is a subsidiary of the
HeidelbergCement AG, Germany.
While analysing the past financial performance of the company, an investor notices that it used to have a
financial year from January to December until FY2013. However, thereafter, the company changed its
financial year from April to March. As a result, Heidelberg Cement India Ltd reported financial
performance of 15 months from January 2014 to March 2015 to align its financial year from April to March.
Therefore, an investor should note that in FY2015, the financial data of the company represents a
performance of 15 months whereas for all other years in FY2009 to FY2020, the data represents the
performance of 12 months.
10 years
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Financial and Business Analysis of Heidelberg Cement India Ltd:
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While analyzing the financials of Heidelberg Cement India Ltd, an investor would note that in the past, the
company has been able to grow its sales at a rate of 10%-12% year on year. Sales of the company increased
from ₹936 cr. in FY2009 to ₹2,170 cr in FY2020.
An investor would notice that in the last decade (FY2009-2020), the sales growth of the company has not
been consistent and it faced periods of decline in its sales.
The company witnessed a decline in its sales in FY2010 and FY2012.
 In FY2010, the sales of the company declined from ₹936 cr in FY2009 to ₹866 cr in FY2010, a
decline of 11%.
 In FY2012, the sales of the company declined from ₹988 cr in FY2011 to ₹870 cr in FY2010, a
decline of 12%.
 In FY2016, it may look like that the sales of the company declined from ₹2,044 cr in FY2015 to
₹1,648 cr in FY2016; however, the investor would remember that FY2015 contains data for 15
months. Therefore, a simple deduction of data for 12 months can be done in the following manner:
₹2,044 * 12/15 = ₹1,635 cr. Therefore, it turns out that in FY2016, the sale of 1,648 cr did not
represent a decline in the sales, if compared for 12 months’ performance. Moreover, an investor
would also appreciate that this calculation is a quick back of the envelope method. To be more
specific, an investor may add the sales of four quarters, from June 2014 to March 2015, to get the
exact sales for the 12 months ending in March 2015.
Nevertheless, an investor observes that in the last 10 years, Heidelberg Cement India Ltd had witnessed
fluctuating sales performance with a decline in sales in FY2010 and FY2012.
Similarly, when an investor analyses the profitability of the company over the last 10 years (FY2009-
FY2020), then she notices fluctuating cyclical patterns in the profit margins as well. The operating profit
margin (OPM) of the company used to be 18% in FY2009, which consistently declined to 7% in FY2011.
Thereafter, the OPM increased to 16% in FY2015 and then again declined to 14% in FY2016. The OPM
has since then improved to 24% in FY2020.
While an investor observes the net profit margin (NPM), then she notices that for most of the years, the
NPM followed the pattern of OPM. However, in FY2013, Heidelberg Cement India Ltd reported net losses.
Such kind of fluctuating performance of sales revenue and profitability indicates that the business
performance of Heidelberg Cement India Ltd is exposed to cyclical factors.
she acknowledges the need for a deeper understanding of the business of Heidelberg Cement India Ltd. She
needs to understand the factors influencing the business performance of the company. This is because, once
an investor has understood the key factors for Heidelberg Cement India Ltd, then she would be able to have
a view about the expected future performance of the company.
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From our previous analysis of multiple such companies that faced cyclical performance in the sales and
profit margins, an investor would remember that most of these companies operate in commodity product
businesses with intense competition and lower barriers to entry. Such companies usually have large
suppliers with huge bargaining power and customers with many choices to buy. Therefore, such companies
tend to face tough business phases and have to take a hit on their profit margins during business down
phases.
Let us see if Heidelberg Cement India Ltd has such a business model.
An investor gets to know about the cyclicity of the cement industry when she reads the credit rating report
of Heidelberg Cement India Ltd prepared by India Ratings in March 2020, page 3:
Exposure to Industry Cyclicality: HCIL’s EBITDA/tonne remains vulnerable to the company’s

ability to maintain its operating parameters amid the inherent cyclical trends in the demand and
supply of cement.
The investor gets a good understanding of the business model of the company when she puts a special focus
on the analysis of the company during the periods in which its sales and profit margins declined.
In FY2010, when Heidelberg Cement India Ltd witnessed a decline in sales by 11% and a decline in OPM
from 18% to 11%, then the company explained many aspects of its business to the shareholders.
The main characteristics of this industry is that it is highly fragmented, regional, cyclical and
capital intensive.
Further, during the second half of the year the demand for cement also declined due to heavy
rains in most parts of the Country resulting in subdued construction activity.
The oversupply coupled with the poor off take of cement created demand supply mismatch puting
pressure on prices. This lead to decline in the capacity utilization throughout the
industry. Significant rise in costs, especially the price of coal, petroleum products, power and
freight cost further eroded the profitability.
Rising input costs continue to be a serious threat to the industry. Reserve Bank too has raised its
March 2011 WPI forecast from 5.5% to 7%. Prices of all key raw materials, fuel and power
have increased substantially over the last year and have adversely impacted the margins.
Key threats to the industry are:-
Excess capacity build up, which may impact prices in the short run.
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From the above information shared by Heidelberg Cement India Ltd, an investor would appreciate that the
cement industry faces intense competition because it is highly fragmented with many suppliers who have
created an overcapacity i.e. supply of cement is more than its demand. In addition, the industry is cyclical
because its demand is impacted by factors like monsoon. Good monsoon leads to a rise in agricultural
income, thereby leading to higher demand from the rural area. However, lesser rains or draught decreases
the demand for cement. Similarly, higher rains lead to floods, crop damage, and in addition, difficulty in
constructing houses. Therefore, both lesser and excessive rains lead to lower demand.
The demand of the cement industry also depends a lot on the infrastructure spending by the government.
The industry is cyclical in nature and to a great extent depends on the infrastructure spending by
the Government.
Therefore, an investor would notice that the factors controlling the demand for cement, housing demand
and infrastructure spending have a cyclical behavior. When an industry has periods of alternate high and
low demand and in addition, it has too many players (fragmented industry), who have created an oversupply
situation, then an investor would appreciate that the negotiating, pricing, or bargaining power of the cement
manufacturers would remain low.
Therefore, an investor would appreciate that the cement industry is facing such an intense competition.
Moreover, when such an industry faces an increase in raw material costs like coal, petroleum products,
power, transportation costs etc. as explained by Heidelberg Cement India Ltd in FY2010 annual report
shared above, then it is obvious that the cement manufacturers would not be able to pass on the increase in
the raw material costs to their customers. As a result, the companies would have to take a hit on their profit
margins.
In the FY2009 annual report, Heidelberg Cement India Ltd explained how intense competition makes
situations difficult for the manufacturers.
the scenario changed during the second half of the year since not only did the demand recede to
some extent but the supply also increased as the additional capacities came on stream. This led to
a temporary demand supply mismatch leading to fall in cement prices almost throughout India.
Moreover the cement was also brought in from the distant markets into the markets in which we
operate. Consequently, it was difficult to protect the margins during the second half.
The company explained that due to overcapacity in the cement industry, manufacturers from far areas
started transporting cement to the markets, which had some demand. As a result, the prices of cement
declined and the profit margins reduced.
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Over the years, the company has considered the inability to pass on the increase in the costs to the customers
as one of the biggest threats.
Rise in input costs due to the high rate of inflation is a serious threat for the industry since it may
not be possible to proportionately increase the selling price of cement thus affecting the profit
margin.
…the new capacities coming on stream there would be pressure on prices, thereby eroding
margin to some extent and also leading to reduction in capacity utilisation.
In FY2011, when Heidelberg Cement India Ltd reported its lowest OPM of 7%, then it indicated the
inability of the cement manufacturers to increase prices in the light of numerous adverse developments as
the reason for low profitability.
During the year sharp rise in input costs without any significant increase in realizations impacted
margins. During February 2011, linkage coal prices increased in the range of 30% to 150% for
various grades. Besides the price of coal, its shortage also troubled the industry…. During the
year power tariff was also increased as a result of increase in coal prices.
Shortage of coal affected power generation adversely, thereby reducing the fly ash availability.
Poor quality and unavailability of gypsum locally, forced your Company to import gypsum.
The weakening of Rupee increased the cost of imported Gypsum by about 10%. Significant
cost increases were also witnessed in pet coke, slag and bags. Freight cost for transportation by
road increased due to increase in diesel price. Railway freight for Cement and Coal was also
increased during the year. Imposition of excise duty on fly ash & coal, enhancement of excise duty
on cement and HSD price hike further aggravated the position.
In light of the above-detailed explanation by the company about the different aspects where the company
faced an increase in raw material prices that it could not pass on to the customers, an investor would
appreciate that the company had to take a hit on its profitability margins. In FY2011, Heidelberg Cement
India Ltd reported its lowest ever operating profit margin.
The company reported that large capacity buildup in the industry is the reason for such a tough business
phase.
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There has been significant capacity addition during the last three years. Cement demand has not
been able to keep pace with the additional supply in the market. The resulting demand supply
mismatch in certain regions may continue to affect the cement prices and realisations for a few
more quarters.
In FY2013, the company reported its poorest performance and reported net losses. If an
Owing to the sluggishness in demand, the high prices of power & fuel, freight and other raw
materials could not be fully absorbed by the industry leading to a drop in profitability.
In FY2015, even though the company reported a significant jump in its OPM from 8% in FY2013 to 16%
in FY2015, still, it reported that the condition of the industry is still poor with large underutilized capacity
and inability to pass on the increase of raw material costs to the customer.
Supply overhang due to large capacity additions in the past few years continues to put pressure
on prices. This has led to a drop in capacity utilisation throughout the industry.
All cost increases will burden the industry as it has not succeeded in passing these to the
customers over the past few years.
..the overall scenario remains one of over-capacity. Industry estimates put the capacity utilisation
levels in the financial year 2015-16 (FY16) in the range of 71% to 72%. Further, the
industry’s inability to pass on the input cost increases to the customers during the past few years
have led to a steady erosion of margins.
The supply side continues to stare at over-capacity resulting in lower capacity utilization. A
significant increase in the power & fuel cost impacted the margins since the industry was unable
to pass on the increases to the consumers mostly due to competitive environment.
Industry operated at an average capacity utilization of ~65% during FY18, flat to marginally
positive over the previous year.
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Over the next two years, about 43 million tonnes of capacity addition is expected, mostly through
brown field expansion projects.
Low demand with increased availability took away the pricing power making it difficult for the
industry to pass on the increased input costs to the market
Therefore, an investor notices that the company has clearly stated to its investors that the position of
overcapacity in the industry is hurting the profit margins. As a result, an investor notices that Heidelberg
Cement India Ltd has taken many steps to reduce its costs in order to improve its profit margins.
a) Control of power and fuel costs:

While analysing the operating costs of Heidelberg Cement India Ltd, an investor notices that over the years,
power & fuel cost of the company had been increasing year after year. In FY2012, power & fuel costs
increased to the level of 35% of sales.
In the FY2012 annual report, the company recognized power & fuel costs as an important area to focus on.
Therefore, it started exploring ways to reduce power costs.
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a.i) Waste Heat Recovery Plant:
One of the ways to reduce power was to install a waste heat recovery (WHR) power plant.
The Company is setting up a Waste Heat Recovery based Power Generation Plant at its clinker
unit at Narsingarh, Damoh (M.P.) which will generate power for captive consumption reducing
dependence on grid power and also the amount spent on power.
The WHR plant was completed in FY2016.
The commissioning of our Waste Heat Recovery based power plant at Narsingarh is a major step
in the direction of reducing the power cost of the company.
An investor gets to know the true benefits of the WHR plant in the conference call conducted by Heidelberg
Cement India Ltd in February 2018, when she reads that the cost of power generated by the WHR plant is
₹0.5 per unit. In comparison, the cost of power from the grid was ₹5.5 to 6 per unit.
Management: Your question is with respect to waste heat recovery power generation cost vis-à-
vis the grid cost?
Sanjay Nandi: Exactly. I just wanted to know how much cost we can save.
Management: It is very negligible, waste heat recovery power cost is variable cost, it is nothing,
it is hardly 50 paisa per unit power generation cost.
Sanjay Nandi: 50 paisa per unit compared like normal generally comes at Rs. 4 – Rs. 4.5, right
sir?
Management: It is more, in MP it invariable power cost from the grid is Rs. 5.5 – Rs. 6.
In the FY2018 annual report, an investor notices that the power from WHR plant meets about 40% of the
power needs of the Narsingarh Plant, Madhya Pradesh.
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The first and foremost initiative was to reduce our dependence on costly grid power and therefore
installed Waste Heat Recovery (WHR) Plant and successfully substituted close to 40% of the grid
power requirements of Narsingarh Plant.
a.ii) Souring of solar power for Ammasandra plant, Karnataka:
In FY2019, Heidelberg Cement India Ltd entered into a contract to source solar power for about 50% of
the total power requirement of Ammasandra plant, Karnataka.
The Company also entered into a 25-year solar power purchase agreement for its Ammasandra
Unit, which will meet close to 50% of its energy requirements.
a.iii) Sourcing power from alternate sources instead of contracted power from the grid:
The company started looking for alternate avenues for power other than the contract demand from the
distribution companies.
Another initiative that has made a remarkable difference to our power cost is reducing the
Contract Demand with the Discom. With due diligence, our teams have progressively optimized
Contract Demand for power across all plants. This has helped us save substantial amount on
account of contract demand charges levied by Discom.
In the conference call conducted by Heidelberg Cement India Ltd in February 2020, the company intimated
the analysts that the power sourced from outside sources is 20-25% cheaper.
Mangesh Bhadang: Two, three questions: Firstly, the power that you said, sourcing outside, if we
may know the rate of the power that you are purchasing for? And again for your Ammasandra
unit, I think you have a solar PPA. What could be the rate for that?
Management: At least 20%, 25% the power sourced from outside is cheaper.
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In February 2020 investor presentation, page 6, an investor notices that the company is dependent on the
grid for only 65% of its power requirements. It indicates that it is able to meet about 35% of the power
needs from WHR plant, solar power, and alternate outside sources.
HCIL’s dependence on grid power decreased to 65%.
Therefore, an investor observes that the initiatives taken by the company to reduce its power and fuel costs
have resulted in good benefits. In FY2012, the power & fuel cost has increased to 35% of sales, which has
steadily declined to 24% in FY2019. It is one of the major reasons leading to the improvement of the
profitability margins of the company over the years.
b) Lower transportation costs:

While analysing the company, an investor notices that the company has undertaken other initiatives to
reduce its transportation costs.
b.i) Higher focus on road transport:
After the company reported its lowest ever OPM of 7% in FY2011, Heidelberg Cement India Ltd undertook
many initiatives to reduce its operating costs. One of the initiatives taken was to reduce its reliance on
railway freight and increase the share of road transport.
Our strategy to increase road dispatches, in view of the steep hike in railway freight towards the
end of the first quarter of 2012, has yielded results and during the year your Company crossed the
initial target of one million tonne road dispatches in Central India
The company also took other steps like direct dispatches of cement to customers from its plants instead of
warehouses to reduce transportation costs.
Steps like route rationalisation, reduction in turnaround time and direct dispatches from plant
instead of warehouse resulted in significant savings.
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b.ii) Overland conveyor belt to reduce the cost of limestone transportation:
The company installed a 21 km long conveyor belt to transport limestone from the mine to the plant, which
reduced the transportation costs.
The transportation of limestone from Patheria Mines to Narsingarh Clinkerisation Plant is done
in a sustainable manner via a 21 km long Over Land Belt Conveyor (OLBC). Despite being capital
intensive, OLBC has helped in reducing our carbon footprint and transportation cost as well.
b.iii) Optimization of logistics:
In addition, the company undertook other optimization initiatives like for transportation of fly ash to reduce
costs by 21%.
The Company was also able to reduce fly ash cost by 21% through optimization of logistics at
Damoh and Jhansi Plants.
c) Use of cheaper pet coke as fuel instead of costlier coal:

In order to control its operating costs, the company shifted from using coal in its kiln to using pet coke,
which is a cheaper source. Pet coke is so cheaper when compared to coal that in FY2017, despite doubling
of pet coke prices, it was still cheaper to use than coal.
Despite the doubling in prices from USD 40 per tonne, pet coke still continues to be economical
compared to coal, though this increase has impacted the margins of the industry.
d) Reverse auction of bags to reduce packaging costs:

In FY2016, the company initiated reverse auction to source packaging bags, which resulted in additional
savings.

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Packing costs were low due to fall in polypropylene granule prices. Additionally, the
Company managed to lower cost by about 7% by conducting reverse auctioning of bags.
e) Different ways of sourcing gypsum to save costs:

In FY2018, Heidelberg Cement India Ltd started the e-auctioning of gypsum to reduce costs by about 18%.
The Company procured natural gypsum through e-auction route and achieved cost reduction of
18% despite the uptrend witnessed in international price of gypsum.
In FY2019, the company entered into long-term contracts to sources gypsum that resulted in an additional
cost savings of about 5% over FY2018.
During the financial year, the Company entered into a long-term contract for procurement of
gypsum leading to reduction in cost by 5% over the previous year.
f) Reducing the interest expense on the loans:

While reading the annual report of Heidelberg Cement India Ltd, an investor notices that the company did
a debt-funded capital expenditure in 2011-2013 to expand its manufacturing capacity.
While analysing the financial performance of the company, an investor witnesses that until FY2012, when
the company’s capital expenditure was under execution and the interest costs were being capitalized; it was
reporting profits. However, in FY2013, when the capital expenditure was completed and the interest cost
on the entire loan was deducted in the profit & loss statement (P&) as an expense, then Heidelberg Cement
India Ltd reported net losses. In FY2013, the interest expense in the P&L increased to ₹106 cr from ₹10 cr
in FY2012.
It seems that the company acknowledged high-interest costs on the debt as one of the reasons for the loss.
Therefore, as a solution, it issued non-convertible debentures to the parent company at a comparatively
lower interest rate.
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In order to curtail the finance costs, your Company issued Debentures aggregating to INR 3700
million to its ultimate holding company HeidelbergCement AG of Germany thus facilitating
repayments of high interest bearing term loans of INR 3700 million taken from banks for Damoh
and Jhansi expansion projects. These Debentures carry a fixed interest rate of 10.4% per annum
which will lead to a saving of around 3% per annum in the interest costs.
As a result, the company could save about 3% per year on the loans of ₹370 cr, which is a saving of about
₹11.1 cr per year.
g) Increase in the capacity utilization levels:

Perhaps the most important factor that has led to the lowering of operating costs and the increase in
profitability margins of Heidelberg Cement India Ltd from FY2015 to FY2019 is the sustained increase of
capacity utilization levels over these years.
Over the years, we have consistently and steadily increased the capacity utilisation from about
78% in FY15 to about 91% in FY19.
The increase in capacity utilization in a capital-intensive industry like cement has a huge impact on the
profitability margins. This is because all the fixed costs of the company are divided over a higher production
volume of cement. As a result, the costs per tonne of cement come down and the profitability per tonne of
the cement goes up.
Therefore, apart from the cost reduction measures discussed above, the significant increase in the capacity
utilization of the plants seems one of the major steps that has led to the increase in the profitability of
Heidelberg Cement India Ltd.
However, at this stage, an investor would remember the above discussion about the cement industry in
which we could observe that it is suffering from high installed capacities resulting in low capacity
utilization.
Heidelberg Cement India Ltd has stressed year after year that the significant underutilized vacant capacity
has led to a tough situation for the industry. The industry is not able to pass on the increase in raw material
costs to its customers due to its oversupply situation. This has been true for almost the entire previous
decade.
A reading of the FY2011 annual report indicates the extent of overcapacity in the cement industry when an
investor notices that the average capacity utilization of the industry is 73%.
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During CY 2011 approx. 20 Million t of cement capacity was added by the industry taking
the overall installed cement capacity to approx. 296 Million t as on 31 st December 2011.
Capacity utilization during CY 2011 averaged at 73% against 76% for CY 2010.
While reading the development of the cement industry by way of analysis of Heidelberg Cement India Ltd
over the years, then she notices that the intensely competitive position of the industry along with huge
oversupply has worsened over the years.
By 2019, the condition of the industry as measured by total manufacturing capacity and its utilization has
worsened further. From 2011 to 2019, the total capacity has increased from 296 MTPA to 495 MTPA
whereas the utilization has declined from 73% to 68%.
February 2020 investor’s presentation, page 4:
All India installed cement capacity estimated to be c. 495 Mn T.
During calendar year 2019, cement Industry reported production volume growth of 3.5%. The
cement Industry operated at an average utilization of c. 68%.
In addition, as per the FY2019 annual report, the investor notices that the cement industry is planning to
make substantial capacity additions.
Over the next two years, ~45 million tonnes additional capacity is expected to get commissioned
This comes as a sharp contrast to the common assumption that any industry usually adds capacity when the
utilization levels increase to a high level. Then why is it that the cement industry is continuously adding
capacities despite low capacity utilization levels.
An investor would appreciate that more capacity additions in an industry, which is facing an oversupply
will further erode the pricing power of the manufacturers. Therefore, in a normal market, it is in the favour
of the suppliers to use their existing capacities fully before they resort to capacity addition.
However, an investor would notice that in the cement industry, this normal market assumption has not
worked.
The failure of normal market forces of supply and demand and their impact on the price of cement was
noticed many years back by the Builder Association of India (BAI), which primarily consisted of the
consumers of the cement industry. When BAI noticed that despite significant underutilized capacity, the
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cement manufacturers are not producing cement in sufficient quantities. As a result, there was an artificial
shortage situation for cement in the market, which has led to an increase in the price of cement.
Therefore, the BAI complained against the cement industry to the Competition Commission of India (CCI)
about the cement manufacturers acting as a cartel by producing a lower amount of cement and keeping the
prices higher. CCI asked the Director General (DG) to conduct an investigation. After the investigation,
CCI found that indeed, the cement manufacturers were coordinating with each other to restrict supply and
keep the prices higher.
As a result, CCI held the cement companies guilty of acting in collaboration with each other to distort the
market and in turn hurting the consumers, the market, and the economy. CCI put a steep penalty of about
₹6,700 cr on various cement manufacturers as well as their industry body, Cement Manufacturers’
Association (CMA). CMA was held guilty of providing the platform where the cement players met and
coordinated their production and pricing strategies in order to keep the prices higher.
Competition Commission of India’s order on the Cement Manufacturers:
The CCI order August 31, 2016, downloadable from the CCI website (click here) is very interesting
reading. We have incorporated the key aspects from the order below, as the order is a very important
resource to understand the cement industry and its dynamics.
Key aspects of the complaint by the Builders’ Association of India (BAI):
 Page 10: Cement manufacturing units had deliberately reduced their production and produced much
less than their installed capacity to create an artificial scarcity and raise the prices of cement in
order to earn abnormal profits.
Key findings of the investigation conducted by the Director General (DG)
 Page 22: The nature of product being almost homogeneous in nature facilitates oligopolistic
pricing. Further, the cement industry has witnessed a lot of consolidation and concentration of
market in the last decade. However, in terms of market power, none of the companies has the
strength to operate independently. The DG has submitted that the price of cement charged by all
the companies is not at competitive levels and the cement manufacturers have been operating at
a profit margin of more than 25%.
 Page 22: there has been a continuous divergence between the cement price index and the index
price of various inputs like coal, electricity and crude petroleum and the gap has widened since
2000-01. The price of cement is rising faster than input prices.
 Page 23: It has been noted by the DG that the price of cement has been on rise since 2004-05 from
about Rs.150/- per bag to close to Rs.300/- in March 2011, whereas during the same period, the cost
of sales has only increased about 30%. As such, the price of cement has been independent of the
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cost of sales. The price of cement is changed frequently by all the companies. Sometimes, the price
changes are made twice a week.
 Page 27: The Opposite Parties were not able to substantiate reasons for low capacity utilisation
even during the period when the demand was high.
 Page 27: According to the DG, reduction in capacity utilisation is not in line with the overall growth
of Indian Economy. Further, as far as consumption is concerned, whatever is produced by the
cement manufacturers is consumed in the market. Therefore, the argument of cement
manufacturers that the capacity utilisation has been lower in recent years because of low demand
is not tenable.
 Page 29: Hence, the DG has concluded that the reduction in capacity utilisation during 2009-10
and 2010-11 was deliberate in order to limit the supply of cement in a concerted manner to charge
a higher price.
 The DG, during the investigation found instances where the prices of cement were increased after
the cement manufacturers met in their industry body (CMA) meetings. Page 106:
Key parts of the order by CCI:
 Page 144: The Commission notes that evidently the growth rate in production lagged substantially
in 2010-11 as against the growth rate of capacity additions. Installed capacity witnessed an increase
in growth rate by 06%, but the production grew marginally by 2.85% only. In comparison, in
the year 2009-10, the growth rate in capacity addition was 19.80% and growth rate in production
was 12.87%.
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 Page 151: From the data tabulated above, it is evident that during November 2010, all the cement
companies including the Opposite Parties had reduced production, although in 2009, in some cases,
there was drop in production and in many cases there was increase also.
 Page 161: The Commission further observes that the third and fourth quarter of 2010-11 witnessed
a GDP growth rate of 8.3% and 7.8% at factor cost respectively and the construction
industry witnessed a growth of 9.7% and 8.2% in Q3 and Q4 of 2010-11 respectively.
However, the cement industry registered a negative growth rate of 5.43% and 3.41% in
cement production in November and December of 2010-11, respectively.
 Page 161: Thus, the Commission observes that the cement companies reduced production and
dispatches of cement in a period when the demand from the construction sector was positive during
November and December, 2010 and thereafter raised prices in the months of January and February,
2011,
 Page 161: Thus, it is evident that the cement companies have been limiting and controlling supply
in periods just before the peak demand season to create artificial scarcity in the market in order
to sell cement at higher prices in the peak season.
As a result, the CCI observed that:
 Page 175: The Commission notes that the impugned action of the Opposite Parties was not
only detrimental to the interests of the consumers but the Opposite Parties also earned huge profit
margins by acting in concert and co-ordination upon prices, production and supplies. Such
conduct deprives not only the consumers but the economy also from exploiting the
optimal capacity utilisation and thereby reducing prices. Further, the act of the Opposite
Parties is also detrimental to the whole economy since cement is a critical input in construction and
infrastructure industry vital for economic development of the country.
From the above order of CCI on the cartelization of the cement industry, an investor notices that:
 The cement manufacturers reduced production even when there was a demand. After all, whatever
they were producing was getting completely sold in the market.
 Cement manufacturers reduced cement production even at times when the India GDP as well as
the construction industry was growing at a fast pace.
The cement companies appealed against the CCI order in National Company Law Appellate Tribunal
(NCLAT). However, the NCLAT dismissed their appeal in July 2018. (Source: Cement firms lose
cartel case: The Telegraph).
Currently, the cement companies have appealed against the CCI order in the Supreme Court of India
(Source: SC stays CCI penalty of ₹6300 crore on cement firms: Livemint)
Investors would notice that the CCI order explains the unique situation observed in the cement industry
where there was continuously a low capacity utilization. However, still, the cement manufacturers were
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adding new capacities. This goes against the normal market behavior where any company first attempts to
utilize its existing manufacturing capacities fully before it puts up a new manufacturing plant.
An investor may notice that in the case of Heidelberg Cement India Ltd, the company has increased its
manufacturing capacity only when it has reached almost 100% capacity utilization in its existing plants.
At the time of capacity expansion in FY2013, the company’s existing plants were running at near full
capacity utilization.
Despite the challenging times and slowdown in GDP growth, the Company achieved a
healthy capacity utilization of 93% as against the industry average of around 75% to 80%.
Similarly, in FY2020, the company announced the plans to expand its capacity when its existing plants
reached near full utilization levels.
February 11, 2020 corporate announcement by Heidelberg Cement India Ltd to the Bombay Stock
Exchange (BSE), page 1:
Moreover, an investor would also recollect from the above discussion that the capacity utilization of
Heidelberg Cement India Ltd has increased over FY2015-FY2019:
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Therefore, an investor may think that Heidelberg Cement India Ltd is not part of the cartel. Moreover, its
name does not feature in the list of the companies on which CCI has put a penalty in its order. Therefore,
an investor may believe that Heidelberg Cement India Ltd is immune to the outcome of the appeal of cement
manufacturers pending in the Supreme Court of India.
However, an investor would appreciate that the intention of the regulatory action by CCI and the penalty
of about ₹6,700 cr put by it on the cement manufacturers is to break their cartel. The message from CCI to
the cement manufacturers and their industry body, CMA, is to follow normal market behavior where
different players attempt to maximize their production even if they have to give discounts to the customers
to sell higher volumes. If CCI/the govt. were able to succeed, then an investor would appreciate that the
supply of cement would increase and the prices of cement may decline.
Considering the 68% capacity utilization of cement industry in 2019, an investor can understand that the
cement production can increase to 1.5 times of the current production without any additional investment in
the industry only by making the cement manufacturers follow the fair market principles.
An investor should not forget that Heidelberg Cement India Ltd is a part of an industry where the product
is a non-differentiable commodity. If there is a price difference, then the consumer can easily switch to
another supplier without any impact to the building or the road it is constructing.
Therefore, if the cement industry starts to follow the fair market principles of demand & supply, and in
turn, starts to utilize its underutilized capacity, then the price of cement for the entire industry will decline.
The reduction in the selling price of cement will affect all the players in the industry. The current high
operating profit margins may not be sustainable in the normal market scenario.
Therefore, an investor should keep a close watch on the developments related to the appeal of the cement
manufacturers in the Supreme Court of India. In addition, she should keep a close watch on the signs of the
return of the fair market principles in the cement industry like:
 Cement manufacturers trying to offer discounts to the customers in order to fully utilize their
installed cement capacity.
 Cement manufacturers installing new capacities only after their existing capacities are fully
utilized.
It is important to monitor these dynamics. This is because a return of fair market principles in the cement
industry would lead to a sharp increase in the supply of cement along with a possible decline in its prices.
While looking at the tax payout ratio of Heidelberg Cement India Ltd., an investor notices that for most of
the last 10 years (FY2010-2019), the tax payout ratio of the company has been in line with the standard
corporate tax rate prevalent in India.
For the years in which the tax payout ratio is different from the standard corporate tax rate like FY2013 &
FY2015 (50%) and FY2016 (22%), the investor notices that it is primarily due to deferred tax charges. For
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example in FY2016, the major difference in the tax payout ratio is due to certain expenses that are
deductible as per the Income Tax Act.
Operating Efficiency Analysis of Heidelberg Cement India Ltd:
a) Net fixed asset turnover (NFAT) of Heidelberg Cement India Ltd:

When an investor analyses the net fixed asset turnover (NFAT) of Heidelberg Cement India Ltd in the past
years (FY2009-19), then she notices that the NFAT of the company has declined from 2.91 in FY2011 to
0.89 in FY2016. Thereafter, the NFAT has increased to 1.20 in FY2019.
The sharp decline in the NFAT from FY2011 to FY2013 from 2.91 to 1.12 seems to be due to the capacity
expansion done by the company in 2013.
The expansion project at Jhansi Unit in U.P. has been successfully completed and commercial
production from the new plant at Jhansi commenced on 16 th January 2013. Trial runs at the new
plants at Narsingarh and Imlai in Damoh (M.P.) have started and commercial production is
expected to commence shortly.
From FY2016, the NFAT has increased steadily from 0.89 to 1.20 in FY2019. The increase in NFAT seems
due to steadily increasing capacity utilization over FY2015-FY2019.
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Nevertheless, an investor would notice that in FY2019, the NFAT of Heidelberg Cement India Ltd is 1.20
at more than 90% capacity utilization levels. The low NFAT indicates that the cement industry is a very
capital-intensive industry where companies need to invest a lot of money in the fixed assets to produce
sales.
If an investor appreciates that the current cement prices that are leading to the NFAT of 1.20 at near full
utilization are artificially inflated due to cartelization of cement manufacturers, and the real market price of
cement should be lower, then she would notice that the NFAT of the cement industry would be even lower.
It may even be less than one if the cement industry operates with fair market principles.
An investor may use another method of calculating the asset turnover. From FY2012 annual report, page
7, an investor gets to know that Heidelberg Cement India Ltd spent about ₹1,570 cr on the expansion
projects.
Capital expenditure on the entire expansion project is about MINR 15700 (including interest
during the construction period that has been capitalized), which has been funded through a mix of
internal accruals, External Commercial Borrowings (ECB) from the promoter group and term
loans from Indian Banks.
The expanded capacities became functional in FY2013. Therefore, an investor would be right to assume
that the sale of ₹870 cr in FY2012 is from the previously installed capacities. When an investor notices the
sale of the company at ₹2,170 cr in FY2020 at near 100% capacity utilization level, then she can assume
that the incremental sales of ₹1,300 cr (= 2170-870) from FY2012 to FY2020 is due to:
1. Full utilization of newly created capacities in FY2013 and

2. Utilization of previously unutilized part of the old capacities.
Therefore, an investor would appreciate that the investment of ₹1,570 cr done by the company in the
capacity expansion has led to less than ₹1,300 cr of sales after full utilization. This indicates that at the
current cement prices, the investment in the cement industry leads to an NFAT of less than one.
This low asset turnover of less than one has serious implications as a huge amount of incremental
investment is needed to show future growth. For the below illustrations, we assume that the cement industry
has an NFAT of 0.8 (1,300 / 1,570 = 0.828)
For example, Let us assume that in the first year, a cement company targets to achieve ₹1,000 cr. of
additional sales.
 As per the NFAT of 0.8 then it would need to invest INR 1,250 cr. in fixed assets (1,000/0.8,
because the fixed asset turnover ratio is 0.8).
 This ₹1,000 cr. of additional sales would provide additional net profits of ₹120 cr. (assuming 12%
NPM of Heidelberg Cement India Ltd in FY2020).
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 If the cement company retains entire profits and invests in its operations, then this incremental
investment of ₹120 cr. of entire profits would generate only ₹96 cr. of incremental sales in the
second year (as the fixed asset turnover ratio is 0.8, 120*0.8 = 96).
 If the cement company wishes to grow sales by another ₹1,000 cr. in the second year as well, then
it would have to generate ₹904 of sales (=1,000 – 96) by investing additional ₹1,130 cr. (=904/0.8
or can be calculated as ₹1,250 cr of total requirement – ₹120 cr. of net profits reinvested). This
₹1,130 cr. needs to come from either fresh equity infusion or debt.
 Please note that these calculations would give the same inference even if an investor assumes that
the new capital investment in the first year will take about 3 years to reach full utilization and the
company will plan a new capital expenditure only after about 3 years of last capacity addition.
Thus, we may see that with a very low fixed asset turnover of 0.8, a cement company would have to keep
on relying on additional sources of funds to maintain its growth. We observe this aspect of the growth of
the cement manufacturers when we analyse their self-sustainable growth rate (SSGR) discussed below.
Such industry dynamics indicate that the cement industry is very tough to operate where the manufacturers
produce a non-differentiable commodity product after putting in a lot of investment.
In light of this, the regular news of different cement manufacturers going out of business should not come
as a surprise to investors. There has been a lot of consolidation in the cement industry over the years where
a few large cement manufacturers dominate the industry and keep buying the outgoing manufacturers. It
has been the case in India as well as in the overseas markets where a few large players like Ultratech,
Holcim, Lafarge, and Heidelberg etc. are dominating the markets.
In the above discussion, an investor would appreciate that the basis of sales and profits is the current market
price, which as per CCI and the Builders’ Association of India, is artificially inflated by the cement
manufacturers through cartelization.
If the cement industry starts following fair market principles and starts utilising their underutilized
capacities; then as a result, the supply would increase and the cement prices will decline. In such a scenario
of lower cement prices, many more inefficient players will go out of business who are currently surviving
due to cartelization.
An investor would appreciate that the cement industry may need to do a complete overhaul with bringing
in a lot more efficiency in its operations if it has to make good profits while following fair market principles.
The extent of inefficiency in the operations of one segment of cement business becomes evident to the
investor when she goes through the conference call conducted by Heidelberg Cement India Ltd in February
2020. In the conference call, the management of the company explained that in India, none of the cement
companies is making profits in the key segment of ready-mix concrete (RMC).
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In Indian context, no ready mix manufacturer I would say would make money unless he gets cement
at a subsidized rate. If I can sell my cement in the market easily. I would not like to give it to my
RMC unit who will want a cement price close to about Rs.500, Rs.600 lower to make him itself
survive.
The management intimated that the RMC units survive only when the cement-manufacturing unit gives
them cement at a subsidized price.
Therefore, if normal business principles start operating in the cement industry, then it will be very tough
for inefficient players to survive. As a result, an investor should closely monitor the developments related
to the appeal of cement manufacturers pending in the Supreme Court of India. In addition, she should also
keep monitoring the change in the business practices of the cement industry where they might start
following fair market principles like:
utilized.
Any development on these fronts may bring a large change in the manner in which cement industry
functions.
b) Inventory turnover ratio of Heidelberg Cement India Ltd:

Heidelberg Cement India Ltd had been witnessing an improvement from 6.3 in FY2012 to 14.5 in FY2019.
This improvement reflects efficient inventory management by the company. In addition, a high inventory
turnover also indicates that the company does not need to hold a lot of cement stock with itself. This
indicates that whatever cement is produced gets sold in the market, which was also observed by the Director
General in the probe for CCI.
c) Analysis of receivables days of Heidelberg Cement India Ltd:

While analysing the receivables days of the company, an investor notices that the receivables days of
Heidelberg Cement India Ltd have been continuously low in the single digits. In addition, the receivables
days of the company have improved from 10 days in FY2010 to 4 days in FY2019.
A low receivables position of 4 days indicates a very strong position of the company in the business.
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Looking at the inventory turnover ratio as well as at receivables days of Heidelberg Cement India Ltd, an
investor would notice that the company has been able to keep its working capital position under control and
not let it deteriorate over the last 10 years (FY2009-2019). As a result, it has not witnessed a lot of money
being stuck in the working capital.
Over FY2009-19, Heidelberg Cement India Ltd Limited reported a total cumulative net profit after tax
(cPAT) of ₹742 cr. During the same period, it reported cumulative cash flow from operations (cCFO) of
₹2,119 cr. An investor notices that the company has very high cCFO when compared to the cPAT over the
last 10 years (FY2009-2019).
would also understand the situations when the companies would have their CFO higher than their PAT.
Learnings from the article on CFO will indicate to an investor that the cCFO of Heidelberg Cement India
Ltd is significantly higher than the cPAT due to following factors:
 Interest expense of ₹615 cr (a non-operating expense) over FY2009-2019, which is deducted while
 Depreciation expense of ₹738 cr (a non-cash expense) over FY2009-2019, which is deducted while
Therefore, an investor would appreciate that during FY2009-2019, Heidelberg Cement India Ltd has kept
its working capital requirements under check. As a result, it has been able to convert its profits into cash
flow from operations.
The Margin of Safety in the Business of Heidelberg Cement India Ltd:

target growth.
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While analysing the SSGR of Heidelberg Cement India Ltd, an investor would notice that the company has
consistently had a negative SSGR over the years. One of the key reasons for a low SSGR for the company
has been its low net fixed asset turnover (NFAT) i.e. highly capital-intensive business. In the above
discussion on NFAT, an investor would remember that the NFAT of the cement business is even less than
one.
depends on the NFAT of a company.
Where,

Therefore, an investor would notice that Heidelberg Cement India Ltd has continuously had a low SSGR
(negative) over the last 10 years (FY2009-2019). However, an investor would appreciate that the company
has been growing at a rate of 10-12% over the years.
the rate of 10-12% from its business profits. As a result, investors appreciate that Heidelberg Cement India
Ltd would have to raise money from additional sources like debt or equity to meet its investment
requirements.
While analysing the past financial performance of Heidelberg Cement India Ltd, an investor notices that
the company has to rely on additional debt. The total debt of the company increased by about ₹515 cr over
the last 10 years. The total debt of the company increased from ₹2 cr in FY2009 to ₹517 cr in FY2019
indicating a net inflow of ₹515 cr (= 517 – 2) from debt.
In addition, the company has used about ₹158 cr of cash & investments during the last 10 years. The
company used to have cash & investments of ₹496 cr in FY2009, which declined to ₹338 cr in FY2019
indicating utilization of ₹158 cr (=496 – 338).
Therefore, an investor would appreciate that over the last 10 years (FY2009-2019), the company used up
about ₹673 cr (=515+158) of funds apart from its profits to achieve 10-12% growth rate.
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b) Free Cash Flow (FCF) Analysis of Heidelberg Cement India Ltd:

While looking at the cash flow performance of Heidelberg Cement India Ltd, an investor notices that during
FY2009-19, the company had a cumulative cash flow from operations of ₹2,119 cr. During this period it
did a capital expenditure (capex) of ₹2,091 cr. As a result, an investor would note that over FY2010-2019,
Heidelberg Cement India Ltd reported a free cash flow (FCF) of ₹28 cr. ( = 2,119 – 2,091).
In addition to the capital expenditure, the company had to meet the interest expense of about ₹615 cr on the
debt that it had for FY2009-2019. Please note that the amount of interest capitalized by Heidelberg Cement
India Ltd is already reflected in the amount of capital expenditure.
As a result, the company had a total cash shortfall of ₹587 cr (= 28 – 615).
The company met this shortfall from the following sources:
 Additional debt: ₹515 cr as discussed above.

 Using its existing cash & investments: ₹158 cr as discussed above.
Therefore, an investor would notice that the growth achieved by the company during the last 10 years
(FY2009-2019) surpassed the ability of the internal cash generation ability of the company from its cash
flow from operations. As a result, the company had to rely on additional debt and equity to meet its funds’
requirements.
any company.
Additional aspects of Heidelberg Cement India Ltd:

On analysing HeidelbergCement India Ltd and reading its publicly available past annual reports and reading
other public documents an investor comes across certain other aspects of the company, which are important
for any investor to know while making an investment decision.
1) Management Succession of Heidelberg Cement India Ltd:
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While analysing the history of Heidelberg Cement India Ltd, an investor notices that the company was
originally incorporated as Mysore Cements Ltd. In 1958 by S.K. Birla. In 2006, HeidelbergCement of
Germany bought a controlling stake in the company from the promoters. Later, the company was renamed
as Heidelberg Cement India Ltd.
After the takeover of the company, Heidelberg Cement India Ltd appointed Mr. Ashish Guha as the
Managing Director (MD).
Key Management Personnel:
Ashish Guha (M.D).
Mr. N.L. Hamirwasia (M.D), (Resigned w.e.f. 23-08-2006)
Mr. Ashish Guha worked as the MD of the company from 2006 to June 30, 2014. Thereafter, Heidelberg
Cement India Ltd promoted Mr. Jamshed Naval Cooper as MD & CEO of the company.
Note: (a) Mr. Ashish Guha was CEO & MD up to 30th June 2014. His remuneration was directly
paid by HeidelbergCement AG. The Company has not paid any sitting fees /
commission/remuneration to Mr. Guha.
(b) The remuneration of Mr. Jamshed Naval Cooper, CEO & Managing Director is borne and
directly paid by HeidelbergCement AG. The Company does not pay any sitting fees /commission/
remuneration to Mr. Cooper.
Since June 2014, Mr. Jamshed Naval Cooper is heading the company. Therefore, an investor would notice
that Heidelberg Cement India Ltd has been able to get professional talent to lead the company.
In addition, from the above disclosure, an investor also learns that the remuneration of the MD & CEO of
Heidelberg Cement India Ltd is paid directly by the parent company, HeidelbergCement AG. This may be
one of the means by the HeidelbergCement AG group to make the MD & CEO directly responsible to the
interests of the overall objectives of the HeidelbergCement AG group.
Nevertheless, an investor notices that Heidelberg Cement India Ltd has been able to find professional talent
to lead the company over the years.
In addition, while analysing the annual reports of the company, an investor notices that Heidelberg Cement
India Ltd does not have any employee stock options plan (ESOP).

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The Company does not have any Stock Option Scheme.
Over the years, an investor would have come across multiple instances in the companies, which relied
heavily on ESOP to reward their senior management that the professional managers took decisions with the
short-term objective of the higher stock price in mind. Many times, these decisions of the management to
please the stock markets to increase the stock price did not create long-term value for the shareholders.
2) Integration of loans of Heidelberg Cement India Ltd with its parent

HeidelbergCement AG:
From the above discussion on the initiatives taken by the company to reduce its costs, an investor would
remember that in FY2013, the company availed loans of ₹370 cr from its parent company in the form of
debentures to repay high-cost bank loans. In this manner, the company had saved 3% per year in the interest
expenses.
This indicated an instance to the investor that the parent company is willing to offer money to Heidelberg
Cement India Ltd whenever needed.
Previously, in the FY2011 annual report, an investor notices that the parent company had given a corporate
guarantee for the loans taken by Heidelberg Cement India Ltd.
Term loan from Banks (Secured by 100% unconditional and irrevocable Corporate Guarantee of
HeidelbergCement AG, Germany, the ultimate holding company)
From the corporate guarantee, it becomes clear to the investor that the parent company of Heidelberg
Cement India Ltd has given full assurance to the lenders that the money given by them to Heidelberg
Cement India Ltd is safe as the parent company will pitch in to repay the money in case the Indian subsidiary
faces any issues.
Moreover, the credit rating report of Heidelberg Cement India Ltd prepared by India Ratings in March 2020
explains the extent of integration of debt facilities of Heidelberg Cement India Ltd and its parent company.
….and the presence of a centralised treasury, as the debt is initially raised in the HCAG books
and then downstreamed to the Indian entity. The company’s strong legal linkage with HCAG is
reflected by its working capital facilities, which are carved out of HCAG’s global limits and have a
cross-default provision.
The financial position of Heidelberg Cement India Ltd and its parent company is deeply integrated to such
an extent that in March 2017, the credit rating agency, India Ratings upgraded the credit rating of
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Heidelberg Cement India Ltd because the credit rating of its parent company, HeidelbergCement AG had
improved.
March 2017 credit rating report, page 1:
The upgrade reflects an upgrade in the ratings of HCIL’s ultimate parent HeidelbergCement
AG (HCAG, Fitch Ratings Ltd: Issuer Default Rating: ‘BBB-’/Stable ).
An investor would appreciate that the assurances from the parent company in the form of debt, corporate
guarantee, cross-default provisions etc. give confidence to the lenders and other stakeholders in their
dealings with Heidelberg Cement India Ltd, which in turn, helps the company in conducting its business.
However, such integrations of financial dealings of the entire group of companies are a two-way street. If
the company benefits from these intra-group transactions on some occasions, then the investor needs to
understand that at times, the company would be required to offer its financial resources for the benefit of
other group companies.
In FY2018, an investor gets an indication of such a possibility that Heidelberg Cement India Ltd may be
asked to use its financial resources for other group companies when the board of directors asked
shareholders’ approval to give ₹50 cr as a working capital loan to its group company, Zuari Cements Ltd.
…consent of the members of the Company, be and is hereby accorded to give Inter-Corporate
Loans to Zuari Cement Limited (ZCL), part of HeidelbergCement Group, from time to time up to
an aggregate amount of Rs. 500 million (principal amount) on such terms and conditions as may
be mutually agreed between the Company and ZCL for the purpose of working capital of ZCL
Therefore, going ahead, an investor should closely monitor the related party transaction of Heidelberg
Cement India Ltd with its group companies to assess whether there is an attempt to shift the economic value
belonging to the shareholders of Heidelberg Cement India Ltd to other group companies.
3) Management of interest rate risk by Heidelberg Cement India Ltd:

While analysing the annual reports of the company, an investor notices that over the years, Heidelberg
Cement India Ltd has used interest rate swaps to manage its interest rate risk.
Before FY2017, the company used interest rate swaps to convert a variable interest rate into a fixed interest
rate.
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The Company has a cross currency interest rate swap agreement with a bank for ECB Loan of
USD 90,000,000 whereby the Company pays a fixed rate of interest of 7.65% to 9.55% (for various
tranches of loan) and receives a variable rate equal to LIBOR 6M+250 bps on the loan amount.
The swap is being used to hedge the ECB loan taken on floating interest rate of LIBOR 6M+250
bps.
The loss on account of restatement of ECB amounting to Rs. 6,293.18 lacs has been charged off
to Profit and loss account and off set with a similar gain on increase in fair value of cross currency
swap.
From FY2017, Heidelberg Cement India Ltd reversed the nature of the interest rate swap. Now, it started
receiving the variable interest rate and paying a fixed interest rate.
The Company had an interest rate swap agreement whereby the Company receives a fixed rate of
interest of 9.08% and pays interest at a variable rate. The swap is being used to hedge the exposure
to changes in the fair value of its fixed rate unsecured loan. The decrease in fair value of the
interest rate swap has been recognised in finance costs and offset with a similar gain on the bank
borrowings.
The usage of interest rate swaps to measure interest rate risk indicates a prudent practice by Heidelberg
Cement India Ltd.
4) The curious case of interest-free loans from Uttar Pradesh Govt. to Heidelberg
Cement India Ltd:
While reading the annual reports of the company, an investor notices that the UP govt. has offered interest-
free loans to Heidelberg Cement India Ltd.
On the face of it, these loans may seem like free money by the govt. to the company. However, when the
investor analyses further, then she notices that these loans are secured by a bank guarantee. In addition, an
investor would appreciate that the bank providing the guarantee to the UP govt. on behalf of Heidelberg
Cement India Ltd will levy charges to cover the risk the bank is taking. Therefore, overall, the company
ends up paying a price equal to its credit risk.
The Company has availed the facility of interest free loan from ‘The Pradeshiya Industrial and
Investment Corporation of U.P. Ltd.’ (‘PICUP), Lucknow in accordance with the ‘Industrial
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Investment Promotion Scheme-2012′, Uttar Pradesh. This loan is secured by bank guarantee and
repayable after expiry of 7 (Seven) years from the date of disbursement of loan. Effective interest
rate in respect of this borrowing is 9.01% p.a for the year ended 31 March 2019 and 31 March
2018.
An investor would notice that the effective cost of these interest-free loans to the company, 9.01% per year,
is not very different from the interest rate it is paying to its parent company for its loans.
The Company has availed Indian rupees term loan in the form of External Commercial Borrowing
(ECB) from HeidelbergCement AG, Germany, the ultimate holding company outstanding
amounting to Rs. Nil (31 March 2018: Rs. 1500.0 million ) on unsecured basis. This was repaid
fully in current year. Interest rate in respect of this borrowing was 10.5% p.a for the year ended
31 March 2019 and 31 March 2018.
Therefore, an investor would appreciate that the term “interest-free” may lead an investor to think that the
loans are truly free of cost. An investor may think that these loans may seem free money to the company,
which it can simply invest in bank fixed deposits and earn profits. However, it does not seem to be the case
because these “interest-free” loans have an effective cost of about 9.01% per year.
5) Incentives for indirect taxes VAT and GST for Heidelberg Cement India Ltd:
While reading the annual reports of the company, an investor notices that Heidelberg Cement India Ltd is
eligible to receive refunds on the Value Added Tax (VAT), and Central Sales Tax (CST), which are
included in Goods & Services Tax (GST).
The Company is entitled to benefits under the Madhya Pradesh State Industrial Promotion Policy,
2004 and 2010 for the increased cement production facility at Damoh, Madhya Pradesh w.e.f. 18
February 2013. Under the said policy, the Company has been exempted from payment of Entry
Tax on input materials for a period of 7 years and also claim refund upto 75% of VAT/CST paid (
which is now subsumed on GST) on sales for a period of 10 years within the state of Madhya
Pradesh in respect of the increased production facility.
On March 31, 2019, Heidelberg Cement India Ltd had receivables of about ₹63 cr for these benefits.
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Therefore, an investor would appreciate that on March 31, 2019, the company is eligible to receive refunds
of about ₹63 cr from the govt. However, in the February 2020 conference call, the company intimated to
the investors that there are many uncertainties surrounding the amount of refund since the change of taxation
to GST.
February 2020 conference call transcript, page 11:
…under the VAT scheme, we have been claiming that money and we were getting from the
government also in time. Now, post-GST they have given the notification that yes, company will
be entitled to the benefit of the same basis. Again, they have come up in the month of August 2019
one notification which talks about the basis of the calculation differently than what we used to get
under the VAT regime…..Since based on the new notification the amount has reduced
significantly…..we have discontinued this benefit, difference is really huge…
Therefore, going ahead, an investor may keep a close watch on the developments related to the incentives
of past taxation schemes on conversion to the GST regime. An investor may update her assumptions based
on future developments.
The Margin of Safety in the market price of Heidelberg Cement India Ltd:
Currently (June 2, 2020), Heidelberg Cement India Ltd is available at a price to earnings (PE) ratio of about
14.5 based on FY2020 earnings. The PE ratio of 14.5 provides some margin of safety in the purchase price
as described by Benjamin Graham in his book The Intelligent Investor.
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Analysis Summary
Overall, Heidelberg Cement India Ltd seems a company that has been growing its business at a fast pace
of 10-12% year on year for the last 10 years (FY2009-2019). However, the business performance of the
company over this period has been cyclical. The company’s performance has alternated between good
periods and poor performance periods. At times, the company witnessed increasing sales along with
improving profit margins. However, at other times, it witnessed declining sales and profit margins.
The fluctuating performance of the company is primarily due to the non-differentiable commodity product
of the company along with a fragmented industry with large unutilized manufacturing capacity. The cement
industry is exposed to many cyclical factors like general economic cycles, govt spending on infrastructure,
rainfall, agricultural output, and crude oil prices etc. All these parameters expose the cement industry to
alternate periods of good and poor performance.
Over the years, Heidelberg Cement India Ltd has taken several initiatives to reduce its costs like installation
of the waste-heat-recovery power plant, buying solar power, buying power from other sources than the
distribution companies, reducing transportation costs by optimizing logistics and installing overland
conveyor belt etc. In addition, the company prioritized the use of pet coke instead of coal in its plants to
save on costs. The company took loans from its parent company and paid off high-cost bank loans to reduce
interest costs.
Further, the company increased its capacity utilization over the years to benefit from economies of scale.
As a result, the profit margins of the company witnessed a significant increase in recent years.
The near-full capacity utilization of Heidelberg Cement India Ltd is in stark contrast to the very low
capacity utilization of the cement industry. An investor is left guessing the answers for this strange behavior.
However, she gets the answer when she reads about an order of Competition Commission of India (CCI)
where CCI found that the cement industry acted as a cartel to increase prices.
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An investigation by the CCI found that the cement manufacturers are distorting the market by acting as a
cartel. CCI held the cement manufacturers guilty of deliberately producing less cement even when there
was an increase in demand in order to create artificial scarcity. CCI imposed a penalty of about ₹6,700 cr
on the cement manufacturers as well as on their industry body, Cement Manufacturers’ Association (CMA)
because it acted as a platform for the manufacturers to coordinate their prices, production, and other
strategies. CCI held that the cement manufacturers have deliberately kept their capacity utilization low.
The findings of the CCI order explain the unique nature of the cement industry where the manufacturers
are continuously increasing their capacity despite significant underutilization. This is contrary to the normal
market behavior where the manufacturers increase capacity when their existing capacities are almost fully
utilized.
An investor should keep a close watch on the behavior of cement manufacturers to monitor if the industry
starts following the fair market principles when the manufacturers compete with each other in order to fully
utilize their manufacturing capacities even if it involves giving discounts to the customers. This is because
a return of fair market principles to the cement industry will increase the supply sharply and may lead to
the decline in cement prices, which as per CCI are artificially inflated.
An investor notices that the cement manufacturing business is highly capital consuming. It has a net fixed
asset turnover of less than one. As a result, any growth plans of the companies put them under debt burden.
Heidelberg Cement India Ltd was not able to meet its growth requirements from its business profits. It had
to rely on debt to increase its business.
If the cartel of cement manufacturers break, the supply increases, and the cement prices fall, then many
inefficient cement manufacturers may go out of business. An investor should keep a close watch on the
developments in the industry especially the outcome of the appeal of cement manufacturers against the CCI
order in the Supreme Court of India.
Heidelberg Cement India Ltd is a professionally run company that has been able to find professionals for
its leadership positions.
The financial position of Heidelberg Cement India Ltd is closely integrated with its parent group where the
parent company gives it loans and gives guarantees to its lenders for the loans given by them to Heidelberg
Cement India Ltd. However, such comfort comes with trade-offs as the parent group plans to use resources
to Heidelberg Cement India Ltd to give working capital loans to its group company Zuari Cements Ltd.
Going ahead, an investor should keep a close watch on the developments in the cement industry to check
whether the manufacturers have started following the fair market principles like:
utilized.
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It is important to monitor these dynamics. This is because a return of fair market principles in the cement
industry would lead to a sharp increase in the supply of cement along with a possible decline in its prices.
In addition, the investor should keep a close watch on the profitability margins of the company, its debt
levels, and its related party transactions with the group companies. If the investor finds that the parent group
is using the economic benefits belonging to the shareholders of Heidelberg Cement India Ltd to its other
group entities, then she may take a decision accordingly.
These are our views on Heidelberg Cement India Ltd. However, investors should do their own analysis
P.S:
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5) Century Textiles & Industries Ltd

Century Textiles & Industries Ltd is a B.K. Birla group company currently involved in the production of
paper and textiles products, and real estate activities. The company has recently sold its large cement
division.
While analysing the past financial performance of the company, an investor notices that until FY2017, the
company used to report only standalone financials. However, in FY2018, the company formed its subsidiary
Birla Estate Private Limited to focus on real estate development. As a result, the company started to report
standalone as well as consolidated financials from FY2018.
and focus on financials, which represent the business picture of the entire company including its
subsidiaries, joint ventures etc. Consolidated financials of any company, whenever they are present, provide
such a picture.
Therefore, in the analysis of Century Textiles & Industries Ltd, we have used standalone financials up to
FY2017 and consolidated financials from FY2018 onwards.
Business Structure of Century Textiles & Industries Ltd:

When reading about the business of Century Textiles & Industries Ltd, an investor notices that the company
is a combination of different independent business segments. At the start of the decade, in FY2010, the
company had the following segments:
1. Cement division (59% of revenue)

2. Paper & pulp division (21%)
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3. Textiles including Rayon man-made fiber division (Viscose filament yarn & related products)
(18%)
Then in FY2010, the company entered real estate business by starting construction of two commercial
buildings at its mill land in Worli, Mumbai. The company completed the construction and leasing of the
two commercial buildings in FY2016 and since then, it is getting an annual rental income of about ₹140-
150 cr.
Credit rating report by CRISIL in July 2019:
Steady annual gross lease rental of Rs 140-150 crore from the commercial real estate assets is
expected to support cashflows over the medium term.
Therefore, by FY2016, the company had four independent division:
1. Cement division (52% of revenue)

2. Paper & pulp division (24%)
3. Textiles including denim, yarn and Rayon man-made fiber division (22%)
4. Real estate division (0.4%)
Thereafter, from FY2018, the company started restructuring its businesses. In FY2018, Century Textiles &
Industries Ltd did two business restructurings.
First, it sold its yarn & denim division. (FY2018 annual report, page 10):
During the year under review, the Company sold its Century Yarn and Century Denim Divisions,
whose turnover was less than 5% of the total turnover of the Company.
Second, it leased out its Rayon man-made fiber division (Viscose filament yarn & related products) to a
group company, Grasim Industries Ltd for 15 years.
With effect from 1 st February, 2018, the Company has granted Grasim Industries Ltd. (GIL) the
right and the responsibility to manage and operate the Viscose Filament Yarn business…..which
comprises of the manufacturing and sale of viscose filament yarn (including pot spun yarn and
continuous spun yarn), rayon tyre cord and chemicals…..for a duration of 15 years…
Thereafter, in May 2018, Century Textiles & Industries Ltd proposed to demerge its cement division to a
group company, Ultratech Cement Ltd., which was completed in Oct. 2019.
FY2020-Q3 results, page 2:
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The Scheme of Demerger between the Company and UltraTech Cement Limited (“Resulting
Company”) and their respective shareholders and creditors (“Scheme”) was approved by the
National Company Law Tribunal (NCLT) on July 3, 2019 and on completion of all conditions
precedent, as specified in the Scheme, the Scheme became effective on October 1, 2019. Pursuant
to the Scheme becoming effective, the Cement Business Division is demerged from the Company
and transferred to and vested in the Resulting Company with effect from May 20, 2018 i.e. the
Appointed Date.
As a result, the company updated its financials from May 20, 2018, by excluding the performance of the
cement division.
In addition, when the company reported its FY2019 financials in the FY2019 annual report, to provide
relevant comparative financials for the previous period, Century Textiles & Industries Ltd provided its
FY2018 financials adjusted after removing the performance of the cement division from its operating
segments. Instead, the company reported the performance of the cement division under discontinued
business segments.
Accordingly, the Cement business has been shown as discontinued operations in the financial
statements.
In another development during, FY2019, the workers of the sold-out yarn and denim division disputed the
sale in the court of law and Century Textiles & Industries Ltd had to cancel the sale process and take back
the yarn & denim division that was sold in FY2018. However, the company kept the yarn & denim division
as an “asset for sale”, therefore, it classified it under discontinued operations.
Pursuant to the objections raised in the Court, against the transaction by the workers of the Y&D
units, during the year, the Company has terminated the Business Transfer Agreement and
has taken back possession of the Y&D units. The Company is exploring various alternatives for
disposal of the units. Accordingly, the assets and liabilities of the Y&D units are classified as assets
held for disposal and the operations have been classified as discontinued operations.
Therefore, in the light of all these business restructuring-related developments since FY2018, an investor
needs to understand which business segments are included in the sales and profits of Century Textiles &
Industries Ltd since FY2018.
While interpreting the numbers reported by different financial databases, an investor should keep in mind
that the sales and the operating profit include the performance of business divisions, which are classified as
continued operations. Moreover, the performance of discontinued operations is included in the net profits,
cash flow statements and the balance sheet.
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Therefore, while interpreting the financial table of Century Textiles & Industries Ltd, an investor should
read it as follows:
Up to FY2017, the sales, operating profit, net profit & all other financial parameters include the
performance of the following four-business division:
1. Cement division
2. Paper & pulp division
3. Textiles including denim, yarn and Rayon man-made fiber division
4. Real estate division
Since FY2018, Century Textiles & Industries Ltd started business restructuring.
In FY2018 and FY2019, the financial performance in the operating income (sales) and operating profits
include the performance of the following divisions:
1. Paper & pulp division

2. Textiles excluding denim, yarn and Rayon man-made fiber division
3. Real estate division
Whereas the net profit, cash flow statement and the balance sheet of FY2018 and FY2019 include the
performance of following additional business divisions, which are classified as discontinued operations by
the company:
1. Cement division
2. Denim and yarn division
In FY2020 and ongoing FY2021, the operating income (sales) and operating profits include the
performance of the following divisions:
1. Paper & pulp division (72% of FY2020 revenue)

2. Textiles excluding denim, yarn and Rayon man-made fiber division (22%)
3. Real estate division (4%)
Whereas the net profit, cash flow statement and the balance sheet of FY2020 onwards, includes the
performance of following additional business division, which is classified as discontinued operations by
the company:
1. Denim and yarn division
An investor would appreciate that understanding and comparing the financial performance of Century
Textiles & Industries Ltd over the years, due to these business-restructuring exercises becomes difficult.
However, an investor would have to keep these developments in her mind while she analyses the business
performance of Century Textiles & Industries Ltd.
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With this background, let us analyse the financial performance of the company since FY2010.
Financial and Business Analysis of Century Textiles & Industries Ltd:

While analyzing the financials of Century Textiles & Industries Ltd, an investor notices that the sales of the
company were growing at a pace of about 8% year on year from ₹4,453 cr in FY2010 to ₹7,645 cr in
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FY2017. However, suddenly, in FY2018, the sales of the company declined to ₹3,898, which have further
declined to ₹2,948 cr in the 12 months ended June 2020 (i.e. July 2019-June 2020).
From the above discussion about the business restructuring exercises undertaken by Century Textiles &
Industries Ltd, an investor would appreciate that the decline in the operating performance from FY2019 is
due to demerger of the cement division, which used to constitute about 52% of the total sales of the
company.
Moreover, when the company reported its FY2019 financials, then in the FY2019 annual report, in order
to provide relevant comparative financials for the previous period (FY2018), Century Textiles & Industries
Ltd provided its FY2018 financials adjusted after removing the performance of the cement division from
operating segment and putting it in the discontinued segment.
As a result, it seems that the financial databases like Screener have updated the FY2018 performance of
Century Textiles & Industries Ltd by using the adjusted financials of the year from its FY2019 annual
report. Therefore, the FY2018 operating performance of the company reported in the financial table above
excludes the performance of the cement division even though the appointed date for the demerger was May
20, 2018.
Nevertheless, from the above discussion, an investor would appreciate that the performance of the cement
division is included in the net profits, cash flow statement and the balance sheet as a part of discontinued
operations. Therefore, while an investor analyses the net profit after tax (PAT) of Century Textiles &
Industries Ltd, then she notices that there is no such sudden decline in the PAT of the company from
FY2018 onwards.
While analysing the operating performance of Century Textiles & Industries Ltd over the years, an investor
notices that the operating profit margin (OPM) of the company has witnessed very sharp movements.
The OPM of the company used to be 19% in FY2010, which declined sharply to 9% in FY2012. Thereafter,
the OPM continued to remain suppressed until FY2016 when the company reported its lowest OPM of 8%
in the last decade. From FY2017 onwards, the operating margin of the company started improving and it
reached 24% in FY2019. Thereafter, the OPM of Century Textiles & Industries Ltd has declined to 13% in
the 12 months ended June 2020 (i.e. July 2019-June 2020).
An investor would appreciate from the above cyclically fluctuating profit margins that the overall business
of Century Textiles & Industries Ltd is highly cyclical. Such kind of fluctuating profit margins are a
characteristic of businesses, which do not have any pricing power over their customers. Most of the times,
these businesses deal in commodity products where the customer is indifferent to the source of the product.
The customers of such products have the option of buying from multiple suppliers both from India and
overseas without much difference in the quality of the product available to them.
As a result, the manufacturers of such non-differentiable commodity products are not able to increase prices
of their products when their input costs go up. If a supplier increases its prices, then the customer easily
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shifts to another supplier or starts importing the products. As a result, the manufacturers have to bear the
impact of the increase in raw material products themselves and in turn, take a hit on their profit margins.
Almost all the business divisions of Century Textiles & Industries Ltd like paper, textiles, cement etc. are
commodity products. As a result, the company finds it difficult to increase prices to its customers and had
to take a hit on its profit margins when its input costs increase.
The credit rating agency, CARE had also highlighted this nature of business divisions of the company in
its credit rating report in January 2019:
Cyclical and commoditized nature of business: All the three key businesses of CTIL viz. cement,
textiles and pulp & paper are commoditized with intense competition and cyclical in nature makes
it vulnerable to demand and supply dynamics and restricts CTIL’s pricing power.
Nevertheless, in order to understand the business performance of the company, it is essential to understand
the business dynamics and performance of each of these divisions individually.
1) Century Pulp & Paper:

As per the investor presentation of the company released in June 2020 (page 4), pulp & paper division
constitutes 72% of the operating revenue of the company. Therefore, in the current business position of the
company, pulp & paper is the most important division for the company.
While reading the available annual reports of Century Textiles & Industries Ltd since FY2007, an investor
gets insights that the pulp and paper business is a purely cyclical business where the industry undergoes the
periods of demand and supply mismatch.
At times, the demand for paper exceeds its supply in the market. As a result, the prices of paper products
increase and the paper manufacturers increase their supply significantly. When the new manufacturing
capacities start functioning, then the industry faces a situation of oversupply. This leads to price wars when
manufacturers undercut prices to stay in the business. During this phase of decline of paper prices, many
small & unorganized players find it difficult to survive and in turn, go out of business. The resulting
shutdown of plants by these small & unorganized players reduces the supply in the market and the prices
of paper products increase.
This seems to be a recurring phenomenon in the paper industry. While reading the developments of the
paper industry over the years in the annual reports of Century Textiles & Industries Ltd, an investor can
easily understand this cycle of the paper industry.
In FY2007-08, the paper industry in India was facing a shortage of supply. As a result, the country was
importing a lot of paper and in addition, many Indian players were expanding their capacities.
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The Indian paper industry is highly fragmented with numerous small players. The industry is
witnessing a healthy demand and its financial performance has also improved. Most players are
augmenting capacities, which are expected to come on stream over the next two to three
years………With steady demand for paper in India and a surging requirement for higher quality
paper, foreign players are exporting to India in a major way.
During this phase when the demand for paper exceeded the production, Century Textiles & Industries Ltd
also announced capacity expansions. In FY2007, the company had completed one expansion project and
simultaneously, it announced another expansion project to produce tissue paper.
The expansion of our paper unit for manufacturing paper from waste paper has
been commissioned from 03.02.2007 with a capacity of 211 tonnes per day and the plant is now
running smoothly.
It has been decided to set up a 100 tonnes per day Prime Grade Tissue Paper Plant at a total
capital outlay of Rs.175 crore based on imported softwood and our own hardwood pulp as raw
material…..is expected to be operative by about September, 2008.
The very next year in FY2008, Century Textiles & Industries Ltd announced its plans to establish a multi-
packaging board plant along with a fibreline plant.
We are setting-up a Multilayer Packaging Board Plant, with a capacity of 500 tonnes per day.
This development, requiring a total capital outlay of about Rs. 775 crore, is expected to be
operational by December 2009. Additionally, we are planning to set up a Paper Grade Pulp Plant
(Fibreline) to produce superior quality wood pulp. The plant demands a capital outlay of Rs. 495
crore and is anticipated to commence operations by December 2009.
An investor would expect that during good times, individuals, as well as companies, become very
enthusiastic. As a result, the manufacturers see only the positives. An investor gets a similar feeling when
in FY2009 annual report, Century Textiles & Industries Ltd mentioned to its shareholders that the demand
for paper would only go up from here.
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Due to favourable Government policies such as the thrust on education, a growing economy and
young population, increasing urbanization, a clear preference for print media and widespread
interest in books and publishing, consumption of paper can only increase…
However, an investor would appreciate that paper is a cyclical industry where the demand rises and falls
over time. In the very next year, FY2010, the upcycle phase of the paper industry was ending and Century
Textiles & Industries Ltd saw a reduction in the demand for paper.
The Paper Business was under severe pressure due to a substantial increase in the prices of raw
materials and reduced demand.
The intense competition in the industry did not allow the company to pass on the increase in raw material
costs to its customers. As a result, the company had to take a hit on its profit margins in the paper division.
The prices of bagasse and wood which constitute major raw materials for pulp and other input
costs have considerably increased without a sizable appreciation in selling prices. This has
adversely affected the performance of this Division for a major part of the year.
By FY2012, almost all of previously announced capacity expansion plants by the paper industry, including
the expansion plants of Century Textiles & Industries Ltd were operational. As a result, the industry started
facing a situation of oversupply. Century Textiles & Industries Ltd also acknowledged that the paper
industry is cyclical in nature.
The output from several new manufacturing facilities has further increased finished
product supply, flooding the market and it will take some time for demand to catch up with these
additional quantities.
Being in the commodity sector, the paper industry is cyclical in nature and is strongly co-related
with global economic factors.
The very next year in FY2013, Century Textiles & Industries Ltd reported net loss.
However, due to higher depreciation in the current year on account of commissioning of

Multilayer Packaging Board and Fiberline Plant (Pulp plant) in the Pulp & Paper Division, the
Company has incurred a net loss.
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By 2014, the paper industry had so much oversupply that the situation of dependence on imports to meet
the demand in FY2008 had now given way to exports of paper from India. Due to oversupply, the company
was not able to pass on the increase in inputs costs to the customers and as a result, had to take a hit on its
profit margins.
Further, apart from rising production and consumption, erstwhile import dependent India has
achieved self-sufficiency and also has witnessed an increase in exports.
While raw material costs have been increasing, the selling prices could not be increased to offset
entirely the rising costs which resulted in an adverse financial performance.
By FY2015, the oversupply situation in the paper industry had worsened to such an extent that the small,
B-grade, unorganized players started to go out of business and a price war was prevalent in the market.
With new installed capacities coming online in the second half of the year, the demand supply
equilibrium in the Indian market shifted towards excess supply. This led to players dropping prices
to remain competitive…..
The biggest threat for the Indian paper industry is from imports of paper products from China and
duty free paper products from the ASEAN region. Products from these regions have priced out
many domestic manufacturers and this has resulted in a price war in the Indian market across all
grades.
This impacted the profitability of the Indian paper industry, as well as economic viability of ‘B’
grade paper mills.
Soon enough, the newly started division by Century Pulp & Paper, the multilayer packaging board business
also experienced oversupply.
…..two newly installed capacities becoming operational by other players in the Multilayer
Packaging Board business. With new capacities, the demand supply equilibrium in the domestic
market shifted towards excess supply.
By FY2017, the oversupply situation in the India paper industry has taken its toll on the paper
manufacturers. A few of them had to shut down their business. Now, it was time for the demand to exceed
supply and the future of the industry started to look bright.
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Based on the recent shut down of some domestic capacities and expected growth in the country’s
GDP, it is likely that the domestic paper industry will grow at a reasonable pace along with the
economy, from a medium to long-term perspective.
By FY2019, the paper & pulp division of the company had started to contribute healthily to the company’s
performance and became one of the key reasons for the improving operating profit margins of Century
Textiles & Industries Ltd.
Pulp & Paper and Real Estates Divisions have primarily contributed to this growth.
The demand in the paper industry exceeds supply and in FY2020, India met about 20% of its paper demand
from imports.
Investor presentation, June 2020, page 34:
 Total Demand- 19.8 Million MT in FY 20-21

 Total Supply:
 Domestic: ~15.8 Million
 Imports: ~4 Million
In FY2020, the paper division of the company operated with 100% capacity utilization. Press release for
Q4-FY2020 results:
Pulp and Paper Business operated at 100% capacity for FY20.
In light of the same, it does not come as a surprise to the investor that the paper manufacturers have again
started increasing the manufacturing capacities. Century Textiles & Industries Ltd announced its plans to
expand the manufacturing capacity in FY2019.
The Company has undertaken a project to expand the Prime Grade Tissue Paper Plant
capacity from 100 tonnes per day to 200 tonnes per day with an Anchor GSM of 19 grams at a
total capital outlay of ₹100 crores at the existing Pulp and Paper Plant at Lalkua, District Nainital,
Uttarakhand.
The credit rating agency, CRISIL, in January 2020, acknowledged that the paper division of Century
Textiles & Industries Ltd has displayed significant improvement in performance over the last 3 years.
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Paper segment’s revenue and profitability have consistently improved, backed by increased
capacity utilisation and realisation over the last three fiscals. This is expected to continue over the
medium term, with completion of capex in high margin tissue segment and de-bottlenecking,
despite some headwinds in realisations.
From the above report, an investor would notice that CRISIL expects that the good performance of paper
division will continue over the medium term.
The management of the company is also giving a positive outlook about the performance of the paper
division.
With increased demand for value added products and an improved order booking position, in
future, we are hopeful of having further improvement in the business.
However, from the above discussion about the development in the paper industry, an investor would
appreciate that the paper industry is cyclical in nature where demand and supply undergo phases. In
FY2007-2008, in the Indian paper industry, demand exceeded supply and many manufacturers announced
expansion plans. In good times, Century Textiles & Industries Ltd said to the shareholders that the paper
demand would only increase. However, soon thereafter, the industry turned into an oversupply situation
where price wars broke out. Paper manufacturers started reporting losses and many players went out of
business and shut down capacities. As a result, the oversupply corrected itself.
Since FY2017, the paper industry is witnessing another upcycle where demand has exceeded supply. The
country is meeting excess demand from imports (just like FY2007-2008) and the manufacturers have
announced capacity expansion.
Based on the insights about the cyclical nature of the paper industry, an investor should be cautious before
she starts projecting the good performance of the paper division into the future. She should be aware that
the paper industry is cyclical where the down-phase follows the upcycle phase and vice versa.
Moreover, while assessing the competition to any company in the paper industry, an investor should not
limit her assessment only to other large paper manufacturers. This is because in the paper industry, many
times, even the small players are able to produce good quality products and give tough competition to the
large players. In the down-phase of the industry in FY2016, Century Textiles & Industries Ltd had disclosed
this aspect of the paper industry to its shareholders.
Some smaller manufacturing set-ups, which enjoy lower cost of production due to advantageous
levels of overhead expenses and taxes, have upgraded the quality of their products, and provide
good competition to large units in terms of both, quality and price.
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Therefore, an investor should always keep the cyclical and intensely competitive nature of the paper
industry while she makes assumptions about the future performance of the paper division of Century
Textiles & Industries Ltd.
2) Century Textiles (Birla Century):

As per the investor presentation of the company in June 2020 (page 4), textiles division contributed to 22%
of revenue in FY2020. While reading the annual reports of Century Textiles & Industries Ltd, an investor
realizes that the textile industry is highly competitive where it is not possible for the manufacturers to pass
on the increase in input costs to their customers. As a result, whenever the raw material prices go up, the
textile manufacturers end up taking a hit on their profitability margins.
the prices of all inputs had gone up which could not be passed on to the end users in view of
adverse market conditions prevailing during the major part of the year coupled with low demand.
Therefore, the performance of textile segment remained depressed.
However, due to the severe increase in the prices of cotton, wages, oil and gas, the cost of
manufacturing has been steadily rising whereas the markets were under pressure due to demand
recession and prevailing general inflation in consumer goods prices. It has not been possible to
increase the selling prices commensurate with the increase in the input costs and therefore, the
margins have been under severe pressure.
Moreover, an investor may think that the textile manufacturers might be facing the challenge in passing on
the increase in input costs to their customers in the segments of yarn etc. She may think that in the case of
the ready-to-wear segment where the manufacturers create brands and sell directly to the end customer,
there the manufacturers might be able to increase prices to compensate for the increase in raw material
costs. However, while analysing the business of Century Textiles & Industries Ltd, the investor notices that
even in the ready-to-wear segment of branded clothes, the textile manufacturers are not able to pass on the
increase in input costs to their customers.
The sales of our ready-to-wear garments marketed under the brand name ‘Cottons by Century’
have been adversely affected due to the demand recession and increase in costs. The recent
introduction of excise duty on the manufacture of ready made garments will further increase the
prices, which will be very difficult to pass on to customers.
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In the textile industry, the position of players is very difficult. When the raw material prices go up, then
they are not able to pass it on to their customers and therefore, have to take a hit on their profit margins. In
addition, when the raw material prices go down, then the market prices of their products fall in line with
the reduction in input costs. Therefore, they face large inventory losses.
Cotton prices reached at an all time high followed by a phase of correction. This left various mills
with high cost inventories causing heavy losses as the selling prices of fabrics did not improve.
At present, the market is very reluctant to absorb increased costs in selling prices because of which
margins are under severe pressure and we have to wait for markets to improve and costs to
stabilize…
By FY2012, the competition in the textile market had become extremely severe from both the domestic
manufacturers as well as from imports that many players realized that they could no longer compete in the
market.
Textile products from Bangladesh permitted to be imported duty free are cheaper and have flooded
the markets, pushing out Indian products with prices that cannot compete.
When the intense competition had taken its toll on the textile manufacturers, then the industry cycle showed
some improvement in FY2013.
The sales at Birla Century have improved by about 65% as compared to last year due to better
use of capacity and increasing demand in domestic and US markets.
However, soon enough, in FY2014, the industry again showed its tough face to the manufacturers where
the inputs cost increased and they could not increase the prices to the customers. As a result, the profit
margins of the players remained depressed.
…those with a presence in weaving, processing or even composite businesses are facing the heat
due to increases in input cost without being able to pass on such higher costs to customers as
the market is simply unable to absorb the same.
Moreover, an investor notices that the competition in the domestic market is not only from Indian
manufacturers but also from international manufacturers like Bangladesh.
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The duty free import of fabrics from China into Bangladesh and in return the Garments are being
imported duty free into India from Bangladesh is hitting hard the Indian Textile Industry.
Nowadays, big brands manufacture their products overseas and then sell them in retail shops in India at
cheaper prices.
The international brands like Marks & Spencer, IKEA, Zara, H & M, Walmart etc. who have
multiple sources to cover fabrics and convert into garments in Bangladesh, Vietnam and
Cambodia etc. for retailing in India at better prices will make it difficult for Indian textile industry
to compete with them.
An investor learns that the smaller countries like Bangladesh, Vietnam etc. are not only contributing to
competition in the Indian market, they are also beating India in competition in the developed markets.
Depreciation of the Euro against the Indian Rupee has adversely affected textile business, apart
from the 9.6% tariff disadvantage Indian textile products suffer from the European Union. India
has already started losing its markets and export orders, and countries like Pakistan, Bangladesh,
Sri Lanka and Vietnam which have duty-free access, are now grabbing the market share.
Increasing competition from countries like Bangladesh, Vietnam, Pakistan and Sri Lanka due
to favorable tariff structures on exports to developed markets like the US, EU, Canada, Australia,
etc. poses a significant challenge to Indian exports.
Therefore, an investor notices that the tough business environment of the textile industry of the previous
decade is still the same for the Indian manufacturers. In FY2010, the manufacturers were not able to pass
on the increase in inputs costs to the customers. Even in FY2019, they are unable to pass on the increase in
input costs to the customers. Moreover, nowadays, the shift from cotton to man-made fibers is increasing
their challenge.
Due to the cash crunch and weak demand in the Indian and Export markets, it is difficult to pass
on the cost to end customers, hence the margins are under pressure. Further, globally consumer
shifting preference from cotton fibre to man-made fibre, which are available at lower prices, is
also putting pressure on prices.
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i) Yarn & denim unit of Century Textiles & Industries Ltd
While reading about the performance of different segments within the textile division, an investor notices
that certain segments like yarn and denim have had a tough time throughout the available period under
analysis.
In FY2009, the company had to cut production, as it did not have enough demand.
The domestic and export markets for cotton yarn and denim remained quite depressed. We are
making every possible effort to develop new varieties of denim to suit the fast changing fashion
trends as also regulating the production as per market needs.
Again, in FY2013, when the situation of the denim market did not improve, then Century Textiles &
Industries Ltd had to make its denim production plant to produce other material.
However the market for denim is depressed. We have, therefore, re-engineered the product line to
produce the items that customers prefer, to overcome the slackness.
In FY2015, the company faced severe pricing pressure in the denim segment.
Further, the cotton yarn market remained depressed for a major part of the year under review,
which adversely impacted our yarn unit near Indore in M.P. Similarly, the denim market also
remained dull and domestic sales and exports from India were facing a severe price crunch.
As a result, it does not come as a surprise to the investor when she reads in FY2018 annual report that
Century Textiles & Industries Ltd has sold off its yarn & denim unit that too at a loss of ₹18.12 cr.
Pursuant to the Business Transfer Agreement (BTA) the Company has sold its Yarn and
Denim (Y&D) units (included in Textile Segment) during the year and has recognized loss on
disposal amounting to ₹18.12 Crore. The operations of Y&D units has been classified as
discontinued operations (Refer note 35).
As the company reported the performance of yarn & denim unit separately in FY2018 annual report, under
the discontinued operations, therefore, an investor could get to know the financial performance of this unit
for FY2017 and FY2018. Otherwise, the financial performance of the yarn & denim unit was clubbed with
other units under the section “textiles” in the segmental results. As a result, an investor could not know the
financial performance of individual units.
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As per FY2018 annual report, page 119, the yarn & denim unit had made a net loss of ₹18.9 cr in FY2017,
which increased to a net loss of ₹36.8 cr in FY2018.
It is unfortunate for the shareholders that the dissenting workers stalled the sale process of yarn & denim
unit and Century Textiles & Industries Ltd had to take back the unit from the buyer and even suffer
restructuring cost of ₹25.5 cr.
Pursuant to the objections raised by the workers of Y&D units against the said business transfer,
during the year the Company has terminated the BTA, refunded the sale consideration and has
obtained back the possession of the Y&D units. The Company is currently exploring various
alternatives including sale to other buyers and accordingly has classified the operations as
Discontinued operations. Further, during the year Company has recognized a provision
for restructuring cost relating to the units amounting to ₹25.49 crores.
As per the performance of the yarn & denim unit disclosed under discontinued operations in the FY2019
annual report, page 128, the yarn & denim unit suffered a net loss of ₹48.56 cr in FY2019.
Therefore, the decision of the company to keep looking for other buyers for the yarn & denim unit does not
come as a surprise to the investor. The yarn & denim unit seems like a continuous drain on the resources of
the company.
ii) Rayon (man-made) fiber & chemicals unit of Century Textiles & Industries Ltd:
Rayon unit of the company primarily comprises of the man-made fibers like viscose filament yarn (pot spun
yarn and continuous spun yarn), rayon tyre yarn and various other chemicals.
From the above discussions on business restructuring, an investor would remember that currently, Century
Textiles & Industries Ltd has given this unit on lease from FY2018 to Grasim Industries Ltd for 15 years
and has already received all the lease payments for next 15 years.
Therefore, this unit may not be very relevant from the perspective of business performance. However, we
believe that an understanding of this unit is essential for investors because of two reasons. First, after the
end of the contract with Grasim Industries Ltd, the company would receive this unit back. Second, the
decisions taken by the management of Century Textiles & Industries Ltd with respect to Rayon unit provide
insights about the quality of the management of the company.
Century Textiles & Industries Ltd used to be one of the largest manufacturers of rayon in Asia and the
largest manufacturer in India. It had a 40% market share in India.
Credit rating report of Century Textiles & Industries Ltd by CRISIL in February 2015:
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the company is one of the largest manufacturers of rayon in Asia and is a market leader in India
(40 per cent market share).
Such a position may indicate to an investor that the company might enjoy a lot of negotiating and pricing
power over its customers. However, it was not true. Century Textiles & Industries Ltd did not command
any pricing power and its profit margins were hit when input costs increased as it could not pass on the
increase in raw material prices to the customers.
While reading about the rayon unit, an investor notices that right from the first available annual report of
FY2007, Century Textiles & Industries Ltd has faced challenges while running its rayon unit.
In FY2007, the company highlighted that there is immense competition in the viscose filament yarn (VFY)
segment and many producers are selling it at a discount. Therefore, the company is unable to increase prices
to cover higher input costs.
Producers like us could not increase prices due to yarn being sold at a discount by a few producers.
Higher cost of raw-materials, particularly Wood Pulp and Sulphur may have to be absorbed, as it
would be difficult at this stage to pass on this increased burden to consumers.
The situation continued to be grim over the years as cheaper imports from China continued to provide
intense competition.
the industry in general, in both the PSY and CSY segments, faced pressure on off-take due to
substantial arrivals from China,
The excess supply situation in the viscose filament yarn (VFY) segment continued over the years and
Century Textiles & Industries Ltd did not expect any respite in the near future.
It is expected that the existing trend of excess supply affecting sales volumes as well as prices will
continue for some time.
When an investor attempts to understand the reasons for such continued situation of oversupply in the VFY
industry (at least since FY2007, the first publicly available annual report of the company), then she notices
that the viscose filament yarn is facing substitution from polyester yarn, which is cheaper.
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Substitution of VFY by Polyester Yarn in a few cases and cheaper prices of Polyester Yarn continue
to affect the off-take as well as the prices of VFY.
In addition, the polyester yarn manufacturers seem to do good research and development to produce newer
varieties of polyester yarn, which made the situation further difficult for VFY producers.
The threat from cheaper polyester yarn continues. Due to continuous research being undertaken
by the polyester industry, new varieties of polyester yarn are being introduced, making it suitable
for alternative use and compete better against rayon yarn.
Soon, the research efforts of polyester industry borne fruit and it launched Recosilk yarn, which further hit
the demand of viscose filament yarn (CFY).
The launch of ‘Recosilk’ yarn by the polyester industry for embroidery, weaving and knitting has
also made a dent in the market share of viscose filament yarn and could lead to a reduction in VFY
consumption.
Soon, the polyester industry introduced new products, which hit the demand for another key product of the
rayon unit, rayon tyre yarn (RTY).
Efforts by Tyre manufacturers to replace rayon tyre yarn with HMLS Polyester continues to pose
a long term threat,
This other key segment of the rayon unit, the rayon tyre yarn (RTY) had been facing oversupply and intense
competition since long. In fact, the competition increased to such an extent that in FY2009, Century Textiles
& Industries Ltd had to stop its production plant.
This has resulted in high inventory due to which production of rayon tyre yarn had to be
suspended from end February 2009.
The situation in the rayon tyre yarn (RTY) segment stayed worse for years to come. In FY2010, 50% of the
manufacturing capacity was kept shut.
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High inventory of rayon tyre yarn continues to remain a major concern and 50% of the production
capacity remains suspended from February 2009.
The high inventory in the RTY segment improved only after about four years of curtailed production. In
FY2012, the company could finally use its full capacity of RTY production.
Efforts by the unit to provide quality products have yielded positive results and it is pertinent to
mention that for the first time in the last 4 years, full manufacturing capacity is being used
However, the very next year, in FY2013, the company again had to suspend 35% of its manufacturing
capacity.
Continuing recession in Europe has adversely affected the off-take of rayon tyre yarn which forced
our unit to curtail its production by about 35%.
Century Textiles & Industries Ltd could use its full manufacturing capacity again only after two years in
FY2015.
After a prolonged period, increased demand and consumption of Rayon Tyre Yarn in Europe and
Japan have led to full capacity utilization of our Rayon Tyre Yarn production capacity.
However, the full capacity utilization of RTY capacity did not mean that it has got its pricing power back.
Instead, in FY2016, the company intimated its shareholders that it is not able to get any price increase for
last four years.
The unit could procure orders for Rayon Tyre yarn for the year 2016 and is expected to operate
at its full capacity. However, it could not get any increase in the price for about four years, which
is a matter of concern.
Just when the company was able to get some order to use its manufacturing capacity of rayon tyre yarn
(RTY), it realised that the customers are now asking for a new product, dipped fabric instead of Rayon Tyre
yarn, which Century Textiles & Industries Ltd is not able to manufacture.
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Tyre manufacturers are demanding dipped fabric instead of Rayon Tyre yarn, which the unit is not
able to supply as it does not have a conversion facility. In the long run, this may threaten our
presence in the International market.
In Rayon Tyre Yarn, the unit may face the threat of losing its market share due to not having an
integrated manufacturing unit for dipped fabrics.
From the above discussion about the key product segments of the rayon unit, viscose filament yarn (VFY)
and rayon tyre yarn (RTY), an investor would notice that these businesses are very tough. In addition, the
manufacturing process of these man-made fibers is polluting. As a result, these companies face tough
environmental regulations. These tough operating conditions along with intense competition due to
oversupply and substitution by polyester make their plants economically unviable. While reading the annual
reports of Century Textiles & Industries Ltd, an investor notices many instances where the multiple
manufacturers of viscose filament yarn closed their plants and shut down their business.
Due to environmental and other problems, one major yarn producing unit in Europe had to close
down a couple of years back.
During the year, overall demand for viscose filament yarn (VFY) has reduced. However, in view
of closure of two Rayon producing units in the country, industry was able to utilize its full capacity
and also reduce inventories.
The world over, due to stringent environment control, rayon manufacturing units are closing their
operations, including one having so well-known a name as Enka Elsterberg, Germany.
Production of VFY by domestic producers has dropped by about 23% in the last 5 years and the
gap thus created has been met through higher imports as there have been no significant additions
to capacities within India.
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While some additional capacities have been commissioned in China, non viable plants were shut
down in Europe & C.I.S. countries due to shift of manufacturing operations away from the western
to emerging markets.
Until now, the environmental norms were getting stringent only in western countries. Therefore, VFY
manufacturers in countries like China and India were happy to get additional business. However, in
FY2016, the VFY manufacturers in China faced closure when the country tightened its environmental
norms to reduce pollution.
FY2016 annual report, page17:
New stringent environmental policy norms adopted by China have led to the closure of 2 VFY
plants in China, having a capacity of 29000 Tons per annum.
In FY2016, Century Textiles & Industries Ltd also realized that India is also considering tighter
environmental norms for VFY production. The company realised that tougher environmental norms are
going to create many challenges for it. As a result, the company along with other players requested the
authorities to reconsider new environmental norms.
A representation made by the unit through Association of Man-Made Fibre Industry of India
(AMFII) for reconsideration of the proposed new environmental norms for the man-made fibre
industries, are at the hearing stage. If imposed, it would be difficult for the industry to meet the
new environmental norms without huge capital investment.
Therefore, from the above discussion, an investor would appreciate that the rayon unit faced multiple
challenges like intense competition, oversupply, cheaper imports, substitution by cheaper polyester
products, and tougher environmental norms. In addition, the company was not able to keep up with the
changing demands of its customers.
As a result, despite being the largest manufacturer of rayon in India and one of the largest in Asia, Century
Textiles & Industries Ltd decided to get rid of its rayon unit by handing it over to Grasim Industries Ltd.
It remains to be seen whether Grasim Industries Ltd would be able to run the rayon unit profitably or it
would hand it back over to the company before completion of 15 years. In any case, the business of rayon
unit has proved to be a tough challenge for Century Textiles & Industries Ltd, which it finally quit in
FY2018.
Moreover, it seems that the company has learnt its lesson from the tough business conditions of the textile
industry and now, it has decided not to invest any big money in the textile unit.
Conference call transcript, May 2018, page 14:
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Management:….we do not want to go for big expansion in textiles because the profits we expect
are more in paper and real estate.
3) Real estate division of Century Textiles & Industries Ltd:

As per the investor presentation of the company in June 2020 (page 4), real estate division contributed to
4% of revenue in FY2020.
At present, Century Textiles & Industries Ltd has two completed and leased out commercial buildings at
Worli, Mumbai, which provide it with an annual rental income of about 140-150 cr.
Credit rating report by CRISIL in January 2020:
Steady annual gross lease rental of Rs 140-150 crore from the commercial real estate assets is
expected to support cashflows over the medium term.
In addition, the company has launched sales in three residential projects at Kalyan, Bengaluru and
Gurugram.
Investor presentation, Q1-FY2021 results, July 2020:
Strong uptick in demand enquiries and conversions at our launched projects (Birla
Vanya, Kalyan and Birla Alokya, Bengaluru) despite the nationwide lockdown
Gurugram project – Birla Navya (JV with Anantraj Ltd) project which is presently in a prelaunch
stage, received a strong response. Sold inventory worth around INR 28 Crs (INR 14 Crs in Q1 FY
21) and collected 2.8 Crs, so far.
There are many uncertainties pertaining to the future of real estate industry due to excessively high prices
that many times, are out of reach for the common person, and the associated execution risk of real estate
projects. These factors have led to the bankruptcy of many established and well-known real estate players
and almost all remaining players including the industry leaders are facing a tough time. Therefore, it remains
to be seen whether Century Textiles & Industries Ltd is able to complete its projects on time and within the
estimated cost.
4) Cement division of Century Textiles & Industries Ltd:

An investor would remember from the above discussion on the business restructuring of Century Textiles
& Industries Ltd that the company has demerged its cement division to Ultratech Cement Ltd. Therefore,
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going ahead, the dynamics of cement are not going to affect the business performance of the company.
Nevertheless, a brief discussion about the business unit, which the management controlled and operated
during the major part of the analysed financial history, provides the investors insights about the decisions
taken by the management with respect to business. Such analysis, now, provides more insights about the
management quality instead of the business quality.
However, an investor would appreciate that cement is an intensely competitive, cyclical industry, which
has always faced a situation of oversupply over the last decade. As a result, the cement division of the
company has contributed significantly to the fluctuating profit margins of Century Textiles & Industries
Ltd until FY2018 when it was a part of the company.
In FY2007, the cement industry position was very attractive where demand exceeded supply. As a result,
many foreign players entered the Indian market.
Four of the top five cement companies in the world have entered India through mergers,
acquisitions or joint ventures. These include Lafarge, Holcim, Italcementi and Heidelberg. These
companies have already garnered about 28% of Indian industry capacity.
In the subsequent years, there was a race among the players to increase capacity. By FY2013, the capacity
installed by cement manufacturers in India had exceeded the targets estimated by the planning authorities.
As a result, the industry faced a situation of oversupply.
The cement industry had surpassed the target set by the working group on this industry for the
XIth five year plan (2007-2012). The installed capacity was over 340 million tonnes against a
target of 298 million tonnes at the end of the terminal year of the XIth five year plan, resulting
in surplus capacity.
By FY2015, the surplus capacity started to have a serious impact on the manufacturers and the capacity
utilization of the industry declined to 69%.
Cement industry’s capacity utilization during the year 2014-15 was about 69%.
Capacity utilization is gradually coming down on account of the mismatch in capacity addition
and demand.
By FY2018, the capacity utilization level of the industry declined further to 68%.
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The Indian Cement industry is grappling with lower capacity utilisation while operating at levels
of about 68 per cent.
At one end, an investor may think that the cement industry was grappling with over-enthusiasm shown by
the cement manufacturers where they added large capacity initially and thereby faced a situation of
oversupply. However, an investor would appreciate that in such situations, the manufacturers stop creating
more supply and wait for the demand to recover so that their capacities reach optimal utilization levels
before they start additional expansion projects.
However, in the cement industry, it seemed that these normal fair-market principles did not apply and the
industry witnessed significant capacity additions even when the utilization levels of existing plants were
very low.
The following analysis of Heidelberg Cement India Ltd would indicate to an investor that the cement
industry increased its manufacturing capacity from 296 MTPA in FY2011 with 73% capacity utilization to
495 MTPA in FY2019 with 68% capacity utilization.
As a result, the Competition Commission of India (CCI) initiated a probe in the working of cement industry.
CCI found that the cement manufacturers were working as a cartel to produce less cement deliberately even
when there was a demand in the market. As a result, CCI imposed a penalty of ₹6,300 cr on leading cement
manufacturers including Century Textiles & Industries Ltd.
The continuous subdued performance of the cement division due to either genuine oversupply or deliberate
under-production had led to the fluctuating profit margins of the cement division of Century Textiles &
Industries Ltd.
From the above discussion about the business performance of Century Textiles & Industries Ltd over the
years, an investor would understand that the company is a mix of a few entirely independent business
division. Therefore, in order to understand the company or to make any assumptions of the future business
performance of the company, an investor needs to understand each of the business divisions individually.
As per the current business structure of Century Textiles & Industries Ltd, the business divisions of paper,
textile and real estate are important. Nevertheless, from the above discussion, an investor understands that
each of these divisions is intensely competitive. In paper and textile divisions, the competition is so intense
that routinely many manufacturers shut down their plants and businesses as they become economically
unviable.
In real estate, even though at the surface, it may look like that demand exceeds supply and the business has
excessive profitability margins. However, if an investor studies the experience of different real estate
players, including the leading, well-known names, then she gets to know that it is very difficult to stay
continuously relevant in this industry. There have been numerous examples of leading players going
bankrupt, unable to complete and deliver their projects and even instances of promoters going to jail.
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Therefore, an investor should be cautious while she starts projecting supernormal profits in the real estate
division into her assumptions in order to justify any high valuation.
Going ahead, an investor should monitor the profitability margins and the capacity utilization of paper and
textile divisions of Century Textiles & Industries Ltd. In addition, she should track the execution progress
of the real estate projects launched by the company. She should also monitor whether, in future, the
company resorts to launching many projects in quick succession without focusing on the completion of
existing projects. This is because launching more real estate projects than what one can complete in time is
the stage where problems start to appear for real estate developers. The greed of getting a lot of money from
the homebuyers at a very initial stage of the project when the real estate developer has hardly spent any
money on construction makes the projects cash surplus right from its launch stage. As a result, the greed to
get more and more money from homebuyers leads to the developers launching more & more new projects
without focusing on completing existing projects.
Therefore, the investor should keep a close watch on the new launches of real estate projects by the
company. If she notices that the company has launched many projects in quick succession, then instead of
becoming very happy, she should become cautious. She should increase her monitoring level of execution
of existing real estate projects. By staying cautious and with close monitoring, she would be able to avoid
negative surprises from the real estate division of the company.
While looking at the tax payout ratio of Century Textiles & Industries Ltd., an investor notices that for most
of the last 10 years (FY2010-2020), the tax payout ratio of the company has been highly fluctuating. Over
the years, the tax payout ratio has varied from 2% in FY2012 to 146% in FY2016.
An investor may appreciate that the many products of the company like textile, paper etc. are exported,
which have tax incentives from the government for its manufacturing operations focused on exports. These
incentives would tend to decrease the tax payout ratio. In addition, the cement plants of the company have
fiscal benefits.
Moreover, due to frequent business restructuring exercises, the company’s profits, as well as tax payout,
tends to fluctuate significantly.
An investor may contact the company directly for any further clarifications about its tax payout ratio and
the incentives available to the company.
Operating Efficiency Analysis of Century Textiles & Industries Ltd:
a) Net fixed asset turnover (NFAT) of Century Textiles & Industries Ltd:
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When an investor analyses the net fixed asset turnover (NFAT) of Century Textiles & Industries Ltd in the
past years (FY2010-19), then she notices that the NFAT of the company has consistently come down from
1.95 in FY2011 to 0.66 in FY2019.
Declining NFAT over the years indicates that the company efficiency of utilization of assets by the company
has deteriorated over the years.
If an investor takes the case of cement division, which used to be a part of the company’s financials until
FY2017 and used to constitute more than 50% of sales, then she notices that the company faced
deteriorating performance of the division due to two factors.
First, the cement industry faced oversupply leading to lower capacity utilization.
Second, the cement plants of Century Textiles & Industries Ltd were old, inefficient and effectively of poor
quality. The management of the Century Textiles & Industries Ltd disclosed this aspect of the cement plants
of the company in its conference call with investors in May 2018 while discussing the deal with Ultratech
Cement Ltd.
As mentioned earlier, the discussion of the business units hived off by the company now provides more
insights about the management quality and their strategic decisions that the quality of the business of the
hived off units.
First, the management highlighted that its cement plants are inefficient and their profitability is less than
the industry average.
Conference call, May 2018, page 2:
Moreover, the profitability of cement division is currently not comparable to the industry average.
The company highlighted that the old plant at Manikgarh, Maharashtra of about 2 MTPA capacity is
currently shut down as it is highly inefficient and is effectively an economically unviable plant.
Rajesh Shah: Out of the existing capacity of 4.8 million tonnes at Manikgarh, 2 million is the
old capacity and shutdown. It’s an old plant and it has lot of inefficiencies relating to power
consumption, heat consumption and to upgrade that it needs a huge investment.
Similarly, another cement plant of the company in Chhattisgarh is very old and is nearing the end of its life.
As a result, an investor would appreciate that the plant would have many inefficiencies in its operations.
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Management: Again about the Chhattisgarh Plant that is the oldest plant that is a 44 year
old plant. And the current life of the plant left is around 6-7 years’ time and maybe after 7 years
it need complete new line will have to be put up so that will again call for huge investment…
Moreover, the management highlighted that the utilization of the new cement capacity created in West
Bengal depends on transporting clinker from Manikgarh, Maharashtra, which is a very expensive and
inefficient method.
Gunjan Prithyani: I just have one clarification there is this grinding unit in West Bengal from
where was you feeding the clinker to that grinding unit?
Management: So in that grinding unit clinker was largely getting supplied from Manikgarh unit
incurring a huge logistic cost.
In addition, the management clarified that it even though it had put up significant 2.8 MTPA new cement
capacity at Manikgarh, Maharashtra, the region has immense competition with low demand. The
management highlighted that even if they increase the production of cement in Manikgarh plant, then they
do not know how to sell it.
Management: I will just come to the power efficiency, but basically demand is also not there in
that area. There is huge competitive intensity in that area and we are not able to sell that. That is
why that utilization level is low.
From the above discussion, an investor notices that the cement division led to deteriorating NFAT for
Century Textiles & Industries Ltd due to many factors. First, significant cement capacity was old, inefficient
and even economically unviable. Therefore, these assets produced lower sales leading to lower NFAT.
Second, the new capital expenditure for creation of new cement manufacturing plants was also done in a
manner, which resulted in new capacity in the region where the company is either not able to sell
(Manikgarh, Maharashtra) or it needs to transport clinker from halfway across the country from
Maharashtra to West Bengal to run the new plant there. All these decisions add to the inefficiency in the
utilization of the assets leading to lower NFAT.
In addition, an investor would remember from the above discussion that the other business divisions like
textile and paper have continuously faced a tough business situation with oversupply, poor pricing power
etc., which leads to poor asset utilization and a decline in NFAT.
Moreover, an investor would notice that the absolute level of asset turnover of Century Textiles & Industries
Ltd is low in the range of 1.00 and the average net profit margin (NPM) for last 10 years is in the range of
4%.
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Please note that as discussed above, the NPM of the company for FY2018 and FY2019 is high because the
sales (operating income) excludes the impact of discontinued operations (primarily cement division)
whereas the net profit after tax (PAT) includes the profit of discontinued operations. As per FY2019 annual
report, page 129, the cement division (discontinued operations) had a profit of ₹129 cr in FY2018 and a
profit of ₹222 cr in FY2019. The addition of this profit in PAT without the related revenue in the sales
increases the NPM.
With this background, an investor notices that the NFAT of the business operations of Century Textiles &
Industries Ltd is about 1.00 and its average NPM is also about 4%, then she acknowledges that the company
is making low returns on its assets. Such businesses, which require a lot of investment in assets to generate
its sales and in addition, earn low profits on its sales, are particularly vulnerable to excessive debt burdens.
This low asset turnover combined with low profitability has serious implications as a huge amount of
incremental investment is needed to show future growth. For example, let us assume that in the first year,
such a company targets to achieve ₹1,000 cr. of additional sales.
 As per the NFAT of 1.00 then it would need to invest INR 1,000 cr. in fixed assets (1,000/1.00,
because the fixed asset turnover ratio is 1.00).
 This ₹1,000 cr. of additional sales would provide additional net profits of ₹40 cr. (assuming average
NPM of 4% over the last 10 years).
 If the company retains entire profits and invests in its operations, then this incremental investment
of ₹40 cr. of entire profits would generate only ₹40 cr. of incremental sales in the second year (as
the fixed asset turnover ratio is 1.00, 40*1.00=40).
 If the company wishes to grow sales by another ₹1,000 cr. in the second year as well, then it would
have to generate ₹960 of sales (=1,000 – 40) by investing additional ₹960 cr. (=960/1.00 or can be
calculated as ₹1,000 cr of total requirement – ₹40 cr. of net profits reinvested). This ₹960 cr. needs
to come from either fresh equity infusion or debt.
 Please note that these calculations would give the same inference even if an investor assumes that
the new capital investment in the first year will take about 3 years to reach full utilization and the
company will plan a new capital expenditure only after about 3 years of last capacity addition.
Thus, we may see that with a low fixed asset turnover of 1.00 combined with a low net profit margin of 4%
results in a situation where the company would have to keep on relying on additional sources of funds to
maintain its growth. As a result, it does not come as a surprise to the investor that in the last 10 years, the
debt of Century Textiles & Industries Ltd has increased from ₹2,367 cr in FY2010 to ₹5,700 cr in FY2017.
The credit rating agency, CRISIL, highlighted that Century Textiles & Industries Ltd is not able to generate
a good return on its assets in its report for the company in February 2015:
Lack of commensurate returns on capex incurred and high working capital intensity in most of
Century’s businesses, has added to high debt levels.
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CRISIL also highlighted that Century Textiles & Industries Ltd has primarily relied on debt to expand its
business in its report for the company in September 2015:
…mainly because of debt-funded capital expenditure (capex) of Rs.60 billion incurred over the six
years through 2014-15 to expand its cement, paper board, and real estate businesses.
Such high debt in business operations that have a low return on assets is a very risky situation for any
business. As the business is not able to generate sufficient cash/return on their assets, then it faces
difficulties to repay its debt.
In light of this understanding, it does not come as a surprise to the investor when she notices that from
FY2018, Century Textiles & Industries Ltd started hiving off its assets to reduce debt. In FY2018, it leased
out the rayon unit to Grasim Industries Ltd to receive about ₹900 cr to repay debt. However, ₹900 cr was
not sufficient to bring the company out from the debt-trap.
The credit rating agency, CRISIL in its report for Century Textiles & Industries Ltd in February 2019
highlighted that the company does not have sufficient liquidity to repay its debt obligations in FY2019.
While the repayment obligations came down with debt reduction post Grasim transaction, the
annual cash generation, is not expected to be sufficient to service the obligations in fiscal 2019.
At this stage, an investor may think that when the financial position of Century Textiles & Industries Ltd
was not able to service its own debt, then how the credit rating agency, CRISIL, assigned it a good credit
rating of AA. In this regard, when an investor reads the credit rating rationale, then she notices that the
financials position of Century Textiles & Industries Ltd did not deserve the credit rating of AA; instead,
CRISIL assigned it this rating by taking the comfort of support of the promoter group.
Credit rating report by CRISIL, February 2019:
Analytical Approach: For arriving at its ratings, CRISIL has applied its criteria for notching
up ratings based on group support.
With the current understanding of low return on investments done by taking huge debt, an investor would
appreciate that the company was in a very tough position. As a result, it had to demerge its cement division
in order to get rid of another about ₹3,000 cr debt.
When an investor sees the situation of Century Textiles & Industries Ltd with respect to excessive debt
taken to create cement, paper, textile assets, which are not giving sufficient return on investment. Moreover,
the cash generation in FY2019 was not sufficient to meet debt obligations even after four years from the
completion of last major capital expenditure (cement unit in Manikgarh, Maharashtra was completed in
September 2014). Then she understands that Century Textiles & Industries Ltd was in a desperate situation
to get out of debt trap.
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With this background when an investor reads the conference call transcript held by the company in May
2018 to discuss the demerger of cement unit, then she is able to understand the urgency of the management
to sell off the cement unit without waiting for an independent bidding process.
If we go for bidding it will take time and delay the growth of the real estate business. So to speed
up the real estate development, we have expedited the process of cement outgo and this will help
us ramp up the start our real estate activity.
The company tried to speed up the sale of cement sales without going for a bidding process even though
many minority shareholders clearly reminded the management that they are not happy with the valuation
of the cement assets offered. The minority shareholders also reminded the management that it has a
fiduciary duty towards the shareholders to get the best value for the cement assets and therefore, the
company should go for bidding.
Conference call transcript, May 2018, page 5 (Dheeresh Pathak from Goldman Sachs):
So obviously the EBITDA multiple is not the right multiple as we have seen with cement. Once the
asset is out for multiple players to bid, it fetches n higher value because people think of it as asset
value rather than just EV/EBITDA multiple right now because the EBITDA is depressed. For most
of the midcap or small cap names you can see EBITDA is depressed. So I would strongly
recommend that is your Fiduciary duty also as management of the company to make sure that
we get the best value for the asset because we as minority shareholders we are not happy with
the valuation we have got so that is my humble request to you.
However, the company went ahead with the demerger of cement assets to Ultratech Cement Ltd without
any bidding. In the voting on the proposal, about 18.61% of minority shareholders voted against the
proposal (Source: Voting results submitted to BSE dated Oct. 25, 2018, page 11)
Therefore, an investor can understand that Century Textiles & Industries Ltd seemed to be under great
pressure to sell off the cement division to get relieved of a major portion of the debt that it had accumulated
to create assets, which were not producing any meaningful return for shareholders or to repay the debt. As
a result, hiving off the assets in quick succession was the only solution and the company leased out rayon
unit and demerged the cement division to group companies in order to get rid of about ₹3,800 cr of debt,
which it could not service from its business cash flow.
Due to the sale and leasing out of assets, the total debt of the company declined from ₹4,359 cr in FY2018
to ₹539 cr in FY2019, a reduction of ₹3,820 cr.
However, it seems that the management of the company has a habit of always looking towards raising debt
to grow the business. Even when the management had recently seen the result of excessive debt-funded
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expansion, which finally forced the management to sell assets to repay debt, the management now again
wants to go after more debt to grow its business.
In the May 2018 conference call, the management informed the shareholders that once the debt comes down
from sale of cement division, then the company would raise more debt to fund its real estate business
activities.
Management: The company balance sheet will supports financial leverage after the sale of
Cement business; hence we will expedite this activity and go strongly in real estate market.
It seems that the company plans to go aggressively into real estate activities and debt-funded growth seems
to be on management’s agenda. In such a situation, an investor should be cautious while monitoring the
debt levels of the company going ahead. This is because; high debt has led to the bankruptcy of many well-
known & leading developers of the country. Real estate sector has its own set of challenges, which many
times companies ignore when they see excessive profit margins on paper. An investor should be cautious
to assess whether the management of Century Textiles & Industries Ltd is also going in the same direction.
Management: Worli you know the pricing is around anywhere between Rs. 35,000 to Rs. 40,000
per square foot. So, we expect about Rs. 25,000 per square foot as a profit on an average of the
next 10 years.
Harsh Thakkar: Sir, coming to the real estate growth story I just want to know that Mr. Jitendra
mentioned that it is around 5 million square feet with a 25,000 of approx. profitability, so it
converts to 12,500 crores of profits over the next 10 years?
Management: That is about that approximately you are right. Harsh we are just talking about
Worli.
An investor should be cautious that in the prime real estate markets of South Mumbai, where supply is very
limited and there is a huge demand of residential real estate at exorbitant prices, there are numerous cases
of real estate developers going bankrupt because they could not complete their projects. The profits just
stayed on paper.
The execution of projects in real estate is essential. It is a serious risk factor in real estate, which many
times, both developers and homebuyers, as well as investors, underestimate.
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If one sees the experience of Century Textiles & Industries Ltd while constructing its commercial buildings
at Worli, Mumbai, then the investor would notice that the actual time taken by the company to complete
the projects was much longer than its first estimates.
In FY2010, when the company had first made the plans of two commercial buildings at Worli, then it had
intimated its shareholders that these building will be completed within the next 12 to 15 months.
Thus, two buildings having constructed area of about eleven lac square feet including parking
spaces etc. should be completed within a period of 12 to 15 months.
Therefore, an investor would expect that the company would be able to complete these buildings by the end
of FY2011 (i.e. March 2011, 12 months) or by June 2011 (15 months).
However, the first building, Birla Aurora, was completed in FY2015, after almost 5 years.
Construction of an office building (Birla Aurora) adjacent to Century Bhavan, the Registered
Office of the Company, has been completed and occupation certificate has been received.
The second building, Century Greenspan, was completed in FY2016, after almost 6 years.
Two new office buildings, Birla Aurora, adjacent to Century Bhavan, and Century Greenspan, on
erstwhile Century Mill’s land, are complete and both the buildings have been partially leased out.
Therefore, an investor should understand that in the case of real estate it is very common for developers as
well as investors to underestimate the risk and only focus on huge profits that appear on paper. However,
numerous towers of uncompleted real estate projects should act as a reminder to investors that the sector is
not a cakewalk but is full of risks. In real estate, even the established specialized players with multiple
decades of experience have gone bankrupt.
Therefore, investors should be very cautious when they assess the real estate developmental activities of
the company. Any attempt to launch multiple projects without focusing on the execution of the existing
projects should be a sign of caution for the investors.
b) Inventory turnover ratio of Century Textiles & Industries Ltd:
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Century Textiles & Industries Ltd was continuously increasing from 4.9 in FY2011 to 6.0 in FY2017 until
the time the cement was demerged. After demerger of the cement unit, the ITR has improved to 4.2 in
FY2019.
Such a pattern of ITR may indicate that the cement division was leading to the deterioration of inventory
utilization efficiency. In addition, the inventory utilization efficiency improved after Century Textiles &
Industries Ltd demerged the cement unit.
c) Analysis of receivables days of Century Textiles & Industries Ltd:

days of Century Textiles & Industries Ltd have been continuously in the range of 25-30 days. Range bound
receivables days indicates that the company has been able to collect money from its customers without any
deterioration in its working capital position.
Looking at the inventory turnover ratio as well as at receivables days of Century Textiles & Industries Ltd
over the years, an investor would notice that the company has been able to keep its working capital position
under control and not let it deteriorate over the last 10 years (FY2010-2019). As a result, it has not witnessed
a lot of money being stuck in the working capital.
Over FY2010-19, Century Textiles & Industries Ltd Limited reported a total cumulative net profit after tax
(cPAT) of ₹1,633 cr. During the same period, it reported cumulative cash flow from operations (cCFO) of
₹8,403 cr. An investor notices that the company has very high cCFO when compared to the cPAT over the
last 10 years (FY2010-FY2019).
Learning from the article on CFO will indicate to an investor that the cCFO of Century Textiles & Industries
Ltd is significantly higher than the cPAT due to following factors:
 Interest expense of ₹3,004 cr (a non-operating expense) over FY2010-FY2019, which is deducted

 Depreciation expense of ₹2,681 cr (a non-cash expense) over FY2010-FY2019, which is deducted
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Therefore, an investor would appreciate that during FY2010-FY2019, Century Textiles & Industries Ltd
has kept its working capital requirements under check. As a result, it has been able to convert its profits
into cash flow from operations.
The Margin of Safety in the Business of Century Textiles & Industries Ltd:

target growth.
While analysing the SSGR of Century Textiles & Industries Ltd, an investor would notice that the company
has consistently had a low SSGR (negative to 1%) over the years. One of the key reasons for a low SSGR
for the company has been its low asset turnover and low profitability.
As discussed above, Century Textiles & Industries Ltd has consistently had a low NFAT of about 1.00. In
addition, the net profit margin (NPM) of the company has been consistently low at an average of 4% over
the last 10 years.
depends on the net fixed asset turnover (NFAT) and the net profit margin (NPM) of a company.
Where,

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Therefore, an investor would notice that Century Textiles & Industries Ltd has continuously had a low
SSGR (negative to 1%) over the last 10 years (FY2010-FY2019). However, an investor would appreciate
that the company had been growing at a rate of 8%-10% until FY2017 after which it started hiving off its
assets like rayon unit and cement division.
the rate of 8%-10% from its business profits. As a result, investors appreciate that Century Textiles &
Industries Ltd would have to raise money from additional sources like debt or equity to meet its investment
requirements.
While analysing the past financial performance of Century Textiles & Industries Ltd, an investor notices
that the company relied on additional debt as well as equity dilution to meet the requirement of funds to
grow at 8%-10% from FY2010 to FY2017. The total debt of the company increased from ₹2,367 cr in
FY2010 to ₹5,700 cr in FY2017 indicating a net increase of ₹3,333 cr (= 5,700 – 2,367) over FY2010-
FY2017.
In addition to the debt, Century Textiles & Industries Ltd raised money by diluting its equity when it allotted
1,86,50,000 preferential warrants to its promoters in FY2015 at a price of ₹354.89 per warrant. The total
value of the warrants was about ₹661 cr (=354.89 * 1,86,50,000). The promoters exercised 84,70,000
warrants on March 30, 2015, and remaining 1,01,80,000 warrants on December 18, 2015, and in turn,
infused money of ₹661 cr in the company.
In terms of the shareholder approval obtained at the extra ordinary general meeting held on 4 th
June, 2014 the Company issued and alloted 1,86,50,000 preferential warrant to the
Promoter Group at a price of ₹ 354.89 per warrant…..
On 30 th March, 2015 the warrant holders had partially exercised their entitlement to
convert 84,70,000 warrant into equivalent number of equity shares as per the terms of issue.
Further on 18 th December, 2015 warrant holders exercised the balance entitlement and
converted 1,01,80,000 warrants into equivalent number of equity share….
Therefore, from FY2010 to FY2017, Century Textiles & Industries Ltd raised a total of about ₹4,000 cr
from additional sources to fund its business expansion i.e. additional debt of 3,333 cr and equity of ₹661
cr.
However, from the above discussion, an investor would note that none of the businesses where Century
Textiles & Industries Ltd invested this money produced a required return on this investment. As a result,
the company reached a situation where it could not service its debt from its business cash flows and it had
to hive off its assets like rayon unit and cement division.
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b) Free Cash Flow (FCF) Analysis of Century Textiles & Industries Ltd:
While looking at the cash flow performance of Century Textiles & Industries Ltd, an investor notices that
by the time, the company completed its capital expenditure program on installing the multilayer board
packaging plant with fiberline, new cement units, and the commercial buildings in FY2016, it had done a
capital expenditure of about ₹5,403 cr during FY2011-2016. However, during FY2011-2016, it could
generate cash flow from operations of ₹3,319 cr.
Therefore, during this period (FY2011-2016), Century Textiles & Industries Ltd had a negative free cash
flow (FCF) of ₹2,084 cr (=3,319 – 5,403). In addition, during this period, the company had an interest
expense of ₹2,045 cr. Please note that the amount of interest capitalized by Century Textiles & Industries
Ltd is already reflected in the amount of capital expenditure.
As a result, the company had a cash deficit of ₹4,129 cr (= 2,084 + 2,045).
From the above discussion, an investor would note that Century Textiles & Industries Ltd met this cash
deficit by way of raising additional debt and issuing warrants to the promoters totalling to about ₹4,000 cr.
any company.
Additional aspects of Century Textiles & Industries Ltd:

On analysing Century Textiles & Industries Ltd and after reading its publicly available past annual reports
from FY2007 and other public documents, an investor comes across certain other aspects of the company,
which are important for any investor to know while making an investment decision.
1) Management Succession of Century Textiles & Industries Ltd:

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While analysing the history of Century Textiles & Industries Ltd, an investor notices that the company was
established in 1897 and is currently a part of B.K. Birla group. Mr. B.K. Birla was the chairman of the
company until his demise in July 2019. After his death, his grandson, Mr. Aditya Birla became the chairman
of the company.
From the remuneration structure of the company, an investor notices that almost all the time, the day to day
executive leaders is provided by a whole-time director (WTD) in the company who is also the highest-paid
employee of the company.
Until March 31, 2016, Mr. B.L. Jain used to be the WTD of the company and the highest-paid employee.
After his retirement, Century Textiles & Industries Ltd appointed Mr. D.K. Agarwal as WTD.
In view of the retirement of Shri B.L. Jain on 31 st March, 2016 from the services of the Company,
he has ceased to be a Whole-time Director. With effect from 1st April, 2016, Shri D.K. Agrawal has
been appointed as Whole-time Director of the Company..
Sadly, Mr. D.K. Agrawal expired on August 24, 2018, and thereafter, Mr. R.K. Dalmia was appointed as
WTD from September 15, 2018.
The Directors express their profound grief at the sad demise of Shri D.K. Agrawal (DIN:
00040123), their esteemed erstwhile colleague who was President (Corporate Affairs) and Whole-
time Director of the Company, on 24th August, 2018…
Shri R.K. Dalmia (DIN: 00040951), Senior President, Textile Divisions of the Company, has been
appointed as a Whole-time Director of the Company with effect from 15 th September, 2018.
Therefore, it appears that as far as day-to-day execution leadership is concerned, Century Textiles &
Industries Ltd relies on the services of professional managers. Moreover, the company is able to find
candidates on time.
However, when an investor looks at the voting pattern by public shareholders to the resolutions of the
election of members of Birla family for the position of chairman, then she notices that quite a few public
shareholders have voted against them.
As per FY2019 annual report, page 53, 8.27% of shareholders voted against the resolution for continuation
of Mr. B.K. Birla as chairman of the company on January 28, 2019.
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Similarly, in the AGM on July 30, 2019, 6.27% of the overall shareholders (i.e. 23.99% of public
institutions) voted against the election of Mr. K.M. Birla as the chairman of the company. (Source: Voting
results of AGM submitted to BSE on July 31, 2019, page 6)
An investor would notice that even though the number of votes against the resolution are not sufficient to
block the election of members of the Birla family as chairman. However, still, the voting results indicate
that a substantial number of public shareholders are not happy with the strategic decisions and business
outcome of the decisions of the current leadership of Century Textiles & Industries Ltd.
In the above discussion, an investor may find a few reasons that might have led to the public shareholders
to vote against the election of members of the Birla family as chairman of Century Textiles & Industries
Ltd. It might be the investment decisions that led to low return on debt-funded capital expansions leading
to unserviceable debt levels. In addition, many minority shareholders may disagree with the way the cement
division was demerged to a group company without bidding.
Even though, an investor may disagree with the quality of management decisions; however, still from the
management succession perspective, an investor should note that Century Textiles & Industries Ltd seems
to have continuity at the board position level where members of Birla family take the position of the
chairman. In addition, for day-to-day executive leadership, the company relies on the services of
professionals where it is able to find candidates in time.
The presence of a well thought out management succession plan is essential in the case of promoter run
businesses as it provides for a smooth transition of leadership over the generations and provides continuity
in the business operations of any company.
2) Project execution by Century Textiles & Industries Ltd

An investor would appreciate that while assessing the project execution efficiency of any company, the
ability to complete the projects within expected time and cost is the key parameter.
While analysing the historical performance of Century Textiles & Industries Ltd, an investor notices that
the company had completed quite a few big projects in almost all its industry divisions like paper, cement,
and real estate.
In the paper division, Century Textiles & Industries Ltd executed a large project of multilayer packaging
board manufacturing along with a paper grade pulp plant (fibreline) project.
In FY2008 annual report, the company intimated its shareholders that it is setting up a multilayer packaging
board plant for 500 tonnes per day (500*365 = 182,500 tonnes per annum) plant and a paper grade pulp
plant (fibreline) project. The company stated that the total expenditure on these projects would be ₹1,270
cr (=775 + 495) and they will be complete by December 2009.
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We are setting-up a Multilayer Packaging Board Plant, with a capacity of 500 tonnes per day.
This development, requiring a total capital outlay of about Rs. 775 crore, is expected to be
operational by December 2009. Additionally, we are planning to set up a Paper Grade Pulp Plant
(Fibreline) to produce superior quality wood pulp. The plant demands a capital outlay of Rs. 495
crore and is anticipated to commence operations by December 2009.
However, upon reading the subsequent annual reports, an investor notices that the plants were delayed and
were completed in FY2012.
The Fibre Line (Pulp Plant) with a capacity of 1.62 lac tonnes per annum and Multilayer
Packaging Board Plant with a capacity of 1.8 lac tonnes per annum at Lalkua, Nainital
(Uttarakhand) have started production and the quality of the production at each facility is expected
to be stabilized in course of time. Further, the 43 M.W. turbine is also now in operation.
While ascertaining whether the delay in completion of the projects had any impact on the cost of the
projects, when an investor reads the annual reports, then she is able to find that in FY2010 annual report,
the company had revised the cost of the project upwards from earlier ₹1,270 cr in FY2008 to ₹1,660 cr in
FY2010.
Civil work for the Fibreline (Pulp Plant) and Multilayer Packaging Board Project including 43
MW Turbine is in full swing. Main equipments have already been ordered and have started
arriving at the site. Erection of the main machinery and recovery plant is in progress. Orders for
auxiliary and balancing equipment are being finalized. Capital outlay on the above projects is
estimated to be Rs.1660 crore. Completion of the project is scheduled for December 2010.
An investor may note that in the FY2008 announcement, the project details do not mention 43MW turbine
whereas, in the FY2010 annual report, it mentions the 43MW turbine. Therefore, an investor may contact
the company directly to understand whether the cost estimates of the project provided in FY2008 included
43MW turbine. If not, then the investor may do her due diligence to ascertain whether the increase in the
project cost by ₹390 cr (=1,660 – 1,270) is justified for a 43MW turbine or it is the increase in cost due to
time overrun.
In addition, the cost of ₹1,660 cr is for estimated completion of the projects in December 2010. Whereas
the projects were completed with further delay in FY2012. Therefore, the additional delay might have led
to further cost increments. An investor may contact the company directly to understand what was the final
cost incurred for these projects.
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For the cement division, Century Textiles & Industries Ltd announced an expansion of manufacturing
capacity at two locations by 3.5 MTPA. It planned expansion of 2.0 MTPA at Manikgarh, Maharashtra
with a 35MW power plant and an expansion of 1.5 MTPA at Sagardighi, West Bengal. The total cost
estimated was ₹965 cr for both the projects.
We intend to expand cement manufacturing capacity to 11.30 million tonnes per annum by setting
up a new cement plant of 2 million tonnes per annum capacity adjacent to existing plant of
Manikgarh cement at Gadchandur, Maharashtra, along with a 35 MW captive thermal
power plant and 1.50 million tonnes per annum cement grinding unit at Sagardighi in District
Murshidabad, West Bengal. The estimated total capital outlay will be about Rs.965 crore.
During next year, in FY2008, the company increased the scope of the projects. The expansion plan at the
Maharashtra plant was increased from 2.0 MTPA to 2.5 MTPA, the plan of power plant increased from
35MW to 40MW. However, an investor notices that the cost of the project increased almost 1.86 times to
₹1,800 cr.
Subsequent to our report in the previous year, our proposal for cement capacity expansion
is modified to expand the cement manufacturing capacity from 7.80 million tonnes per annum to
11.80 million tonnes per annum. This is expected to be achieved by setting up a new clinker line
of the capacity of 2.50 million tonnes and an equivalent cement grinding facility, adjacent to the
existing plant of Manikgarh Cement at Gadchandur, Maharashtra, along with a captive Thermal
Power Plant of 40 MW and as planned earlier, the 1.50 million tonnes per annum cement grinding
unit at Sagardighi in Dist. Murshidabad, West Bengal. The revised total outlay for the aforesaid
expansion is estimated to be about Rs.1800 crore.
From the above disclose an investor notices that from FY2007 to FY2008, Century Textiles & Industries
Ltd increased the scope of the project by 0.5 MTPA of cement manufacturing capacity and 5MW of the
thermal power plant. However, the cost increase due to these changes was ₹835 cr (=1,800 – 965).
The company deferred these projects for some time in light of the 2008-09 global economic recession.
Nevertheless, in FY2010, the company restarted the work on these projects. However, an investor notices
that in FY2010, the cost of the project has increased further from ₹1,800 cr to ₹2,025 cr (425 + 1,600).
The orders have been placed for the main plant and machinery for the grinding unit with a capacity
of 1.5 million tpa at Sagardighi, Dist. Murshidabad, West Bengal…….The grinding unit is
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expected to be operational by the last quarter of 2011-12. The total outlay on the project is
estimated at Rs.425 crore.
Manikgarh Cement expansion – 2.5 Million tonnes capacity per annum and 40 MW Captive
Thermal Power Plant: …. orders for all main cement manufacturing equipment and for the captive
thermal power plant will be placed before June/July 2010. The total outlay on the project is
estimated to be about Rs.1600 crore. The enhanced capacity should be fully on stream by the end
of the calendar year 2012.
In FY2010, Century Textiles & Industries Ltd said that the West Bengal project would complete by March
2012 and the Maharashtra project would complete by December 2012.
However, the West Bengal project was completed in July 2013.
Sonar Bangla Cement – Grinding Unit – 1.5 Million tpa – Village Dhalo, P.O. Gankar, Dist.
Murshidabad (West Bengal): Out of two cement mills, one was commissioned in February,
2013 and another in July, 2013.
In addition, the Maharashtra project was completed in September 2014.
Our new Cement expansion unit at Manikgarh in Maharashtra State which commenced production
in September, 2014 is financed mainly out of loans…
From the above discussion, an investor would notice that in the case of execution of capacity expansion
projects in the cement division, Century Textiles & Industries Ltd witnessed significant time and cost
overruns.
An investor would appreciate that when projects experience delays in execution, then usually their costs
increase. In addition, the increase in costs in completion of the projects brings down the return that the
company may earn on its investment. The delay in the completion of projects of units like paper and cement
may be one of the reasons that Century Textiles & Industries Ltd could not generate sufficient return on its
capital investments.
Let us now look at the execution of another important division of Century Textiles & Industries Ltd, real
estate division.
In the above discussion in the net fixed asset turnover (NFAT) section, an investor would remember that
the company faced significant delays in the completion of its commercial buildings. Initially in FY2010,
the company had expected to complete these building in 12-15 months i.e. by March 2011 and June 2011.
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However, the first building, Birla Aurora, was completed in FY2015, after almost 5 years and the second
building, Century Greenspan, was completed in FY2016, after almost 6 years.
Let us see if the company faced cost overruns while constructing its commercial buildings.
Initially, in FY2011, Century Textiles & Industries Ltd intimated its shareholders that the approximate cost
of these building would be about ₹625 cr.
At present, one office building adjacent to Century Bhavan, the registered office of the Company
and another office building with an entry plaza on Century Mill’s land at Worli, both meant for
leasing, are under construction with a total constructed area of about thirteen lac square feet
including parking spaces etc. at a total cost of about Rs.625 crore.
Century Textiles & Industries Ltd decided to classify the completed commercial buildings under the section
“Investment Property” in its balance sheet.
Investment property representing immovable property intended to be leased out and not intended
to be substantially used by the Company are carried at cost less depreciation (computed in the
manner prescribed for Fixed assets) and impairment.
When the company completed the construction of both its commercial building; first in FY2015 and the
second in FY2016, then in the FY2016 annual report, it showed the value of investment property as ₹1,007
cr.
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Therefore, an investor would notice that in the case of real estate project execution, Century Textiles &
Industries Ltd faced a time overrun of about almost 5-6 years and a cost overrun of about 60% (1,007/625
= 1.61).
From the above discussion, an investor would appreciate that in the case of real estate projects, execution
of the projects within budgeted time & cost is the most important characteristic of any developer. Due to
the huge shortage of quality homes, real estate developers are able to sell their launched flats; however,
timely execution within the original budget that differentiates a good developer from an average one.
Therefore, while ascertaining the potential of the real estate division of the company, an investor should be
cautious and always closely monitor the execution of its existing projects. This is because many times, the
roadblocks faced by the developers may not be in the control of the company at all. For example, if the
company does not get required approvals or the raw material controlled by unorganized/black market like
sand etc., then all the estimated projections and the profits will stay only the paper. Moreover, in the case
of real estate, such execution challenges are more common than what the developers and investors initially
think.
Therefore, it is essential that investors focus prominently on the execution progress of the existing projects
of Century Textiles & Industries Ltd all the time.
3) Suboptimal capital allocation by Century Textiles & Industries Ltd:

During the conference call in May 2018, while discussing the demerger of the cement unit, the management
of Century Textiles & Industries Ltd highlighted that the cement operations of the company are highly
inefficient. The management said that in FY2018, the cement unit has an EBITDA per tonne of ₹367/-,
which is below the industry average.
Moreover, the profitability of cement division is currently not comparable to the industry average.
For the year ended March 31, 2018 it has achieved revenue of Rs. 4306 crore and EBITDA of Rs.
544 crores, which includes net one-time gain of Rs. 51 crore. This translates to EBITDA per ton
of around 367 based on the capacity and after adjusting for one-time gain.
When an investor compares EBITDA per tonne of Century Textiles & Industries Ltd with other cement
manufacturers in its regions, then she notices that the performance of ₹367 per tonne is very low.
A competitor of the company, Heidelberg Cement India Ltd had an EBITDA per tonne of more than double
of Century Textiles & Industries Ltd. In FY2018, Heidelberg Cement India Ltd reported an EBITDA per
tonne of ₹781 against the EBITDA per tonne of ₹367 of cement division of Century Textiles & Industries
Ltd.
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Credit rating report of Heidelberg Cement India Ltd prepared by India Ratings in March 2020:
The company has gradually increased its EBITDA/tonne to INR1,108 in 9MFY20 (FY19:
INR987; FY18: INR781) mainly due to increased sales realisation…..
Moreover, an investor would notice that the EBITDA per tonne of Heidelberg Cement India Ltd is
continuously on the rise, which had reached ₹1,108 in 9M-FY2020.
While analysing the business of Century Textiles & Industries Ltd and the responses of the management in
the conference call, an investor notices some of the decisions by the company that make the investor think
further.
The management clarified that it even though it had put up significant 2.8 MTPA new cement capacity at
Manikgarh, Maharashtra, the region has immense competition with low demand. The management
highlighted that even if they increase the production of cement in Manikgarh plant, then they do not know
how to sell it.
Management: I will just come to the power efficiency, but basically demand is also not there in
that area. There is huge competitive intensity in that area and we are not able to sell that. That is
why that utilization level is low.
Management: It is not 2 million it is 1.2 million ton. Presently there is a very limited market
potential in that area and we are operating at only 64% capacity. 2-million plant capacity is non
operationsal since last 3-4 years because there is no market available. Other than that the plant
is also cost ineffective at that location
From the above statement, an investor thinks whether it was the right decision to put ₹1,600 cr of capital in
the Manikgarh, Maharashtra region to create capacity when the company is not able to sell the cement in
the region.
In addition, the company highlighted that the cement plant established in West Bengal does not have any
consistent economical source of clinker. As a result, it has to send clinker from Maharashtra to West Bengal,
almost halfway across the country, so that the West Bengal plant can produce cement. This transportation
of clinker over long-distance adds to the cost of cement production and in turn, reduces the profitability
(EBITDA per tonne).
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Gunjan Prithyani: I just have one clarification there is this grinding unit in West Bengal from
where was you feeding the clinker to that grinding unit?
Management: So in that grinding unit clinker was largely getting supplied from Manikgarh unit
incurring a huge logistic cost.
An investor may think that being in the cement business since 1974, the management of the company could
have planned its capital allocation better. It could have avoided putting money in Manikgarh or it could
have put less money in Manikgarh and instead put some of the money in establishing a clinker plant near
to West Bengal plant or any other such combination.
At the end of the day, these are the decisions for which the shareholders appoint experienced management
on the board and in executive positions.
Nevertheless, the end result of all the business decisions in the cement division was that in FY2018, Century
Textiles & Industries Ltd had less than half of the EBITDA per tonne than its competitors. As a result, it
landed up in a situation where it could not service its debt from its cash generation.
The credit rating agency, of Century Textiles & Industries Ltd by CRISIL, February 2019:
While the repayment obligations came down with debt reduction post Grasim transaction, the
annual cash generation, is not expected to be sufficient to service the obligations in fiscal 2019.
In light of the above, an investor feels that the capital allocation by the management in the cement decision
left room for improvement.
Let us now look at the rayon man-made fiber division.
From the above discussion on the business dynamics of different divisions of Century Textiles & Industries
Ltd, an investor would notice that the rayon man-made fiber division was facing a very tough time. The
industry was grappling with challenges like:
 Substitution of viscose filament yarn by cheaper polyester yarn

 Oversupply in both domestic and export markets. Cheaper imports from China & other countries
 Tough environment norms leading to expensive measures to control pollution from the
manufacturing units
 Economic unviability due to above challenges leading to the closure of units and shutdown of
business by many manufacturers even the well-known names in Europe and others in China and
India.
An investor would remember from the above discussion that the rayon unit faced immense challenges to
run its plants, which frequently run at below optimal capacity for many years. The company found it
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difficult to pass on the increase in raw material costs to its customers. At one time, the company could not
increase the price of rayon tyre yarn to its customers for four years.
The unit could procure orders for Rayon Tyre yarn for the year 2016 and is expected to operate
at its full capacity. However, it could not get any increase in the price for about four years, which
is a matter of concern.
An investor would appreciate that such tough business conditions remove the possibility of any meaningful
return on the investments done by the manufacturers. However, when an investor notices that despite these
tough challenges, Century Textiles & Industries Ltd decided to put more money in the rayon unit.
The process of installation of 12 machines for production of viscose filament yarn is in progress
in order to increase the production capacity of viscose filament yarn by about 5 per cent per
annum.
Three additional Pot Spun Yarn (PSY) spinning machines with balancing equipment in spin bath
and four Continuous Spun Yarn (CSY) spinning machines are expected to be commissioned by
June, 2013 and additional six CSY machines by March, 2014. After such commissioning, the
capacity of PSY & CSY will increase by about 1800 tonnes per year.
During the year, capacity of the doubling & twisting unit has been enhanced from 90 tonnes per
month to 150 tonnes per month. Additional capacity for Zero Twist Rayon Tyre Yarn was
commissioned by adding 72 winding position during the second half of the year.
An investor thinks when the company knew that the business dynamics of the rayon man-made fiber unit
are extremely tough and as a result, the manufacturers are not able to make a meaningful return on their
investments. Cheaper substitute products are available in the market. Many established players have found
the business to be unviable. Then, under these circumstances, could the company avoid putting more money
in this division, which was funded by debt.
Nevertheless, by FY2018, Century Textiles & Industries Ltd reached a situation where it was not possible
to repay debt from its business cash flows. As a result, the company felt it better to lease out its rayon unit
to Grasim Industries Ltd, earn rent rather than running the business, and earn profits.
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An investor may analyse the investment decisions of Century Textiles & Industries Ltd from a higher view.
The investor would appreciate that if the capital allocation by the company had been right, then the
investments done by the company would have earned sufficient return to pay the interest, make the timely
repayments, earn sufficient additional surplus for shareholder for taking the equity risk.
On the contrary, the company landed up in a situation where the money was already spent in the assets and
the assets were not generating enough profits. The lenders will ask for their repayments when they fall due
whether the company pays it from business profits or sells/leases out its assets. In the end, Century Textiles
& Industries Ltd had to hive off rayon unit to Grasim Industries Ltd, demerge the cement division to
Ultratech Cement Ltd in order to get rid of the debt.
This indicates that the capital allocation decisions of Century Textiles & Industries Ltd leave a room for
improvement. This might be one of the reasons that many minority shareholders voted against the election
of members of the Birla family for the post of chairman of the board.
4) Preferential issue of warrants by Century Textiles & Industries Ltd to the

promoters:
From the above discussion in the self-sustainable growth rate (SSGR) section, an investor would remember
that in FY2015, Century Textiles & Industries Ltd had allotted warrants to its promoters on a preferential
basis. The promoters converted some of these warrants into equity shares in FY2015 and the remaining
warrants in FY2016.
In terms of the shareholder approval obtained at the extra ordinary general meeting held on 4 th
June, 2014 the Company issued and alloted 1,86,50,000 preferential warrant to the
Promoter Group at a price of ₹ 354.89 per warrant…..
On 30 th March, 2015 the warrant holders had partially exercised their entitlement to
convert 84,70,000 warrant into equivalent number of equity shares as per the terms of issue.
Further on 18 th December, 2015 warrant holders exercised the balance entitlement and
converted 1,01,80,000 warrants into equivalent number of equity share….
The following chart shows the share price of Century Textiles & Industries Ltd on the date of allotment of
warrants, on the dates of exercise of warrants and on the date when one of the promoters sold 2.46% stake
in the company after allotment of warrants. (Source: Moneycontrol)
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When an investor analyses the above chart, then she observes the following:
 In the months preceding the allotment of warrants on June 4, 2014, the share price of Century
Textiles & Industries Ltd stayed in the price range of ₹300-350/-. As a result, according to the
formula approved by the regulator, the company allotted 1.865 cr warrants at ₹354.89 to the
promoters. It valued the total warrant transaction at ₹661 cr. At June 4, 2014, the promoters paid
25% of the amount i.e. ₹165 cr (=661 * 0.25) to the company and got the warrants. This transaction
fixed the price at which the promoter would get 1.865 cr shares from the company at ₹354.89
irrespective of the share price when they decide to exercise the warrant.
 On March 30, 2015, the promoters exercised 0.847 cr warrants and paid balance 75% of the value
for 0.847 cr shares. At March 30, 2015, the market price of the shares of Century Textiles &
Industries Ltd was ₹638.90. Therefore, at March 30, 2015, the promoters got 0.847 cr shares at a
cost of ₹300 cr (=0.847 * 354.89) whose market value at March 30, 2015, was ₹541 cr (=0.847 *
638.90). The promoters had an unrealized gain of ₹241 cr (=541 – 300) due to allotment and
exercise of warrants.
 On December 18, 2015, the promoters exercised the balance 1.018 cr warrants and paid balance
75% of the value for 1.018 cr shares. At December 18, 2015, the market price of the shares of
Century Textiles & Industries Ltd was ₹572.70. Therefore, at December 18, 2015, the promoters
got 1.018 cr shares at a cost of ₹361 cr (=1.018 * 354.89) whose market value at December 18,
2015, was ₹583 cr (=1.018 * 572.70). The promoters had an unrealized gain of ₹222 cr (=583 –
361) due to allotment and exercise of warrants.
 Moreover, due to the exercise of warrants, the shareholding of the promoters increased from
40.23% on December 31, 2014 (BSE) to 50.21% on December 31, 2015 (BSE). An investor
would note that due to the warrant transaction, the promoters could fix the cost of acquisition of
about 10% stake in the company at ₹354.89 per shares, which was constant irrespective of the
subsequent movement in the share price of the company. An investor may appreciate that if the
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promoters would have attempted to buy a 10% stake from the market, then it is unlikely that they
could get it at ₹354.89 per share. This is because, whenever the stock market notices that the
promoters are buying shares from the open market, then it increases the share price significantly.
 An investor would appreciate that even though the regulatory guidelines state that promoters cannot
sell shares received via warrant allocation for a period of 3 years. However, when the promoters
already have many existing shares of the company with them, then they can safely sell the existing
shares and in turn, get a profit from the warrant allotments.
 As per FY2016 annual report, page 33, on March 22, 2016, the promoters sold 27,46,100 shares
(2.46% stake) in the company. At March 22, 2016, the market price of the shares of Century
Textiles & Industries Ltd was ₹524.15. Therefore, when compared to the warrant allotment price
of ₹354.89 per share, the promoter realized the gains of ₹169.26 per share (524.15 – 354.89). It
amounted to a total realized gain of ₹46.48 cr. (= 169.26 * 27,46,100). Effectively, from the sale
of shares, the promoter recovered about ₹144 cr put in by them in the warrants (=524.15 *
27,46,100).
An investor may note that the warrants are considered a way of promoters to infuse equity in the company.
However, we believe that the structure of the warrants where the promoters first pay only 25% of the money
and would pay the balance 75% later has many issues related to it.
We believe that the warrants are if at all, 25% beneficial to the company and 75% beneficial to the
promoters.
Common logic says that no one holding stock warrants would exercise them to get shares at a price, which
is higher than the price at which he/she can get shares from the market.
More so, if the intention of the promoters is to infuse money into the company, then they should simply get
all the shares at the current market price and give the entire money to the company upfront so that the
company may use it for the purpose for which it needs money.
The entire structure of paying 25% at the time of allotment of stock warrants and then keeping the option
to pay 75% at the time of exercise, which the promoters would decide based on whether at the date of
exercise, the promoters are making money or not, seems challenging.
If the promoters pay 25% now and let the stock warrants expire due to the market price being consistently
lower than the exercise price in future, then it effectively means that the promoters did not have the true
intention of infusing 100% of the money or that the company did not need 100% of the money.
It might be that the company needed only 25% of the money, which promoters put in by way of stock
warrants allotment and the right to get shares in future at a discount is the payoff that promoters would
enjoy as a consideration for giving 25% to the company. The company might not have needed the balance
75% at all.
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There have been many instances in the past when the markets crashed after the allotment of warrants and
the promoters refuse to exercise the warrants and pay the balance money. You may read one such example
in our analysis of ADF Foods Ltd, where in December 2007, the promoters paid 10% of the amount of the
warrants; however, they refused to pay the balance 90% when the warrants became due after 18 months in
June 2009 because the stock markets had crashed by that time.
In fact, it was one of the main reasons that in February 2009, SEBI increased the upfront payment for
warrants allotment from 10% to 25%. The regulator realized that the promoters used warrants to enrich
themselves when the stock markets rose while their loss was limited to only 10% if the markets fell.
(Source)
There were complaints that promoters allotted warrants to themselves and select investors at a
pre-determined price, but didn’t buy them when the due date came if the prevailing stock prices
were lower than the decided price. If the prices were higher, they would convert those warrants
and at least make a paper profit, and in some cases encash the gains.
It is to discourage promoters from trading profits. Warrants are seen as an instrument that gives
an advantage to promoters above retail investors, who have all other rights equal to company
founders.
When the markets melted during 2008 and early 2009, promoters of many companies such as
Hindalco Industries, Tata Power, GE Shipping and Pantaloon Retail did not convert those
warrants, regulatory filings show.
After similar complaints, in February 2009, the regulator had raised the up-front margin to be
paid by warrant subscribers to 25% from 10% since the payment lost was insignificant compared
with the losses one would have made if forced to buy.
Therefore, we believe that exercise of a structured deal where the promoters get preferential treatment by
allotment of warrants by paying 25% and then keeping the option to pay 75% at the time of exercise is not
in the favour of public shareholders.
5) Dividends of Century Textiles & Industries Ltd funded by debt:

While an investor analyses the past financial performance of the company, then she notices that during the
phase of FY2011 to FY2015, the company was continuously doing debt-funded capital expenditure. During
this period, the company was not making sufficient profits and cash flow from operations to meet its
investment requirements. Further, during FY2013, the company reported a net loss as well of ₹34 cr.
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Therefore, during FY2011-FY2015, the investment requirements of the company exceeded its operating
cash flows. As a result, the debt of the company was continuously on a rise every year. The debt increased
from ₹2,369 at the start of FY2011 to ₹6,139 at the end of FY2015.
However, when an investor notices the dividend payout by the company during this phase (FY2011-
FY2015), then she notices that the company continued to declare dividends. The dividend payout
(excluding distribution tax) continued at ₹51 cr per year from FY2011 to FY2014 and it increased to ₹56
cr in FY2015. The company declared dividend (excluding distribution tax) of ₹51 cr even in FY2013 when
it had a net loss of ₹34 cr.
An investor would appreciate that during FY2011 to FY2015, the company was investing all the money
that it made from operations and more money raised from debt into its capital expansion projects. The debt
of the company was continuously increasing. As a result, an investor may infer that the money to be paid
to shareholder as dividends is effectively the debt taken by the company from lenders in order to transfer
to the bank accounts of the shareholders of the company.
We believe that the dividends distributed by any company should come from the free cash flows (FCF) of
the company after meeting the capital expenditure (capex) of the company from its operating cash flow. In
the company does not have a surplus free cash flow after meeting capital expenditure and it has to raise
debt to meet the capex, then it should not raise more debt to pay dividends to equity shareholders. Instead,
it should avoid paying dividends, control its debt levels and reduce the interest costs for the company.
6) Increasing remuneration of whole-time director even when the performance of

Century Textiles & Industries Ltd was going down:
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While analysing the financial performance of the company, an investor notices that the net profit after tax
(PAT) of the company had declined from net profits of ₹339 cr in FY2010 to a net loss of ₹95 cr in
FY2016. However, during the same period, the remuneration of the highest-paid employee of the company,
its whole-time director (WTD), increased from ₹1.61 cr (FY2010 annual report, page 26) to ₹3.74 cr
An investor would notice that the remuneration of the WTD increased by 132% (3.74/1.61 = 2.32) during
the period when the performance of the company declined from reasonable profits in FY2010 (₹339 cr, 8%
net profit margin) to net losses of ₹95 cr in FY2016.
In addition, the investor may note that during FY2013 when Century Textiles & Industries Ltd made a net
loss of ₹34 cr, the remuneration of the WTD increased by 23% from ₹1.94 cr (FY2012 annual report,
page 29) to ₹2.39 cr (FY2013 annual report, page 30).
From the above disclosures, an investor may feel that the remuneration of the management of Century
Textiles & Industries Ltd is not linked to the business performance of the company. Whether the company
makes profits or losses, the interests of the management of the company are intact. The increase in the
remuneration of the WTD from ₹1.60 cr in FY2010 to ₹3.74 cr in FY2016 amounts to about a 15% increase
every year even when the performance of the company was going down. In FY2013, when the company
reported losses, then the remuneration of WTD increased by even more i.e. 23%.
An investor may fear that in such remuneration structures, the management may not be much bothered
about the financial performance of the company as their monetary interests are intact. Even if:
 the execution of the projects is being delayed year after year

 the cost of the projects is increasing year after year
 the heavily debt-funded capital expenditure is not earning sufficient return
 the company is taking more debt to pay out dividends
 the cement assets are earning less than half the EBITDA per tonne than the competitors…
..the management may not be overly concerned. They are getting their salaries with a good annual hike
every year.
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We believe that going ahead; investors should keep a close watch on the remuneration of the management
of the company. In case, the investors notice that the deterioration in the performance of the company is
not having any impact on the remuneration of the management of the company, then she may find that in
future as well, the company may land up in a situation where the management may not be concerned about
capital allocation efficiency. In such a case, in future, the company may again face a situation where it may
go for extensively debt-laden projects that may not produce sufficient return on capital and then, once again,
the company may have to sell its assets to repay debt.
Linking the remuneration of the management with the performance of the company is essential. Otherwise,
the probability of poor capital allocation decisions increases manifold. Moreover, instead of policies on
paper, the changing remuneration with changing performance of the company should be clearly visible in
the final money paid to the management during the year.
Please note that when the remuneration of the management is unlinked to company’s performance and
when the dividends to the shareholders are unlinked to the company’s performance, then it has a high
probability of creating conditions leading to inefficient allocation of capital. This is because, in the short-
term, no one is getting impacted due to poor capital allocation. The management keeps getting a significant
hike in remuneration even when the company makes losses. The shareholders keep getting their dividends
even if the company makes losses even if the company raises more debt to pay money to the accounts of
shareholders. In such a situation, it is usually very long before everyone realizes that the company is in a
debt-trap where it cannot service its debt from its cash flows. It is then that the companies have to sell assets
to repay debt.
7) Usage of short-term funds for creating long-term assets by Century Textiles &
Industries Ltd:
An investor would appreciate that any company should attempt to fund its long-term assets like fixed
assets/manufacturing plants etc. by using long-term money and use short-term money only for short-term
usages like funding inventory/trade receivables etc. This is because the company should maintain the asset-
liability matching i.e. when the short-term money comes for repayment, then it can repay it by collecting
money from the customers while there is no imminent pressure to repay long-term money used to fund the
manufacturing plants. A company can safely plan the repayment of long-term funds by accumulating
surplus profits over time.
However, when a company tries to use short-term money to fund long-term assets, then it puts itself in a
risky situation. This is because, the short-term may become due for repayment when the manufacturing
plant created using this short-term money, has not yet started generating sufficient profits.
Such situations are risky because, if the company is not able to refinance the short-term money continuously
until the time the manufacturing plant reaches optimal utilization level to produce surplus profits, then the
company may face liquidity challenges.
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While analysing the annual reports of Century Textiles & Industries Ltd, an investor notices that during the
capital expansion phase of the company until FY2014, the auditor of the company has repeatedly
highlighted in its report that the company has relied on short-term money to fund the creation of its
manufacturing plants.
In FY2014, the company used ₹637 cr of short-term money for a long-term purpose. FY2014 annual report,
page 43:
The Company has obtained bank borrowings amounting to ₹ 637.41 Crore on a short term basis,
which have been used for investment in fixed assets.
page 41:
The company has obtained bank borrowings amounting to Rs.482.62 Crore on a short term basis,
which have been used for long term investment in fixed assets.
page 41:
….according to the information and explanations given to us, funds raised on a short-term basis,
aggregating Rs. 777.47 Crore, have been used for long-term investment in Fixed assets.
page 41:
…according to the information and explanations given to us, as at the close of the year, short term
loans aggregating Rs.871.18 Crore stand utilized for long term investment.
page 39:
…according to the information and explanations given to us, as at the close of the year, short term
loans aggregating Rs.603.76 Crore stand utilized for long term investment.
page 47:
…we are of the opinion that, prima-facie, as at the close of the year, short term funds amounting
to Rs.30.15 Crore stand utilised for long term purposes
page 45:
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…we are of the opinion that, prima-facie, as at the close of the year, short term funds amounting
to Rs. 88.20 Crore have been utilised for long term purposes;
An investor would note that using short-term funds for creating long-term assets is not a prudent practice.
Going ahead, an investor should keep a close watch on the sources for funds that the company uses for its
expansion plans.
8) Related party transactions of Century Textiles & Industries Ltd:

While reading the annual reports of the company, an investor comes across certain instances when the
company invested money in other group companies ever since the first publicly available annual report of
FY2007.
i) Transactions with Kesoram Industries Ltd:
 FY2014: invested about ₹19.4 cr in equity shares of Kesoram Industries Ltd (FY2014 annual report,
page 58)
 FY2009: invested about ₹18 cr in equity shares of Kesoram Industries Ltd (FY2009 annual report,
page 47)
 FY2008: invested about ₹12 cr in equity shares of Kesoram Industries Ltd (FY2008 annual report,
page 53)
ii) Transactions with Mangalam Cement Ltd:
 FY2006: gave a loan of ₹45 cr to Mangalam Cement Ltd (FY2007 annual report, page 53)
 FY2012: invested about ₹3 cr in equity shares of Mangalam Cement Ltd (FY2012 annual report,
page 55)
iii) Transactions with Century Enka Ltd:
 FY2010: invested about ₹9 cr in equity shares of Century Enka Ltd (FY2010 annual report, page
47)
 FY2011: invested about ₹9.5 cr in equity shares of Century Enka Ltd (FY2011 annual report, page
49)
An investor would notice that the company invested money in the group companies/gave loans to them
even in the years FY2010-FY2014 when the company itself was making significant investments in its
expansion projects and was raising a large amount of debt to fund them.
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In addition, an investor would note that at the time when Century Textiles & Industries Ltd had to hive off
its assets in order to control its debt, then the major assets were transferred by the company to its other
group entities.
Century Textiles & Industries Ltd demerged its cement division to a Birla group company, Ultratech
Cement Ltd without a bidding process. The company took valuation and fairness reports from independent
consultants and demerged the unit to Ultratech Cement Ltd.
In the May 2018 conference call, many investors/analysts expressed their dissent to the process of the
demerger and the valuation.
Gautam Dedhia: See this involves technical as far as valuation of plant is concerned. So you
mentioned about Bansi Mehta they are a Charted Accountant Firm. So technically I do not know
how qualified they would be to value a cement plant of such big capacities.
Dheeresh Pathak: So as minority shareholders we are not happy with the valuation that has
been offered and I feel as management we have fiduciary duty to get bidding from other suitors as
well. So as to know what the fair market value of the asset is. So I will strongly recommend you to
do that exercise so that we can establish a fair market value which is based on what other buyers
might also be willing to offer rather than just one particular party because we are not happy we
think the asset can give us much more.
However, the company went ahead with the demerger of cement assets to Ultratech Cement Ltd without
any bidding. In the voting on the proposal, about 18.61% of the minority shareholders voted against the
proposal (Source: Voting results submitted to BSE dated Oct. 25, 2018, page 11)
For rayon unit, Century Textiles & Industries Ltd gave it to another Birla group company, Grasim Industries
Ltd for 15 years for an upfront rent of ₹600 cr and transfer of debt (working capital limit) of about ₹165 cr.
Grasim Industries Ltd also paid an interest-free, refundable security deposit of ₹200 cr. In this case as well,
an investor is not sure whether any other proposal was sought by Century Textiles & Industries Ltd that
could have indicated what any other player might be willing to pay.
Therefore, many times, while investing in a company belonging to large corporate houses that are involved
in multiple businesses spreading across many group companies, investors would notice that the promoters
keep doing business restructuring between their group companies. They keep using the resources and assets
of one company for the usage of another group company. Many times, such intra-group transactions are
due to the habit of promoters to see their entire group with multiple companies as an entity with a “pool of
resources”. In order to get the best usage of the supposed “pool of resources,” the promoters keep moving
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money and assets out of one group company to another group company that might be in urgent need of
money or can use the assets more efficiently.
In such instances of intra-group transfer of money or assets, the public shareholders of one company may
think that the resources belonging to their company are being used for the benefits of another company.
However, the promoters may not look at these transactions from this same perspective. For them, it might
be a question of shifting assets from one group company to another company that might use them more
efficiently. In the promoters’ mind, the thought process would be to get the best value of the “pool of
resources” spread across their multiple group companies.
To understand more about such intra-group transfers of money & assets and to see live examples, an
investor may study our analysis of National Peroxide Ltd belonging to Wadia group and Ashok Leyland
Ltd belonging to Hinduja group.
In the case of National Peroxide Ltd, the Wadia group shifted money and equity shares of their group
companies from one entity to another to make the best use of it from the overall group perspective. It
involved taking loans in National Peroxide Ltd and then lending them further to other group companies like
GoAir.
In the case of Ashok Leyland Ltd, the Hinduja group shifted entire business divisions and other assets from
one company to another to make the best use of it. It involved shifting the foundry business first from Ashok
Leyland Ltd to Hinduja Foundries Ltd and then shifting it back to Ashok Leyland Ltd after almost 10 years.
Therefore, we believe that whether an investor likes it or not, when she invests in companies belonging to
large corporate group houses, then she should be ready to witness intra-group transactions where assets are
moved by the promoters from one entity to another in the manner they seem best to get the maximum value
out of it.
The Margin of Safety in the market price of Century Textiles & Industries
Ltd:
Currently (July 19, 2020), Century Textiles & Industries Ltd is available at a price to earnings (PE) ratio of
about 13.0 based on consolidated earnings of last 12 months (July 2019 to June 2020). The PE ratio of 13.0
provides some margin of safety in the purchase price as described by Benjamin Graham in his book The
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Analysis Summary
Overall, Century Textiles & Industries Ltd seems a company that is a combination of multiple independent
companies (business divisions). These divisions are largely independent units and in effect, a stake in the
company provides an investor with exposure to multiple industries. Nevertheless, an investor notices that
all the business divisions of Century Textiles & Industries Ltd suffer from cyclicity, capital intensiveness,
commoditized & non-differentiable products, intense competition both from domestic and imports, and
poor pricing power. As a result, frequently, manufacturers in these business divisions go out of business.
The tough business conditions of the divisions of Century Textiles & Industries Ltd had an impact on the
financial performance of the company as well. Over the last 10 years, the company reported its operating
profit margins (OPM) decline from 19% to 8%. Only after hiving of the rayon unit and the cement divisions,
the company could witness its OPM improve to previous levels.
Century Textiles & Industries Ltd attempted to grow its business aggressively during FY2010-FY2015. As
a result, it started expansion projects in its various business divisions like paper, cement, and real estate. As
the business divisions of the company operate in a tough, competitive environment with poor pricing power,
they do not generate a large surplus cash flow. As a result, Century Textiles & Industries Ltd had to rely
primarily on debt and equity dilution to meet its capital requirements for expansion projects.
However, the fortunes of the businesses remained the same even after putting in about ₹6,000 cr of capital
in expansion projects from FY2010-FY2016 and the business divisions did not produce meaningful profits
to justify large debt-funded capital expansions. As a result, the company landed up in a situation where its
cash generation became insufficient to repay its debt obligations.
Therefore, Century Textiles & Industries Ltd had to resort to hiving off its assets to repay its debt. It
attempted to sell its loss-making yarn & denim unit. However, the workers protested and it had to cancel
this sale. In addition, it leased out its rayon unit to Grasim Industries Ltd and used the money to repay some
of its debt. However, still, the remaining debt was very high and the business divisions like cement were
operating at very inefficient levels with about half the profitability of the industry peers. As a result, it had
to demerge the cement unit to Ultratech Cement Ltd to reduce its debt.
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The poor ability of the company to generate returns on its capital investments i.e. inefficient allocation of
capital seems to be the main reason for the sub-optimal business performance of the company. Over the
years, the company witnessed significant delays and cost overruns in almost all its expansion projects like
paper, cement and real estate. The sub-optimal return generation by the capital investments led to net losses
for the company in FY2013 and FY2016.
However, an investor notices that the remuneration of the senior management of the company (its whole-
time director) had increased consistently at a significant pace despite the deteriorating business performance
of the company. Century Textiles & Industries Ltd gave remuneration hike of 23% to the WTD even in the
year when the company had reported net losses. Over FY2010-FY2016, when the company’s net profits
declined from ₹339 cr (8% NPM) to a net loss of ₹95 cr in FY2016, the remuneration of the WTD increased
at an annual growth rate of 15%. Therefore, it seems that the remuneration of the management of the
company was independent of the business performance of the company.
In addition, when an investor looks at the dividend payment history of the company, then she notices that
Century Textiles & Industries Ltd paid out consistent dividend even when its profits were declining and
even when it made a net loss. As the company paid out dividends even during the years when it was raising
large debt to meet its expansion projects, therefore, an investor may infer that the dividends during these
periods were funded by debt.
Looking at the above events, an investor finds that in the case of Century Textiles & Industries Ltd, the
fate/remuneration of the management was independent of the business performance of the company. In
addition, the dividend payments to the shareholders were also independent of the business performance of
the company. Such situations tend to make the decision-makers indifferent to the consequences of their
decisions and many times lead to inefficient capital allocation decisions. When these sub-optimal capital
allocation decisions are funded by debt, then the companies face debt-trap and have to sell their assets to
repay debt. The position of Century Textiles & Industries Ltd seems similar.
The Birla family has provided consistency in the succession at the board level and the company has hired
professional whole-time directors to manage day-to-day executive leadership. However, it seems that many
public shareholders are not happy with the management of the affairs of the company and the decisions of
the company to hive off assets to promoter group companies without independent bidding. As a result,
many public shareholders have voted against the election of Birla family members as chairman of the
company.
The company has recently reduced the debt-burden by hiving off its assets and the management seems eager
to go for aggressive expansion in real estate by again leveraging its balance sheet. We believe that going
ahead; an investor should keep a close watch on the execution of the launched real estate projects of the
company. Real estate business involves significant execution/project completion risk as many factors that
stop construction progress are beyond the control of the developers. An investor should be cautious of this
fact all the time.
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In addition, the investor should continuously monitor the profit margins of paper and textile divisions of
the company and its further investments in these divisions to find out whether the company is doing sub-
optimal capital allocation.
These are our views on Century Textiles & Industries Ltd. However, investors should do their own analysis
P.S:
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6) Paushak Ltd
Paushak Ltd is India’s largest phosgene based speciality chemicals manufacturer. Paushak Ltd is a part of
the Alembic Pharmaceuticals group.
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Let us analyse the financial performance of the company since FY2011.
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Financial and Business Analysis of Paushak Ltd:

While analyzing the financials of Paushak Ltd, an investor notices that the sales of the company had grown
at a pace of about 20% year on year from ₹30 cr in FY2011 to ₹138 cr in FY2020. The sales growth of the
company had been almost consistent year on year except for two instances. First, in FY2017, the sales of
the company declined to ₹72 cr from ₹78 cr in FY2016. Thereafter, in FY2020, the sales of the company
declined to ₹138 cr from ₹140 cr in FY2019.
However, when an investor notices the operating profit margin (OPM) of the company, then she notices
that the OPM of Paushak Ltd witnessed fluctuations in the past.
From the above chart, an investor would notice that the OPM of the company declined sharply almost every
alternate year. The OPM declined from 20% in FY2011 to 15% in FY2012. The OPM again declined from
23% in FY2013 to 20% in FY2014. Thereafter, the OPM declined significantly from 25% in FY2015 to
17% in FY2017. In the recent past, the OPM has improved to 31% in FY2020.
The fluctuating profit margins of the company indicate that the company faces some challenges in passing
on the increase in the cost of raw materials to its customers. As a result, when the input prices increase,
then the company has to take a hit on its profit margins. Most of the times, such fluctuating margins with
low pricing power are found in the industries where manufacturers face heavy competition.
In the case of Paushak Ltd, the company is the largest producer of phosgene based speciality chemicals in
India.
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Paushak is India’s largest phosgene based specialty chemicals manufacturer serving

pharmaceutical, agrochemical and performance industries. The Company is domestic market
leader in most of its product portfolio.
However, despite being the market leader, Paushak Ltd faces a lot of competition as well as pricing pressure
from cheaper imports from China as well as other Indian producers of phosgene products.
In FY2012, when the company faced a decline in its operating profit margin (OPM) to 15% from 20% in
FY2011, then the company highlighted the competition from low-cost products from China as well as
Indian manufacturers.
The threat to our business is the competition of low cost phosgene intermediates from China and
other countries and competition within India.
The pricing pressure from the competition was one of the reasons when the company witnessed a decline
in sales as well as a significant decline in profit margins in FY2017.
Cost competition and pricing pressure experienced across various products is a significant
concern…
Cost competition and pricing pressure from Chinese manufacturers has been threat to the
industry..
In FY2019, when the company increased its sales to ₹140 cr from ₹105 cr in the previous year, then the
company highlighted that it has benefited from the reduced competition from Chinese manufacturers due
to strict environmental norms implemented by the Chinese govt.
The Company has benefited from the constrained supplies and shortage of intermediates and
chemicals from China due to stricter environmental compliance. However, supplies from China is
expected to improve in near future, which will result in more cost competition and pricing
pressure.
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Once again, in FY2020 when the company witnessed a decline in its sales, then the key reason was the
competition at low prices from China. The company expects these challenges to increase going ahead.
We have experienced competition and pricing pressure from Chinese suppliers and expect the
same to increase. It is also expected that competition will increase both, locally and
internationally.
During the current times, when many countries have put in trade restrictions on imports from China, an
investor may think that the threat from the low-cost imports from China may be over. However, an investor
needs to keep in mind a few aspects. First, when large markets like the USA stop accepting Chinese
products, then the remaining countries face an increase in competition from Chinese suppliers as the
Chinese manufacturers start exporting more products to the remaining countries that accept their products.
Second, if a country does not accept Chinese products directly, then the Chinese manufacturers use the
multistep supply global chains to export products to any market. For example, when India imposed duties
on Chinese imports, then China started exporting duty-free fabric into Bangladesh where the fabric was
converted into garments and then those garments were imported duty-free from Bangladesh into India.
Source: FY2019 annual report of Century Textiles & Industries Ltd, page 18:
The duty free import of fabrics from China into Bangladesh and in return the Garments are being
imported duty free into India from Bangladesh is hitting hard the Indian Textile Industry.
Therefore, an investor may appreciate that if any country is able to manufacture goods at a cheaper price,
then the competition will hit the business of the manufacturers in the target country (e.g. India) whether by
way of direct imports or by way of indirect imports using global supply chains.
In addition, the company stated that the fluctuating price of crude oil is one of the parameters that affect its
business.
..rising crude cost along with fluctuation in foreign currency pose significant risks for the business.
From the above disclosure by Paushak Ltd, an investor would appreciate that the crude oil prices have an
impact on the profit margins of the company. As a result, an investor may infer that the recent sharp increase
in the profit margins of the company during FY2018-2020 might be due to a decline in crude oil prices.
The crude oil prices declined from $75 per barrel in FY2018 to $11 per barrel in FY2020. (Source:
Macrotrends)
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The credit rating agency, CRISIL has also highlighted in its report for Paushak Ltd in Dec. 2018 that the
key reason for fluctuating profit margins of the company is volatile raw material prices.
Due to volatile raw material prices and moderate scale, the margin has fluctuated between 19-
25% during fiscals 2013 and 2017
Moreover, on multiple occasion, the company has highlighted that it is dependent on the pharmaceutical
industry for its business. At times, when the pharmaceutical products where its products are used, reach the
end of their life, then the sales of Paushak Ltd are hampered.
A number of our existing products going into Pharma industry are coming under pressure due
to maturity of their end-applications. At the same time, other Pharma products have to await the
respective patent expiry.
In FY2017, when the sales of the company declined from the previous year, the company once again
highlighted the dependence on the pharmaceutical industry and the intense competition it faces that has led
to pricing pressure.
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The pharma intermediates segment is under pressure due to end product stagnation and cost
pressures.
From the above discussion on the competition from low priced Chinese products limiting the pricing power
of the company, continuously fluctuating crude oil prices as well as the maturity of pharmaceutical end
products, an investor may appreciate that the OPM of Paushak Ltd is expected to remain volatile going
ahead. As a result, an investor should keep a close watch on the profit margins of the company going ahead.
In addition, an investor may appreciate that one of the strengths of the business model of Paushak Ltd is
the restrictions imposed by govt on phosgene.
Credit rating report of Paushak Ltd by CRISIL, Dec. 2018:
The company is backward integrated and is one of the few companies licensed to manufacture
phosgene gas as there are government restrictions on it.
It usually takes 4-5 years to get all the required approvals for any expansion of phosgene manufacturing
capacity. In the past, Paushak Ltd started the process of taking approvals for capacity expansion for
phosgene products in FY2010.
Company has filed an application with the Government for permission to significantly increase its
licensed capacity for Phosgene and downstream products.
However, the company could start construction of the plant only in FY2014 as it took the company almost
4 years to get all the requisite approvals from Ministry of Environment and Forests, Ministry of Industries
and the Gujarat Pollution Control Board.
The Company have initiated the new project installation in 2 phases with an investment plan of
₹15 Crores. This would enhance the capacity of phosgene from existing 120 MT per month to the
permitted 400 MT per month.
Therefore, an investor may appreciate that one of the reasons for high OPM of Paushak Ltd in the range of
20-30% is linked to the restrictions imposed by the govt. on the processing of phosgene. In case, to boost
the economic activity, improve the ease of doing business or as a part of the structural reforms, then an
investor may notice that the company may face significantly enhanced competition and low-profit margins.
Therefore, going ahead, an investor may keep a close watch on the govt. regulations related to phosgene.
This is because any relaxation by the govt. in the current restrictions on handling phosgene would be a
significant change in the industry dynamics affecting Paushak Ltd.
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While looking at the tax payout ratio of Paushak Ltd., an investor notices that for most of the last 10 years
(FY2011-2020), the tax payout ratio of the company has been lower than the standard corporate tax rate in
India.
One of the key reason for the lower tax payout ratio has been that until FY2019, Paushak Ltd was under
minimum alternate tax (MAT) regime.
The company falls under the provisions of MAT u/s 115JB and the applicable Indian statutory tax
rate for year ended March 31, 2019 is 21.55%
However, from FY2020, the company has come under the new standard corporate tax rate applicable in
India.
The company falls under the normal provisions of Income Tax Act, 1961 and the applicable Indian
statutory tax rate for year ended March 31, 2020 is 29.12%.
Operating Efficiency Analysis of Paushak Ltd:
a) Net fixed asset turnover (NFAT) of Paushak Ltd:

When an investor analyses the net fixed asset turnover (NFAT) of Paushak Ltd in the past years (FY2011-
20) then she notices that the NFAT of the company has witnessed a fluctuating pattern. Nevertheless, each
of the periods of decline in NFAT corresponds to the capacity expansion projects undertaken by the
company.
The NFAT of the company increased from 2.98 in FY2012 to 5.49 in FY2014 with the increase in sales
during the period. However, from FY2015 to FY2017, the NFAT of the company declined to 2.63. The key
reason for this decline was the increase in net fixed assets because of the capacity expansion project
executed by Paushak Ltd during FY2014-FY2016.
Thereafter, the NFAT of the company increased to 3.75 in FY2019. In FY2020, the NFAT of the company
has declined to 3.51, which again seems to be due to the initiation of another capacity expansion project by
Paushak Ltd in FY2020.
The credit rating agency, CRISIL, in its report for Paushak Ltd in Feb. 2020, has provided details of the
capacity expansion project along with the expenses incurred by the company on it.
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Capex of Rs 120 crore, to increase capacities, has commenced in fiscal 2020, with about Rs 25
crore expended till date.
Going ahead, the investor should keep a close watch on the execution progress of the project to assess
whether the project is going as per the budgeted cost & timelines.
b) Inventory turnover ratio of Paushak Ltd:

Paushak Ltd has improved over the last 10 years. The ITR of the company has increased from 5.4 in FY2012
to 8.1 in FY2020.
Such a pattern of ITR indicates that Paushak Ltd has been able to manage its inventory efficiently without
any deterioration in the efficiency over the last 10 years (FY2011-2020).
c) Analysis of receivables days of Paushak Ltd:

While analysing the receivables days of the company, an investor notices that over the years (FY2011-
2019), the receivables days of Paushak Ltd have deteriorated. The receivables days increased from 72 days
in FY2011 to 93 days in FY2019.
Due to the long receivables period, the company had to take steps to control the situation. The company
intimated its shareholders in the FY2020 annual report that it has changed its policies for receivables. As a
result, its receivables days improved from 93 days in FY2019 to 78 days in FY2020.
During the year, the Company has made changes in its Policy for receivables, payables and other
components of working capital, which resulted in change in working capital ratios.
Nevertheless, increasing receivables days over the years affected the working capital position of Paushak
Ltd.
When an investor notices the change in trade receivables of Paushak over FY2011-2020, then she notices
that over this period, the trade receivables of the company increased from ₹6 cr to ₹26 cr. It indicates that
during FY2011-2020, about ₹20 cr of funds were stuck in receivables.
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Over FY2011-20, Paushak Ltd Limited reported a total cumulative net profit after tax (cPAT) of ₹155 cr.
However, during the same period, it reported cumulative cash flow from operations (cCFO) of ₹125 cr.
Learning from the article on CFO will indicate to an investor that the cCFO of Paushak Ltd is lower than
the cPAT due to following factors:
 Increase in trade receivables (₹20 cr) and inventory (₹11 cr) over FY2011-2020, which is deducted
from profits while calculating the CFO.
 Other income of ₹40 cr over FY2011-2020, which is deducted from profits while calculating the
CFO.
The Margin of Safety in the Business of Paushak Ltd:

target growth.
While analysing the SSGR of Paushak Ltd, an investor would notice that the company has consistently had
a high SSGR (40-60%) over the years. The key reasons for high SSGR for the company have been its high
profitability, decent asset turnover and low dividend payout ratio.
Over the years, Paushak Ltd has reported a net profit margin (NPM) of 25-30%, net fixed asset turnover
exceeding 3.5 and low dividend payout ratios of 5-7% of earnings.
depends on net profit margin (NPM) and net fixed asset turnover (NFAT) of the company. In addition,
SSGR is inversely dependent on the dividend payout ratio of a company.
Where,
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Therefore, an investor would notice that Paushak Ltd has continuously had a high SSGR (40-60%) over the
last 10 years (FY2011-FY2020). Whereas the company had been growing at a rate of 20% over the same
period. SSGR indicates that the business model of Paushak Ltd has the inherent to support growth rates of
20%.
As a result, Paushak Ltd has been able to grow its sales from ₹30 cr in FY2011 to ₹138 cr in FY2020 only
from its business cash flows. The company has always kept minimal debt on its books. Paushak Ltd is debt-
free in FY2020.
In addition, the company returned excess cash to its shareholders by way of a buyback in FY2019.
the company has bought back and extinguished 1,25,000 (One Lakh Twenty Five Thousand ) fully
paid up equity shares of the company having face value of ₹ 10/- each at a price of ₹ 1700/- per
Equity Share aggregating to ₹ 21,25,00,000/-…
The investor arrives at the same conclusions when she assesses the free cash flow (FCF) position of Paushak
Ltd.
b) Free Cash Flow (FCF) Analysis of Paushak Ltd:

While looking at the cash flow performance of Paushak Ltd, an investor notices that during the last 10 years
(FY2011-2020), the company reported cash flow from operating activities (CFO) of ₹125 cr. During this
period, the company spent ₹70 cr on capital expenditure. As a result, the company had a free cash flow
(FCF) of ₹55 cr (=125 – 70).
In addition, the company also had other non-operating income of ₹40 cr over FY2011-2020. As a result,
Paushak Ltd had a total surplus fund of about ₹95 cr (=55 + 40) over FY2011-2020.
Upon reading the annual reports of Paushak Ltd, an investor notices that the company has utilised the
surplus cash in the following manner:
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 Buyback of equity shares worth ₹21.25 cr in FY2019

 Dividends (excluding distribution tax) of about ₹10 cr during FY2011-2020.
 Reduction of debt from ₹2 cr in FY2011 to debt-free in FY2020.
The remaining funds have been kept by the company with itself, which it has invested in financial
instruments as well as in the promoter group entities. At March 31, 2020, Paushak Ltd had cash &
investments of ₹165 cr at market/fair value.
Self-Sustainable Growth Rate (SSGR) and free cash flow (FCF) are the main pillars of assessing the margin
of safety in the business model of any company.
Additional aspects of Paushak Ltd:

On analysing Paushak Ltd and after reading its publicly available past annual reports from FY2009 and
other public documents, an investor comes across certain other aspects of the company, which are important
for any investor to know while making an investment decision.
1) Management Succession of Paushak Ltd:

While analysing the history of Paushak Ltd, an investor notices that the company was promoted in 1972 by
the promoters of the Alembic Pharmaceutical group.
Currently, the promoters, Mr. Chirayu Amin (age 73 years), chairman, and his son Mr. Udit Amin (age 40
years) are a part of the board as non-executive directors.
 Mr. Chirayu Amin, Chairman: Promoter Non-Executive

 Mr. Udit Amin, Promoter Non-Executive
 Mr. Udit Amin is the son of Mr. Chirayu Amin.
In addition, the day-to-day executive leadership is provided by a professional director, Mr. Abhijit Joshi
(age 63 years), whole-time director & CEO. Mr. Joshi joined the company in May 2013.
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The Board of Directors at its meeting held on 24th April, 2013 appointed Mr. Abhijit Joshi as
Additional Director of the Company with effect from 1st May, 2013. Mr. Abhijit Joshi has done
his Masters in Organic Chemistry and Production Management. He has vast experience of 32
years in the fields of Basic Research, Tech-transfer, Production and Manufacturing site
administration, etc. He has worked with various well known Indian as well as Multinational
Companies in pharmaceutical space.
From the leadership structure of Paushak Ltd, it seems that the promoters provide the overall strategic
leadership by being in the non-executive roles on the board of directors whereas the day-to-day executive
leadership is provided by professional managers.
In addition, the presence of father-son duo of Mr. Chirayu Amin and Mr. Udit Amin in the board of directors
indicates the presence of a well thought out management succession plan. The presence of members of
different generations of the promoter family at the same time in the board allows the opportunity for the
younger generation to learn the finer nuances of the business while the older generation is still around.
It is essential in the case of promoter run businesses as it provides for a smooth transition of leadership over
the generations and provides continuity in the business operations of any company.
2) Related party transactions of Paushak Ltd:

While reading the annual reports of the company, an investor notices that since FY2008, the first data in
the publicly available annual reports, Paushak Ltd has given a large amount of funds to the promoter owned
entities.
The money has been put in the promoter group companies under different forms like equity shares,
preferential shares, option right of immovable property or optionally convertible preference shares (OCPS).
In addition to the investment transactions, Paushak Ltd also entered into property buy/selling transactions
with the promoter group entities.
Many times, these investments were of a significant amount when compared to the net profits of the
company. At times, when the repayment of the preferred shares came due, then the company and the
promoters extended the repayment date of the instruments so that the promoter group entities can use the
funds for extended periods.
Most of these investment transactions of Paushak Ltd were with the following entities of the promoter
group, which were present in the list of shareholding companies by which promoters owned a stake in
Paushak Ltd. (FY2015 annual report, page 18)
 Whitefield Chemtech Private Limited (2.42% stake in Paushak Ltd in FY2015)

 Sierra Investments Limited (25.42% stake in Paushak Ltd in FY2015)
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 Shreno Limited (7.40% stake in Paushak Ltd in FY2015)

 Nirayu Private Limited (5.35% stake in Paushak Ltd in FY2015)
i) Investment in the debt of promoter group entities of Paushak Ltd:
While analysing the annual reports of the company, an investor notices that right from FY2008 until
FY2020, Paushak Ltd has continuously funded promoter group entities via preference shares or other exotic
instruments like “Option Right of Immovable Property”.
From the above table, an investor would notice that the investment by Paushak Ltd in the debt of promoter
group entities was about ₹13 cr from FY2008 to FY2013. It increased to ₹17 cr in FY2014. It came down
to ₹1.1 cr briefly in FY2017. However, it increased again and in FY2020, the exposure of Paushak Ltd in
the preference shares of promoter group companies was ₹54.2 cr.
The promoters of the company have continuously kept these debt investments with themselves by extending
the tenure of the preference shares when it reached its maturity date. Alternatively, the promoters found out
new exotic instruments like “Option Right of Immovable Property” to make Paushak Ltd give loans to their
entities.
For example, the existing preference shares of ₹8 cr issued by Whitefield Chemtech Private Limited were
due for redemption on March 29, 2012. However, in FY2012, the company extended the maturity date of
remaining preference shares to March 29, 2015.
The shares were due for redemption on 29.3.2012. However, at the request of the issuer, the
Company has agreed the extension of redemption date as 29.3.2015.
At March 29, 2015, when the preference shares became due for redemption, then the promoter group entity,
Whitefield Chemtech Private Limited could not repay Paushak Ltd in full. At March 31, 2015, the company
still had dues of ₹2.7 cr to Paushak Ltd, which was finally repaid in FY2016.
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Similarly, the existing preference shares issued by Sierra Investments were due for redemption on March
01, 2015. However, as per FY2015 annual report, page 43, the company redeemed only 60% of the
preference shares and extended the maturity date of remaining preference shares to March 31, 2017.
From the above table, an investor would notice that when one promoter group entity, Whitefield Chemtech
Private Limited, redeemed ₹3.3 cr of the preference shares in FY2014, then in the same year, the promoters
made Paushak Ltd invest ₹8.5 cr in the “Option Right of Immovable Property” of another promoter group
entity, Shreno Limited. As a result, despite redemption of a part of the preference shares by one promoter
entity, the overall exposure of Paushak Ltd to the promoter group entities in FY2014 increased from ₹12.1
cr to ₹17.1 cr.
Therefore, an investor would notice that throughout FY2008-FY2020, the promoters of the company have
made Paushak Ltd give money to the promoter owned entities by way of different instruments. At times,
the amount of the money given by Paushak Ltd to the promoters entities (₹13 cr – ₹17 cr) was multiple
times of the net profit of the company of ₹3-4 cr until FY2012.
In addition, at multiple occasions, Paushak Ltd gave loans to its related party companies where it gave a
loan during the year and received it back before the end of the year.
In FY2013, it gave a loan of ₹1 cr to related companies, which was repaid before the end of the year.
The Company has granted unsecured loan to company listed in register maintained under section
301 of the Companies Act, 1956. Total number of party is 1 (One) and total amount outstanding
as at 31.03.2013 is Nil. The maximum amount involved was ₹ 1,00,81,370/-.
In FY2014, it gave a loan of ₹2 cr to related companies, which was repaid before the end of the year.
The Company has granted unsecured loan to company listed in register maintained under section
301 of the Companies Act, 1956. Total number of party is 1 (One) and total amount outstanding
as at 31.03.2014 is Nil. The maximum amount involved was Rs.2,05,27,123/-.
It might seem like a case where the promoters shifted the economic benefit worth many years of profits of
Paushak Ltd to themselves by making the company invest in the preference shares or “Option Right of
Immovable Property” of promoter owned entities.
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ii) Investment in the equity shares of promoter owned entities by Paushak Ltd:
While analysing the utilization of funds by Paushak Ltd over the years, an investor notices that the company
has continuously invested in the equity shares of the four promoter owned entities mentioned earlier.
Paushak Ltd invested in the equity shares of Whitefield Chemtech Private Ltd and Sierra Investments
Limited at least since FY2008, the earliest publicly available data. In FY2018, both Whitefield Chemtech
Private Ltd and Sierra Investments Limited were merged into Nirayu Pvt. Ltd. As a result, the investment
done by Paushak in these two companies was transferred into preference shares of Nirayu Pvt. Ltd.
During the year, upon the amalgamation of Whitefield Chemtech Pvt. Ltd. (WCPL) and Sierra
Investments Pvt. Ltd. (SIPL), with Nirayu Private Limited (NPL), 9,919 and 1,27,134 Preference
Shares of Rs. 100/- each at a premium of Rs. 900/- each, have been allotted by NPL in exchange
of 1,150 equity shares of Rs. 10/- each held in WCPL and 28,252 equity shares of Rs. 10/- each
held in SIPL,
In addition, apart from the investment in the equity shares of Whitefield Chemtech Private Ltd and Sierra
Investments Limited, from FY2016, Paushak Ltd had invested in the equity shares of Nirayu as well as
Shreno Limited.
At March 31, 2020, Paushak Ltd had an exposure of about ₹44 cr in the equity shares of promoter group
entities including minor equity shareholding in Alembic Ltd and Alembic Pharmaceuticals Ltd. (valued at
about ₹0.05 cr).
iii) Sale of properties by Paushak Ltd to promoter group entities:
As per the related party transactions disclosures of Paushak Ltd, it sold a land parcel to Alembic Ltd for
₹10.17 cr in FY2019 (Source: FY2019 annual report, page 77).
Next year, in FY2020, the company sold another land parcel to Alembic Pharmaceuticals Ltd for ₹2.43 cr.
Both these transactions are within the promoter group entities. In addition, the annual reports do not contain
any details of an independent bidding process to sell the land parcels to independent third parties. Therefore,
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an investor needs to do her own due diligence in order to estimate whether these transactions are at fair
value or not.
An investor may directly contact the company to know further details about these land parcels like their
size, location etc. She may also seek details whether any bidding for the land parcels was done by the
company. These details would help the investor in doing an independent check for the valuation.
3) Promoters using funds of Paushak Ltd for holding their stake in the company:
An investor would notice from the above discussion that Paushak Ltd has given a significant amount of
money to the promoter owned entities, which in turn hold a stake in Paushak Ltd.
An investor would appreciate that money is a fungible commodity. As a result, an investor may interpret
these transactions like initially, the promoters invested money in Paushak Ltd in the form of equity shares.
Later on, the promoters withdrew the money from Paushak Ltd in the form of investment by Paushak Ltd
in the preference shares, equity shares or “Option Right of Immovable Property” in the promoter owned
entities.
Moreover, an investor would notice that the investment by Paushak Ltd in the preference shares of promoter
group entities is a continuous exercise. This may look like a case where the company has loaned out money
to the promoters, which they had invested in the equity shares of Paushak Ltd in the form of promoter
shareholding.
4) Remuneration to Mr. Udit Amin, son of Mr. Chirayu Amin:

From the above discussion on management succession, an investor would notice that both the promoters,
the father and son, Mr. Chirayu Amin and his son, Mr. Udit Amin are in a non-executive position in the
board of directors. A non-executive position means that the directors are not involved in the day-to-day
activities of the company. Instead, the directors are involved in some other commitments full-time and are
available to the company only on a limited basis, mainly around the board meetings.
However, when an investor notices that Mr. Udit Amin, the son of the chairman is taking more remuneration
than his father Mr. Chirayu Amin as well as more money than the remuneration of the whole-time director
and CEO, Mr. Abhijit Joshi, then the investor feels that the remuneration of Mr. Udit Amin might be higher
than justified.
In FY2020, Mr. Udit Amin had the following remuneration when compared to the chairman and the CEO
of the company (FY2020 annual report, page 82):
 Udit Amin, non-executive director: ₹1.25 cr

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 Chirayu Amin, chairman: ₹0.007 cr

 Abhijit Joshi, WTD & CEO: ₹0.61 cr
In FY2019, Mr. Udit Amin had the following remuneration (FY2020 annual report, page 82):
 Udit Amin, non-executive director: ₹0.77 cr

 Chirayu Amin, chairman: ₹0.007 cr
 Abhijit Joshi, WTD & CEO: ₹0.56 cr
Therefore, an investor notices that the remuneration of Mr. Udit Amin who is associated as a non-executive
director with the company is higher than his father who is the non-executive chairman as well as the whole-
time director & CEO who is associated full-time with the company.
Moreover, the remuneration of Mr. Udit Amin increased by 62% in FY2020 to ₹1.25 cr from ₹0.77 cr in
FY2019 where the net profit (PAT) of the company had declined by more than 10% in FY2020 to ₹35 cr
from ₹39 cr in FY2019.
In light of the above factors, an investor may make her own judgment related to the remuneration of Mr.
Udit Amin.
5) Escalation in the cost of the capacity expansion project of Paushak Ltd:

While reading the credit rating report of the company by CRISIL in December 2018, an investor notices
that the estimated cost of the capacity expansion project proposed by the company is about ₹120 cr.
Paushak is embarking on large capex of about Rs 120 crore to be executed over fiscals 2019-2021.
The capex is largely towards expansion of existing capacities, including increasing phosgene
capacity by upto three times.
However, when the investor reads the approval letter for the project from the Ministry of Environment,
Forest and Climate Change in August 2018, then she notices that the company intimated to the ministry a
project cost of ₹75.5 cr.
Approval letter (download here), page 3:
The estimated project cost is Rs.75.5 crores including existing investment of Rs.5.5 crores. Total
estimated project cost is Rs.70 crores for expansion Project.
In light of the same, an investor notices that the company increased the cost of the project by about 60%
from ₹75.5 cr in August 2018 to ₹120 cr in December 2018, within a duration of 3 months.
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An investor may contact the company directly to seek clarifications about the reasons for the significant
increase in the project cost over a period of 3 months.
6) Mismatch in the information in the annual report of Paushak Ltd:

While reading the annual reports of the company, an investor notices that at times, the company has given
different data for the remuneration of its whole-time director (WTD) & CEO, Mr. Abhijit Joshi at different
places in the annual report.
The FY2019 annual report mentions the following about the remuneration of WTD & CEO:
 Page 33: ₹56.33 lac

 Page 28: ₹48.70 lac
The FY2018 annual report mentions the following about the remuneration of WTD & CEO:
 Page 35: ₹52.48 lac

 Page 30: ₹47.33 lac
An investor may contact the company directly to understand the reasons for disclosing different
remuneration of the WTD & CEO at different places of the annual reports.
In FY2020 annual report, this error did not appear and the company disclosed the same remuneration data
at different places in the annual report.
7) Sharp decline in the power & fuel costs of Paushak Ltd in FY2017:
While analysing the financial performance of the company for FY2017, an investor notices that during the
year, the sales of the company declined to ₹72 cr from ₹78 cr in FY2016, a decline of about 8%.
However, while analysing the annual report of FY2017 at page 53, an investor notices that the power and
fuel cost of the company declined by about 45% in FY2017 to ₹3.50 cr from ₹6.36 cr in FY2016.
Such a sharp decline of 45% in the power & fuel costs in the year when the sales have declined only by
10% comes as a surprise to the investor. We believe that an investor may contact the company directly to
understand the reasons for the significantly large decline in the power & fuel costs in FY2017 when
compared to the sales decline. An investor may ask whether the company received any cheaper source of
power during the year or any one-time power subsidy or it was a typographical error while preparing the
annual report (less likely).
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The Margin of Safety in the market price of Paushak Ltd:

Currently (July 26, 2020), Paushak Ltd is available at a price to earnings (PE) ratio of about 27 based on
earnings of FY2020. The PE ratio of 27 does not provide any margin of safety in the purchase price as
described by Benjamin Graham in his book The Intelligent Investor.
Analysis Summary
Overall, Paushak Ltd seems a company that has been growing at a fast pace of about 20% year on year in
the past (FY2011-2020). The company has faced competition from low-cost imports from China as well as
pricing pressure from other Indian manufacturers. The competitive environment has led to volatile profit
margins of the company where the operating profit margin (OPM) has seen large fluctuations year on year.
However, despite competition and the dependence of ever-changing crude oil prices, Paushak Ltd has
witnessed significantly high OPM of 25-30% over the years.
One reason for high OPM of Paushak Ltd is the restriction imposed by the govt. on handling and processing
of its basic raw material, phosgene. Phosgene is a hazardous material and getting the approvals from the
govt. for capacity expansion may take 4-5 years. These restrictions act as a barrier to entry for new
manufacturers leading to high-profit margins for the existing players.
Because of high-profit margins, the company has been able to generate a lot of surplus cash after meeting
its capital expenditure requirements over FY2011-2020. Paushak Ltd has used this cash to give payouts to
the shareholders in the form of dividends and buyback. In addition, an investor notices that the company
has given a significant amount of money to promoter-owned entities.
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Paushak Ltd has invested significant money in the preference shares, equity shares and other exotic
instruments issued by promoter owned entities. Continuously, at least since FY2008, the promoter owned
entities have maintained the money taken by them from Paushak Ltd. The promoter owned entities have
extended the maturity of preference shares when they are due for payment. At times, the promoters have
repaid money from one company and then taken money in a different company. At other times, the promoter
entities received money from Paushak Ltd by way of equity investments, part of which were later converted
into preference shares.
An investor notices that over the years, there have been continuous transactions involving money transfer
between Paushak Ltd and the promoter-owned entities. In addition, the company has sold two land parcels
to the promoter group companies in the recent past.
Currently, apart from Mr. Chirayu Amin, his son, Mr. Udit Amin is also a part of the board of directors of
the company indicating a management succession plan in action. However, Mr. Udit Amin despite being a
non-executive director is taking a remuneration that is higher than his father, the chairman, and the whole-
time director & CEO of the company.
Going ahead, an investor should keep a close watch on the profit margins of the company in the light of
competition from cheaper imports and dependence on crude oil. In addition, an investor should closely
watch developments related to relaxation in the restrictions on the handling of phosgene. This is because
any relaxation by the govt. in giving approvals for phosgene plants would significantly increase the
competition for Paushak Ltd and bring down the high-profit margins.
These are our views on Paushak Ltd. However, investors should do their own analysis before making any
investment-related decisions about the company.
P.S:
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7) ADF Foods Ltd

ADF Foods Ltd is an Indian manufacturer of packaged food products exporting branded food products to
the Middle East (Camel, Aeroplane), USA (PJ’s Organics, Nate’s, Soul, Truly India) and around the world.
While analysing the past financial performance of the company, an investor notices that for the entire last
10 years period (FY2010-2020), ADF Foods Ltd has had a few subsidiaries to manage its overall business.
As a result, the company has published both standalone as well as consolidated financials every year.
and focus on financials, which represent the business picture of the entire group. Consolidated financials of
any company, whenever they are present, provide such a picture.
Therefore, in the analysis of ADF Foods Ltd, we have used consolidated financials in the assessment.
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Financial and Business Analysis of ADF Foods Ltd:
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While analyzing the financials of ADF Foods Ltd, an investor would note that the sales growth of the
company has witnessed three distinct phases during FY2010-2020.
First, during FY2010-2014, ADF Foods Ltd witnessed sharp growth when its sales increased from ₹97 cr
in FY2010 to ₹208 cr in FY2014. However, thereafter, in the second phase of FY2015-2018, the company
faced many challenges. During this period, the sales of the company declined from ₹208 cr in FY2014 to
₹201 cr in FY2018. Nevertheless, after FY2018, the sales of the company have increased consistently and
ADF Foods Ltd reported sales of ₹273 cr in FY2020. Therefore, even though, it seems that the company
reported a sales growth of 10% year on year in the last 10 years (FY2010-2020); however, upon closer
inspection, an investor notices that the company has faced quite a few challenges in its business during this
period.
While analysing the profitability performance of ADF Foods Ltd, an investor notices that during the first
half of the last decade (FY2010-2014), when the company witnessed a sharp growth in its sales, the
operating profit margin (OPM) of the company declined by almost 50%. The OPM of the company declined
from 16% in FY2011 to 8% in FY2014.
After FY2014, when the company entered the phase of stagnant sales, then the OPM of the company started
improving steadily year on year. The OPM increased from 8% in FY2014 to 15% in FY2020.
While an investor observes the net profit margin (NPM), then she notices that for most of the years, the
NPM followed the pattern of OPM. The NPM of ADF Foods Ltd used to be 14% in FY2010, which declined
to 3% in FY2014. Thereafter, the NPM has witnessed improvement and increased to 16% in FY2020.
Such kind of fluctuating performance of sales revenue and profitability indicates that the business
performance of ADF Foods Ltd is exposed to strong headwinds (challenging) factors.
When an investor notices such kind of fluctuating performance in both the sales as well as profitability,
then she acknowledges the need for a deeper understanding of the business of ADF Foods Ltd. She needs
to understand the factors influencing the business performance of the company. This is because, once an
investor has understood the key factors for ADF Foods Ltd, then she would be able to have a view about
the expected future performance of the company.
From our previous analysis of multiple such companies that faced fluctuating/cyclical performance in the
sales and profit margins, an investor would remember that most of these companies operate in businesses
with intense competition and lower barriers to entry. Intense competition provides customers with many
choices to buy. Therefore, such companies tend to face tough business phases and have to take a hit on their
profit margins whenever the raw material costs increase.
With this background, let us attempt to understand the business characteristics of ADF Foods Ltd.
While reading about ADF Foods Ltd, an investor notices that the business of packaged food products has
many organized and unorganized players competing for market share. The organized players include both
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domestic players as well as multinational companies selling their products in India. The unorganized players
sell their unlabeled products in the market at a cheaper price and increase competition.
Increasing competition from existing players and entry of new players can impact the market
share. The presence of unorganized sector offering products in loose unbranded form also
intensifies competition.
An investor notices that the intense competition in the processed food segment is not a new development.
The company has highlighted it to its shareholders continuously over the years.
The intense competition faced from established brands, from organized sector and numerous
players in unorganized sector may pose as a challenge to the business.
Intense competition from unorganized sector: One of the characteristics of this industry
is the presence of unorganized sector offering products in loose unbranded form which intensifies
competition.
An investor notices that ADF Foods Ltd earns more than 95% of its sales from exports and about 5% from
the domestic market.
FY2020-Q4 results presentation, page 6:
Exports contribute to more than 95% of revenues
Therefore, an investor would appreciate that ADF Foods Ltd faces competition from Indian and MNC
players in the Indian market and in addition, in the overseas markets, it faces competition from MNC
players, Indian players exporting overseas as well as manufacturers from countries with cheaper production
like Malaysia and Pakistan.
The credit rating agency, CRISIL, highlighted the intense competition faced by ADF Foods Ltd in its report
for the company in May 2020.
Exposure to intense competition: The ADF group is present in the processed and ethnic
food segments. With bulk of revenue generated from exports, the group has to compete not only
with packaged food manufactures in Pakistan and Malaysia, but also with established domestic
players such as ITC, MTR and Pachranga.
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In 2010, another credit rating agency, ICRA, highlighted the intense competition in the food processing
industry in its report for ADF Foods Ltd.
However, ratings are constrained by the highly competitive nature of the food processing industry
in the international and domestic market.
Therefore, an investor would appreciate that ADF Foods Ltd operates in a business segment, which faces
intense competition from organized, unorganized, domestic as well as multinational packaged food
manufacturers. In this business segment, a customer has the option to buy from many manufacturers.
An investor would appreciate that because of the intense competition, the packaged food manufacturers
would face difficulty in increasing prices to the customers when their input costs increase. As a result, when
input costs increase, then the packaged food manufacturers have to absorb the costs themselves and in turn,
take a hit on their profit margins.
In May 2020, credit rating agency, CRISIL, highlighted the inability of ADF Foods Ltd to pass on the
increase in input costs to its customers.
Vulnerability to volatility in raw material prices: Key raw materials include agro-based
products such as mangoes, chillies, edible oil, and sugar. As raw material prices largely depend
on inflation, monsoon, and government policies, the group remains exposed to any sharp
fluctuations. Further, any hike in input cost cannot be entirely passed on to customers, given
the competitive environment.
Therefore, when an investor analyses the business performance of ADF Foods Ltd during the period of
FY2011-2015 when its operating profit margin (OPM) declined from 16% to 8%, then she notices that the
company has repeatedly highlighted rising costs as one of the main challenges.
The continuing factors posing as hindrances for the Company are the complex supply chain
configuration, the Labour intensive operations, and ever rising costs.
The Business risks or threats faced by the Company are mainly lack of adequate external
infrastructure, increase in the prices of raw materials, packing material and fuel, non-availability
of raw materials, exchange rate fluctuations, changes in fiscal benefits/laws.
Any increase in the prices of core raw materials, would adversely affect the Company’s operating
results.
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Therefore, an investor would appreciate that whenever the raw material prices for ADF Foods Ltd increase,
then the company has to take a hit on its profit margins as due to intense competition, it is unable to pass
on the increase in input costs to its customers.
In light of the competitive environment, one of the key measures left for companies to improve profit margin
is to control operating costs.
In FY2017, when the operating profit margin (OPM) of ADF Foods Ltd improved significantly (in the
consolidated financials), then the company intimated its shareholders that the improved profitability is due
to cost control measures undertaken by it in USA operations.
The improvement in the profitability could be achieved on account of improvement in our US

operations through cost control measures.
US Business: The Company has moved all its production to a contract packer located in Ohio.
The contract manufacturing would help the Company to reduce considerably the cost of
operation & improve financial position.
An investor would note that in the same year (FY2017), in the standalone financials, the company’s
profitability has suffered and one of the reasons for the same was increase in raw material costs that could
not be passed on to the customers.
The reduction in the net profit is mainly due to two factors. One of these is high input cost of major
raw materials and the other is devaluation of sterling pound on account of Brexit which has
impacted revenue and profits of our UK business.
Therefore, an investor would appreciate that the company faces serious challenges to increase product
prices to its customers when its input costs increase and the main method to increase profitability for the
company is to cut down operating costs.
In light of the intensely competitive business environment and the inability of ADF Foods Ltd to pass on
increases in input costs, an investor should be cautious when she extrapolates the current operating profit
margins (OPM) of the company of 15% in the future. The raw materials used in its products are agricultural
inputs whose prices and availability depend a lot on monsoon as well as government policies. As a result,
there is continued uncertainty in the sourcing of the raw material by ADF Foods Ltd.
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Procurement risk: …The major raw material being agro based, availability of same depends
on the vagaries of nature. Therefore, any disruption in the supply due to a natural or other
calamity or violent changes in the cost structure could adversely affect the Company’s ability to
reach its consumers with the right value proposition.
The credit rating agency, ICRA, has also highlighted the challenges on the front of raw material for ADF
Foods Ltd in its report for the company in September 2010.
Further, profitability of the company is susceptible to volatility in prices of its key raw materials
(mango, oil, sugar and vegetables) which are dependent on climatic conditions in India and farm
output besides the demand-supply scenario.
As a result, we believe that an investor should do deeper due diligence before she projects current profit
margins of the company in future. While analysing the historical performance of ADF Foods Ltd, an
investor notices that the company had operating profit margins at the levels of 15%-16% in FY2010-2011
and then the profitability witnessed a sharp decline. It took ADF Foods Ltd for almost 10 years to bring its
profitability to the previous levels. Anyone who during FY2010-2011 would have projected the profitability
margins of ADF Foods Ltd to stay at 15% or improve further would have faced a negative surprise.
Therefore, we believe that investors should be cautious in their assumptions about the company’s
performance in the future.
While looking at the tax payout ratio of ADF Foods Ltd., an investor notices that for most of the last 10
years (FY2010-2020), the tax payout ratio of the company has been highly fluctuating. Over the years, the
tax payout ratio has varied from 9% in FY2011 to 44% in FY2018.
An investor may appreciate that the major source of revenue for the company is export. As a result, the
company would have some tax incentives from the government for its manufacturing operations focused
on exports. These incentives would tend to decrease the tax payout ratio.
On the contrary, the company also had a manufacturing presence overseas in the past and as discussed
above, it currently uses contract manufacturers. As a result, of these overseas manufacturing operations as
well as the sales in different foreign countries, the company has to pay taxes in many foreign countries,
which affects its tax payout ratio.
While reading the annual reports, an investor notices that in FY2018, when the company had the highest
tax payout ratio of 44%, then it was primarily due to the difference in tax rates in foreign jurisdictions.
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In addition, another factor that leads to deviation of the tax payout ratio of ADF Foods Ltd from the standard
corporate tax rate of 30% is the tax exemptions granted to companies with a turnover of less than ₹250 cr,
which is 25% excluding surcharges and cess.
Reduced rate of 29,12% is applicable for company’s which have reported a turnover of upto
Rs.250 crores and the prospective rate has been used by the Company for calculating deferred tax
as future tax rate is to be used.
An investor may contact the company directly for any further clarifications about its tax payout ratio and
the incentives available to the company.
Further advised reading: How to do Financial Analysis of a Company
Operating Efficiency Analysis of ADF Foods Ltd:
a) Net fixed asset turnover (NFAT) of ADF Foods Ltd:

When an investor analyses the net fixed asset turnover (NFAT) of ADF Foods Ltd in the past years
(FY2010-19), then she notices that the NFAT of the company has improved from 1.84 in FY2011 to 3.11
in FY2019.
Increasing NFAT over the years indicates that the company has been able to improve the asset utilization
efficiency of its plants.
One of the key reasons for the improvement of NFAT of ADF Foods Ltd over the years has been its
improving capacity utilization of its plants.
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During FY2010 and FY2011, the company had a low capacity utilization of 62% and 66% respectively.
The credit rating agency, ICRA, had also highlighted modest capacity utilization of its plants by ADF Foods
Ltd as one of the concerns in its report for the company in September 2010.
Though ADF generates healthy operating margin, net margin of the company and profitability
indicators remain moderate due to modest capacity utilization….
Whereas in recent years, the capacity utilization of the plants of ADF Foods Ltd has improved significantly.
In May 2019, while upgrading the credit rating of the company, CRISIL highlighted the improved capacity
utilization of its plants by ADF Foods Ltd as one of the strong points of the company.
Better capacity utilization, favorable raw material prices and increasing contribution from high
margin frozen food segment has resulted in higher operating margin
As a result, an investor would notice that improving capacity utilization of its plants by ADF Foods Ltd has
resulted in an increase in its NFAT over the years.
Moreover, an investor would appreciate that the recent capacity expansion plans announced by ADF Foods
Ltd also indicate that the company has achieved the optimal capacity utilization levels for its existing plants.
……this year we have initiated capex of Rs. 20 crore for expansion of product capacities both at
the Nadiad and Nasik facilities.
Going ahead, an investor should monitor the progress of the capacity expansion to check whether the
company is able to complete the projects in expected time and cost budgets and if it can utilize them to
optimal levels.
b) Inventory turnover ratio of ADF Foods Ltd:
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While analysing the inventory turnover ratio (ITR) of the company, an investor notices that the ITR of ADF
Foods Ltd had been stable in the range of 8.0 to 8.5 over the years.
Stable inventory turnover over the years indicates that the company has been able to manage its inventories
efficiently without letting significant money being stuck in its inventory.
An investor would notice that some of the raw material used by the company like mangoes are season
products. In such cases, companies need to purchase the requirement for the entire year during the mango
season. As a result, many times, the companies dependent on agricultural inputs in their products carry a
large inventory, which makes their operations working capital intensive.
The credit rating agency, CRISIL had highlighted the working capital intensive nature of business of ADF
Foods Ltd in its report for the company in September 2014.
The rating strengths continue to be partially offset by the working capital intensive nature of
operations and the near-term profitability pressure; and competition in the domestic ethnic food
segment.
c) Analysis of receivables days of ADF Foods Ltd:

days of ADF Foods Ltd have been continuously in the range of 60-70 days. Stable receivables days indicates
that the company has been able to collect money from its customers without any deterioration in its working
capital position.
Looking at the stable inventory turnover ratio as well as at receivables days of ADF Foods Ltd over the
years, an investor would notice that the company has been able to keep its working capital position under
control and not let it deteriorate over the last 10 years (FY2010-2019). As a result, it has not witnessed a
lot of money being stuck in the working capital.
Over FY2010-19, ADF Foods Ltd Limited reported a total cumulative net profit after tax (cPAT) of ₹127
cr. During the same period, it reported cumulative cash flow from operations (cCFO) of ₹149 cr.
would also understand the situations when the companies would have their CFO higher than their PAT.
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Therefore, an investor would appreciate that during FY2010-2019, ADF Foods Ltd has kept its working
operations.
The Margin of Safety in the Business of ADF Foods Ltd:

target growth.
While analysing the SSGR of ADF Foods Ltd, an investor would notice that just as the phases discussed
above for sales growth, the SSGR of the company also depicts distinct phases.
The SSGR of ADF Foods Ltd used to be very low (negative) until a couple of years back whereas, in recent
years, it has improved to 16%. One of the key reasons for a low SSGR for the company in the past had been
its low profitability (NPM) during FY2012-2016.
depends on the NPM of a company.
Where,

Please note that in our SSGR calculations, we use the 3-year average of each of the parameters. Therefore,
both improvement and deterioration of the parameters affect the SSGR with a lag.
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An investor would notice that during FY2012-2016, ADF Foods Ltd continuously had a low (negative)
SSGR due to low profitability whereas, in this period, the company was growing its sales at a fast pace. As
a result, the company had to raise capital by both debt as well as equity to fund its growth plan.
The company raised debt from HDFC Bank to acquire a company Elena’s Foods Specialties Inc. in the
USA.
For the purpose of the acquisition of this new manufacturing unit in USA, the Company has
pledged its fixed deposits worth Rs. 998 lacs and Mutual Funds’ Units of the face value of Rs. 875
lacs with HDFC Bank, Mumbai Branch. Pursuant to a Stand By Letter of Credit issued by HDFC
Bank, Mumbai Branch in its favour, HDFC Bank, Bahrain Branch has sanction a term loan of US
$ 4 million to ADF Foods Holdings (USA) Ltd.
Thereafter, the company raised additional debt to complete its expansion of Nadiad plant.
Your Company’s Greenfield project in Nadiad shall become operational during the current
financial year.
An investor would notice that during this period, the company had a negative SSGR due to low profitability
whereas it was making capital investments at a fast pace. As a result, the debt levels of the company
increased from ₹1 cr in FY2010 to ₹43 cr in FY2013. In addition to debt, the company raised additional
equity (₹13 cr) by way of warrants in FY2012-FY2013. The company issued 2,000,000 warrants at ₹65
each (2,000,000 * 65 = ₹13 cr) to the promoters in FY2012.
During the year, the Company allotted 20,00,000 (Twenty Lakh) warrants convertible into
equivalent number of equity shares of Rs. 10/- each at an issue price of Rs. 65/- per warrant to
certain members of the promoter group on preferential basis on receipt of the minimum
subscription amount of 25% of issue price i.e. Rs. 16.25/- per warrant.
Out of the 2,000,000 warrants issued, 200,000 warrants were converted into equity shares in FY2012 and
remaining 1,800,000 warrants were converted into equity shares in FY2013.
During the financial year 2011-12, the Company had issued 20,00,000 convertible warrants to
certain members of the Promoter group on Preferential basis. Out of these, 2,00,000 warrants
were converted into equivalent number of equity shares of face value Rs. 10/- each on 28th March,
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2012. The remaining 18,00,000 warrants were converted into equivalent no. of equity shares
on 23rd January, 2013.
Therefore, an investor would appreciate that during the first half of the last decade, ADF Foods Ltd
attempted to grow more than its inherent ability and as a result, it had to raise debt (₹42 cr) as well as equity
(₹13 cr) to meet its growth aspirations.
After FY2014, the company went into a phase of stagnant sales. There was not sales growth from FY2014
(sales ₹208 cr) to FY2018 (sales ₹201 cr). Nevertheless, as discussed above, during this period, the company
decreased its operating costs and as a result, improved its net profit margin significantly from 3% in FY2014
to 9% in FY2018. As a result, the SSGR of ADF Foods Ltd improved significantly.
As a result, the company could use its cash flow for retiring its debt as well as return the money to equity
shareholders by way of the buyback.
By FY2018, the company has reduced its debt to ₹1 cr from ₹43 cr in FY2013. In addition, it did a buyback
in FY2017 where it bought back shares worth ₹9.63 cr from its shareholders.
The Company bought back 798,539 equity shares at an average price of Rs.120.60 per share. The
Company had thus spent Rs. 9,63,07,029/- (Rupees Nine Crore Sixty Three Lakhs Seven Thousand
and Twenty Nine Only) excluding the transaction cost.
Thereafter, the company did another buyback in FY2019 where it bought back shares worth ₹29.99 cr from
its shareholders.
…we successfully completed a buyback of 11,78,742 equity shares through the open market route
at an average price of Rs. 254.43 per equity share utilizing a total of Rs. 29.99 crore
An investor notices that in the first half of the last decade, ADF Foods Ltd had low profitability; however,
it chose to grow its sales at a fast pace. As a result, the company had to raise additional debt as well as
equity to meet its growth requirements until FY2014. Thereafter, the situation changed. The company
stopped chasing sales growth and instead focused on cutting down operating costs leading to improvement
in profit margins. As a result, after FY2015, the company could repay almost its entire debt and could buy
back shares from its shareholders.
b) Free Cash Flow (FCF) Analysis of ADF Foods Ltd:
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While looking at the cash flow performance of ADF Foods Ltd, an investor notices that during FY2010-
19, the company had a cumulative cash flow from operations of ₹149 cr. During this period it did a capital
expenditure (capex) of ₹66 cr. Please note that while calculating the capital expenditure over last 10 years,
we have removed the increase in fixed assets of ₹16 cr during FY2013, which in effect is due to the
revaluation of one of its brands, which resulted in its intangible assets increasing from ₹29.5 cr in FY2012
to ₹45.5 cr in FY2013.
…the Company received Ashoka brand, which was valued at Rs. 2,935.99 lacs by an independent
valuer…
Therefore, an investor would note that over FY2010-2019, ADF Foods Ltd reported a free cash flow (FCF)
of ₹83 cr. ( = 149 – 66).
debt that it had for FY2010-2019. Please note that the amount of interest capitalized by ADF Foods Ltd is
already reflected in the amount of capital expenditure.
As a result, the company had surplus cash of ₹68 cr (= 83 – 15).
The company use this surplus cash as under:
 Buyback of shares from shareholders of about ₹40 cr: FY2017 (9.63 cr) and FY2019 (29.99 cr)
 Dividend payments to shareholders of about ₹25 cr excluding dividend distribution tax.
any company.
Additional aspects of ADF Foods Ltd:

On analysing ADF Foods Ltd and reading its publicly available past annual reports and reading other public
documents an investor comes across certain other aspects of the company, which are important for any
investor to know while making an investment decision.
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1) Management Succession of ADF Foods Ltd:

While analysing the history of ADF Foods Ltd, an investor notices that the promoter family started business
as a small shop selling dry fruits by the name “American Dry Fruits” in 1932. Over time, the family grew
the business to a packaged food processor spread across many countries.
Mr. Ramesh H. Thakkar was the chairman of the company until his death in FY2014. Thereafter, his brother
Mr. Ashok H. Thakkar became the chairman of the company.
Consequent to death of Mr. Ramesh H Thakkar, Mr. Ashok H. Thakkar, Vice Chairman has been
designated as the Chairman of the Company in the Board meeting held on 11 th August, 2014.
Thereafter, Mr. Ashok H. Thakkar ran the company with his nephews Mr. Bimal R. Thakkar and Mr.
Bhavesh R. Thakkar (sons of Mr. Ramesh H. Thakkar). The relationship is evident from the following
disclosure in the FY2016 annual report.
Mr. Ashok H. Thakkar is related to Mr. Bimal R. Thakkar and Mr. Bhavesh R. Thakkar as their
father’s brother.
The three senior members of the family ran the company together until FY2019. However, it seems that in
FY2019, the family member decided to go different ways and Mr. Ashok H. Thakkar and Mr. Bhavesh R.
Thakkar left the company in May 2018.
During the year under review, Mr. Ashok H. Thakkar, Chairman and Mr. Bhavesh R. Thakkar,
Executive Director & CFO tendered their resignations from the closure of the business hours
on 29th May, 2018.
At the same time, Mr. Mishal A. Thakkar, son of Mr. Ashok H. Thakkar also resigned from the company.
Mr. Mishal A. Thakkar is the son of Mr. Ashok H. Thakkar. He has resigned from the position
of VP – Operations in the Company with effect from close of business hours of May 29, 2018.
After the resignation of Mr. Ashok H. Thakkar along with his son, Mr. Mishal A. Thakkar, and nephew,
Mr. Bhavesh R. Thakkar, currently, Mr. Bimal R. Thakkar (aged 55 years) is in charge of the company’s
affairs as chairman.
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Mr. Bimal R. Thakkar has been appointed as an Executive Chairman w.e.f. 5th June, 2018 in place
of the outgoing Chairman i.e. Mr. Ashok H. Thakkar
On February 15, 2019, Shivaan B. Thakkar joined the company as Manager – Business & Strategy
Development.
Mr. Shivaan B. Thakkar – Manager Business & Strategy (w.e.f. February 15, 2019)
The company has disclosed that Mr. Shivaan B. Thakkar is son of Mr. Bimal R. Thakkar.
Mr. Shivaan Thakkar (3,000 equity shares representing 0.01% of total paid-up capital) and Mr.
Sumer Thakkar (2,000 equity shares representing 0.01% of total paid-up capital), being sons of
Mr. Bimal Thakkar, Promoter of the Company…..
The presence of family members of different generations in the company indicates the presence of
succession planning in the family. This is because the leadership can be transitioned from the elder
generation to the new generation smoothly. In ADF Foods Ltd, the presence of the elders, Mr. Ramesh H.
Thakkar and his brother Mr. Ashok H. Thakkar along with the next generation, Mr. Bimal R. Thakkar and
Mr. Bhavesh R. Thakkar ensured that there was no leadership vacuum in the company when Mr. Ashok H.
Thakkar and Mr. Bhavesh H. Thakkar left the company.
The presence of family members of different generations in the company allows for grooming of the new
generation of the promoter family while the senior members of the promoter family are still playing an
active part in the day-to-day activities.
2) Recent shareholding changes of ADF Foods Ltd:

From the above discussion, an investor would remember that on May 29, 2019, Mr. Ashok H. Thakkar and
Mr. Bhavesh R. Thakkar resigned from the company. However, while analysing the changes in the
shareholding pattern of the company, an investor gets to know that Ashok and Bhavesh had started to sell
the stake in ADF Foods Ltd, which they held directly as well as indirectly through their family members.
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As per FY2018 annual report, page 41, Ashok and Bhavesh sections sold the following stakes:
 Ashok H. Thakkar sold 6.84% stake in the company out of 6.89% held by him at the start of the
year.
 Mishal A. Thakkar, son of Mr. Ashok H. Thakkar, sold 8.49% stake in the company out of 8.59%
held by him at the start of the year.
 Priyanka B. Thakkar, who is the wife of Mr. Bhavesh R. Thakkar, sold 3.77% stake in the company
out of 5.19% held by her at the start of the year.
Further, as per FY2019 annual report, page 48, Bhavesh section sold the following stakes:
 Bhavesh R. Thakkar sold 2.12% stake in the company out of 5.55% held by him at the start of the
year.
 Bhavesh Ramesh Thakkar HUF sold its entire 2.70% stake in the company at the start of the year.
Therefore, during FY2018 and FY2019, Ashok and Bhavesh sections sold 23.92% stake from the company
(23.92 = 6.89 + 8.49 + 3.77 + 2.12 + 2.70).
As per the annual reports of FY2018 (page 41) and FY2019 (page 48), a major portion of this stake was
bought by two entities
 Mentor Capital Ltd: 13.88% and

 Alpana S. Dangi: 5.30%
Both Alpana S. Dangi and Mentor Capital Ltd did not have any stake at the start of FY2018 in ADF Foods
Ltd. Therefore, effectively, they bought 19.18% (= 13.88 + 5.30) stake out of 23.92% stake sold by the
Ashok and Bhavesh sections.
Mentor Capital Ltd seems to be a part of the companies owned by an investor Mr. Sanjay Dangi. As per
corporate database Zaubacorp, the following is the list of directors of Mentor Capital Ltd ( click here):
 Abhishek Tejawat
 Amit K Dangi
 Sanjay Soumitra Dangi
Alpana S. Dangi also seems to be related to Mr. Sanjay Dangi (details below).
As per the shareholding pattern of ADF Foods Ltd for March 31, 2020 (BSE), the names of both Mentor
Capital Ltd and Alpana S. Dangi are no longer a part of the shareholders. Instead, the name of Authum
Investment and Infrastructure Limited appears with a 22.44% shareholding of ADF Foods Ltd.
As per corporate database Zaubacorp, the following is the list of directors of Authum Investment and
Infrastructure Limited (click here):
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 Vinit Kishorchandra Parikh

 Amit K Dangi
 Vimal Ajmera
 Tapan Sodani
 Alpana Sanjay Dangi
 Navin Kumar Jain
In the above list of directors of Authum Investment and Infrastructure Limited, an investor would notice
that one of the directors is Alpana Sanjay Dangi. Therefore, it seems that the investor Mr. Sanjay Dangi has
consolidated his holding in ADF Foods Ltd under Authum Investment and Infrastructure Limited and
currently holds 22.44% stake in the company.
While doing a further search about Mr. Sanjay Dangi, an investor gets to know about certain instances
where Mr. Sanjay Dangi has been penalized by Securities and Exchange Board of India (SEBI) in the past
for allegations of market manipulation.
1) In 2010, Mr. Sanjay Dangi was barred by SEBI from dealing in equity markets (Source: Sanjay
Dangi, another barred market manipulator, still pulling strings: Moneylife, Dec 9,
2010)
Last week, the market watchdog, Securities and Exchange Board of India (SEBI) had issued an
order against Sanjay Dangi, a Mumbai-based high net-worth individual, barring him from dealing
in the equity markets. Initial investigations by the Income Tax Department and further findings of
SEBI confirmed that Mr Dangi had colluded with promoters of four companies, namely, Murli
Industries, Ackruti City, Welspun Corp and Brushman India, to artificially jack up these scrips
through dummy companies connected to the promoters or Mr Dangi himself.
2) In Jan 2013 (Source: Sebi confirms interim directions against Sanjay Dangi: Business
Standard):
The Securities and Exchange Board of India (Sebi) on Tuesday confirmed its interim directions
to bar Sanjay Dangi and his associates from dealing in the stock market for rigging share prices.
3) In Oct. 2013 (Source: Sebi slaps Rs 21 lakh fine on 6 entities in Sanjay Dangi case:
Economic Times)
Sebi has slapped a total penalty of Rs 21 lakh on six entities for alleged failure to comply with
market watchdog’s summons related to its probe on fraudulent trading activities by Sanjay
Dangi and associated entities
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The case of Mr. Sanjay Dangi was highlighted in a case study in the National Conference on “Capital
Market Frauds and Malpractices – Genesis, Resolution and Prevention” on 10 October 2013
under Promoter-Broker-Operator nexus. The case study is available on the website of Institutional
Investor Advisory Service (IIAS) (download here).
CASE STUDIES: Sanjay Dangi
One of the biggest crackdowns by SEBI on Insider Trading / Share Manipulation or Promoter-
Broker-Operator nexus cases is the case of Sanjay Dangi, a Mumbai based High Networth
Individual. Dangi’s cohorts were his wife Alpana Dangi and brother Sunil Dangi.
In light of the above information, when an investor notices that investor who has been accused of
manipulating share prices of companies, own 22.44% stake of ADF Foods Ltd at March 31, 2020, then she
should be extra cautious while putting her hard-earned money and do deeper due diligence before making
an investment decision.
3) Promoters of ADF Foods Ltd fined by SEBI for insider trading:

While reading about the promoters of the company, an investor comes across an order by SEBI against
some of the promoters of ADF Foods Ltd particularly Mr. Bhavesh R. Thakkar for insider trading in the
shares of the company. In the order dated February 22, 2019, SEBI highlighted that in 2016, Mr. Bhavesh
R. Thakkar bought shares of the company through his relatives (his mother in law and a cousin sister of his
wife) before the buyback was announced by the company to stock exchanges. As per SEBI order, Mr.
Bhavesh R. Thakkar sold these shares shortly after the announcement of buyback was made on the stock
exchanges.
The SEBI order (available at SEBI website here) in this regard is an insightful reading to
understand the ways in which promoters use accounts of the related parties to indulge in insider trading.
The order depicts the relationship of the parties, the sequence of events, and the flow of money in a nice
pictorial presentation to establish the case of insider trading.
The following section in the SEBI order, page 9 provides the relationship between the various entities
involved in the case:
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As per the SEBI order, the following people related to Mr. Bhavesh R. Thakkar played a key role in the
insider trading case whose relationship is shown in the above chart:
 Priyanka Thakkar, wife of Mr. Bhavesh R. Thakkar

 Pallavi Mehta, mother in law of Mr. Bhavesh R. Thakkar
 Navin Mehta, father in law of Mr. Bhavesh R. Thakkar
 Shefali Mehta, a paternal cousin of Ms. Priyanka Thakkar and
 Abhishek Mehta, son of Ms. Shefali Mehta
SEBI noticed that the discussions about the buyback of shares started in the company on May 21, 2016,
when the idea was first put up in a meeting. The buyback was finally approved and disclosed to stock
exchanges on July 27, 2016.
During this period, Mr. Bhavesh R. Thakkar bought shares using the demat accounts of his mother in law,
Ms. Pallavi Mehta and the cousin sister of his wife, Ms. Shefali Mehta on May 31, June 1, June 14, June
16 and June 28, 2016. On investigation, SEBI found out the chain of money transfers from the bank account
of Mr. Bhavesh R. Thakkar to Ms. Pallavi Mehta and Ms. Shefali Mehta via the bank account of his wife,
Ms. Priyanka Thakkar. For example, this illustration in the SEBI order, page 7, shows the way money was
transferred from the account of Mr. Bhavesh R. Mehta:
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As per the order:
 On June 14, 2016, Mr. Bhavesh R. Thakkar transferred ₹60 lac to the account of his wife, Ms.
Priyanka Thakkar.
 On the same day, Ms Priyanka Thakkar transferred money to the account of her mother, Ms. Pallavi
Mehta.
 On the same day, Ms. Pallavi Mehta transferred part of the money to the stockbroker, Lalkar
Securities and transferred the remaining money to Ms. Shefali Mehta.
 Two days later, Ms. Shefali Mehta transferred the money received by her from Ms. Pallavi Mehta
to the stockbroker Lalkar Securities.
In this manner, shares were bought in the accounts of Ms. Pallavi Mehta and Ms. Shefali Mehta using the
money transferred by Mr. Bhavesh R. Thakkar before the buyback was announced to the stock exchanges.
ADF Foods Ltd announced the buyback to the stock exchanges on July 27, 2016.
After the buyback was announced, Ms. Pallavi Mehta and Ms. Shefali Mehta sold the shares bought by
them from the money transferred by Mr. Bhavesh R. Thakkar. After the sale, the money was transferred
back to Mr. Bhavesh R. Thakkar using the above account in a reverse manner. The chain of fund transfers
is highlighted by SEBI in its order. For example, the following diagram shows the transfer of funds from
the accounts of Ms. Pallavi Mehta and Ms. Shefali Mehta to the account of Mr. Bhavesh R. Thakkar on
August 1 and August 2, 2016.
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The above chart shows that
 On August 1, 2016, Ms. Shefali Mehta received money from stockbroker Lalkar Securities from
sale of shares.
 The next day, on August 2, 2016, she transferred the money to the account of Ms. Pallavi Mehta,
mother in law of Mr. Bhavesh R. Thakkar.
 The same day, on August 2, 2016, Ms. Pallavi Mehta transferred the money to the account of her
daughter, Ms. Priyanka Thakkar, wife of Mr. Bhavesh R. Thakkar.
 The same day, on August 2, 2016, Ms. Priyanka Thakkar transferred the money to the account of
Mr. Bhavesh R. Thakkar.
Looking at this evidence, SEBI concluded that Mr. Bhavesh R. Thakkar was in the possession of insider
information about the buyback of shares of ADF Foods Ltd and bought shares of the company in the
accounts of his relatives before the buyback was announced to the public. After the buyback announcement,
when the share price of ADF Foods Ltd increased, then Mr. Bhavesh R. Thakkar sold the shares in the
accounts of these relatives and thereby made illegal gains.
The stockbroker, Lalkar Securities disclosed to SEBI that the orders for buy/sell in the accounts of Ms.
Pallavi Mehta and Ms. Shefali Mehta were received on phone from Mr. Bhavesh and others. SEBI order,
page 6:
Lalkar Securities informed SEBI that orders used to be received on behalf of the suspected entities
from Navin Mehta, Abhishek Mehta and Bhavesh Thakkar from mobile phone numbers…
As a result, SEBI found Mr. Bhavesh R. Thakkar and the other related persons guilty of insider trading in
this case and put a penalty of ₹ 1.02 cr on Mr. Bhavesh R. Mehta and others. SEBI order, page 13:
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….I prima facie find that Navin Mehta, Bhavesh Thakkar and Abhishek Mehta, being ‘Insiders’
have traded in the shares of ADF Foods through the trading accounts of Pallavi Mehta and Shefali
Mehta when the price sensitive information remained undisclosed….
In view of the foregoing, I, in exercise of the powers conferred upon me……hereby impound the
alleged unlawful gains of a sum of ₹1,02,63,169.81 (alleged gains of ₹77,23,637.73 + interest of
₹25,39,532.08 (from May 21, 2016 to February 15, 2019)…
From the above discussion, an investor would notice that Mr. Bhavesh R. Thakkar resigned from ADF
Foods Ltd on May 29, 2018. In addition, he had sold some of his stake in the company as well.
Nevertheless, the above order should serve as a good illustrative example of the methods used by promoters
of companies to profit by trading in the shares of their own company using the insider information.
4) Back-to-back warrants issued by ADF Foods Ltd to promoters:

While analysing the FY2010 annual report of the company, an investor gets to know that in December
2007, ADF Foods Ltd had allotted 1,500,000 warrants to its promoters at ₹70 each, totalling to a value of
₹10.5 cr. The promoters had paid 10% of the money upfront i.e. ₹1.05 cr at the time of allotment of warrants.
An investor would remember that soon after December 2007, the global meltdown started in January 2008
and the prices of almost all the stocks across the world declined. At the same time, the stock price of ADF
Foods Ltd also declined. As a result, the fact in warrant allotment that the promoters will only exercise
warrants when they make money from them came true.
The promoters of the company refused to pay the balance 90% of the money and the warrants expired at
the maturity.
FY2010 annual report of ADF Foods Ltd, page 6:
The Company had allotted 15,00,000 Convertible Warrants of Rs. 70/- each (Rs. 7.00 per warrant
paid on allotment) on preferential basis to Promoters/Directors, their friends and relatives on 24th
December 2007. None of the subscribers of the warrants had exercised their option and the
same expired on 23rd June 2009. Rs. 1,05,00,000 received on allotment of warrants was credited
to Capital Reserve Account.
This incidence proved the concerns of the minority investors about preferential allotment of warrants to
promoters that promoters use warrants to benefit themselves ahead of minority shareholders. SEBI realized
that 10% upfront payment of 10% for warrants was very low to generate commitment from promoters to
infuse money in the company by compulsorily exercising to them. As a result, in February 2009, SEBI
increased the upfront payment for warrants allotment from 10% to 25%.
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The key reason that led SEBI to increase the upfront payment for warrants was that the promoters used
warrants to enrich themselves when the stock markets rose while their loss was limited to only 10% if the
markets fell. (Source)
There were complaints that promoters allotted warrants to themselves and select investors at a
pre-determined price, but didn’t buy them when the due date came if the prevailing stock prices
were lower than the decided price. If the prices were higher, they would convert those warrants
and at least make a paper profit, and in some cases encash the gains.
It is to discourage promoters from trading profits. Warrants are seen as an instrument that gives
an advantage to promoters above retail investors, who have all other rights equal to company
founders.
When the markets melted during 2008 and early 2009, promoters of many companies such as
Hindalco Industries, Tata Power, GE Shipping and Pantaloon Retail did not convert those
warrants, regulatory filings show.
After similar complaints, in February 2009, the regulator had raised the up-front margin to be
paid by warrant subscribers to 25% from 10% since the payment lost was insignificant compared
with the losses one would have made if forced to buy.
This also goes with our belief that the warrants are if at all, 25% beneficial to the company and 75%
beneficial to the promoters.
Common logic says that no one holding stock warrants would exercise them to get shares at a price, which
is higher than the price at which he/she can get shares from the market.
More so, if the intention of the promoters is to infuse money into the company, then they should simply get
all the shares at the current market price and give the entire money to the company upfront so that the
company may use it for the purpose for which it needs money.
The entire gimmick of paying 25% at the time of allotment of stock warrants and then keeping the option
to pay 75% at the time of exercise, which the promoters would decide based on whether at the date of
exercise, the promoters are making money or not, seems like a facade to us.
If the promoters pay 25% now and let the stock warrants expire due to the market price being consistently
lower than the exercise price in future, then it effectively means that the promoters did not have the true
intention of infusing 100% of the money or that the company did not need 100% of the money.
It might be that the company needed only 25% of the money, which promoters put in by way of stock
warrants allotment and the right to get shares in future at a discount is the payoff that promoters would
enjoy as a consideration for giving 25% to the company. The company might not have needed the balance
75% at all.
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Many times, like in the case of ADF Foods Ltd in FY2009, the markets crash after the allotment of warrants
and the promoters refuse to exercise the warrants and pay the balance money, then the promoters lose the
money, which they had paid upfront on the allotment of the warrants. However, in such situations, an
investor should not think that the promoters have lost and the company got free money.
An investor should understand that the promoter is in charge of the company. He makes decisions on behalf
of the company. He will not take the loss sitting down. Many times, investors would notice that when
promoter lose money on a warrant issuance as the markets had crashed, then they make the company come
up with a second warrant issuance, which is usually bigger in size and at a cheaper exercise price. This is
primarily to recover their losses in the first warrant allotment.
In the case of ADF Foods Ltd, the promoters lost about ₹1.05 cr to the company in 2009 when the markets
crashed after warrant allotment and they could not exercise the warrants. Immediately after the loss in the
first warrant issue, the promoters came up with another bigger warrant issue at a much cheaper price where
they could recover their losses.
The Company had allotted 23,26,110 Convertible warrants of Rs. 32/- each (Rs. 8.00 per warrant
July 2009. Of the above, 8,20,222 warrants were converted on 11th September 2009 and balance
warrants 15,05,888 were converted on 27th October 2009. The balance amount of Rs. 24 per
warrant was duly received before exercise of warrants.
Therefore, we believe that entire gimmick of a structured deal where the promoters get preferential
treatment by allotment of warrants by paying 25% and then keeping the option to pay 75% at the time of
exercise is not in the favour of minority shareholders.
5) Strange case of giving out inter-corporate deposits by ADF Foods Ltd

whenever the promoters had to exercise the warrants:
While reading the publicly available annual reports of ADF Foods Ltd from FY2010, an investor notices
that the company has allotted warrants to its promoters at multiple occasions. However, upon deeper
analysis, an investor also notices that whenever the promoters exercised their warrants to get shares from
the company, invariably, during that time, ADF Foods Ltd had given out inter-corporate deposits of nearly
the similar amount, which was due from the promoters for their obligation on the exercise of warrants.
Let us see some of these instances of allotment of warrants, which were associated with giving out of inter-
corporate deposits of a similar amount.
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In FY2010, ADF Foods Ltd had allotted 2,326,110 warrants to the promoters at a price of ₹32 per warrant
on July 29, 2009.
The Company had allotted 23,26,110 Convertible warrants of Rs. 32/- each (Rs. 8.00 per warrant
July 2009. Of the above, 8,20,222 warrants were converted on 11th September 2009 and balance
warrants 15,05,888 were converted on 27th October 2009. The balance amount of Rs. 24 per
warrant was duly received before exercise of warrants.
The promoters exercised the warrants after 3 months on October 27, 2009. For this transaction, the
promoters had to pay ₹7.44 cr to the company on the allotment of warrants and the exercise (2,326,110 *
32 = ₹7.44 cr).
However, when an investor analyses the FY2010 annual report, then on page 97, she notices that the
company has given out inter-corporate deposits of ₹8.50 cr in FY2010.
Whoever received these inter-corporate deposits, repaid them next year (FY2011 annual report, page 41).
Later on, while reading the FY2012 and FY2013 annual reports of ADF Foods Ltd, an investor notices that
the company had allotted 2,000,000 warrants to its promoters at ₹65 per share.
During the year, the Company allotted 20,00,000 (Twenty Lakh) warrants convertible into
equivalent number of equity shares of Rs. 10/- each at an issue price of Rs. 65/- per warrant to
certain members of the promoter group on preferential basis on receipt of the minimum
subscription amount of 25% of issue price i.e. Rs. 16.25/- per warrant.
Out of the 2,000,000 warrants issued, 200,000 warrants were converted into equity shares in FY2012 and
remaining 1,800,000 warrants were converted into equity shares in FY2013.
During the financial year 2011-12, the Company had issued 20,00,000 convertible warrants to
certain members of the Promoter group on Preferential basis. Out of these, 2,00,000 warrants
were converted into equivalent number of equity shares of face value Rs. 10/- each on 28th March,
2012. The remaining 18,00,000 warrants were converted into equivalent no. of equity shares
on 23rd January, 2013.
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An investor would notice that out of the total price of ₹65/- per share, the promoters had to pay 75% i.e.
₹48.75 per share at the time of exercise of warrants (65 * 75% = 48.75).
The promoters exercised 200,000 warrants in FY2012 resulting in the obligation of ₹0.98 cr at the time of
exercise in FY2012 (200,000 * ₹48.75 = ₹0.975 cr) whereas the promoters exercised remaining 1,800,000
warrants in FY2013 leading to an obligation of ₹8.78 cr at the time of exercise of warrants in FY2013
(1,800,000 * ₹48.75 = ₹8.775 cr).
While reading the FY2012 annual report, page 76, an investor notices that in FY2012, ADF Foods Ltd gave
out an inter-corporate deposit of ₹ 1cr. In addition, in the FY2013 annual report, page 74, an investor notices
that the inter-corporate deposit given out by ADF Foods Ltd increased from ₹1 cr in FY2012 to now ₹10.25
cr in FY2013 indicating an outflow of ₹9.25 in the form of inter-corporate deposits.
These inter-corporate deposits were duly paid back by whoever had availed them over the next two years.
These inter-corporate deposits are not reflected in the related party transactions section of the annual report
indicating that the parties to whom ADF Foods Ltd gave money are not classified as related parties directly.
If an investor wishes for further clarifications, then she may contact the company directly to seek further
details like the names of the counterparties to whom these inter-corporate deposits were paid by the
company and the reasons for payment of inter-corporate deposits to other counterparties when ADF Foods
Ltd itself had a lot of debt on its books. In FY2012, ADF Foods Ltd had a total debt of ₹37.5 cr, which
increased further to ₹42.9 cr in FY2013.
As the money is a fungible commodity, therefore, the above increase in debt of ADF Foods Ltd in FY2013
and the simultaneous increase in inter-corporate deposits given out by it to other counterparties may be
interpreted as a situation where ADF Foods Ltd raised additional loans in FY2013 to give them out as inter-
corporate deposits to other counterparties.
An investor may seek details of these transactions of inter-corporate deposits of amounts similar to the
exercise value of the warrants every time when the promoters exercise their warrants into shares. Investors
may ask the company details of the counterparties of these inter-corporate deposits.
This is because, an investor would appreciate that if it is the money given out by the company in the form
of inter-corporate deposits that is coming back to it in the form of exercise of warrants, then effectively, the
company is itself financing the money that it receives from the warrant holders.
Investors may do their own deeper due diligence in this regard.
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6) Acquisition of Elena’s Food Specialties, Inc. USA by ADF Foods Ltd:

In FY2011, the company intimated its shareholders that it has acquired a US-based food manufacturer,
Elena’s Food Specialties, Inc. FY2011 annual report, page 13:
During the year your Company has completed the acquisition of Elena’s Food Specialties, Inc., a
US based manufacturer and marketer of organic and natural food products.
The total consideration paid by ADF Foods Ltd to buy 89% stake in Elena in FY2011 was about $4.9
million for which it had taken a loan of $4 million. The credit rating agency, ICRA had disclosed these
monetary details in its credit rating report for ADF Foods Ltd in February 2011.
ADF, through its step down subsidiary, acquired certain brands, inventory and fixed assets and
assumed lease liability of Elena’s for total purchase consideration of US$ 4.9 million. The
transaction was funded through term loan from bank – US$ 4 million and balance through internal
accruals of the company.
As per FY2011 annual report, page 65, the INR value of $ 4.0 million loans taken by ADF Foods Ltd is
disclosed at ₹16.78 cr indicating an exchange rate of ₹41.95 per USD. As a result, an investor can estimate
that in FY2011, ADF Foods Ltd paid a sum of ₹20.6 cr to acquire Elena ($4.9 million @ ₹41.95/USD =
₹20.6 cr)
ADF Foods Ltd had initially acquired 89% in Elena’s business via its 89% shareholding in ADF Holdings
(USA) Limited (AHUL). The shareholding of ADF Foods Ltd in AHUL remained at 89% until FY2014.
In FY2015, ADF Foods Ltd increased its holding in AHUL to 100% (FY2015 annual report, page 133).
As a result, it might be that ADF Foods Ltd had to pay some additional amount to acquire remaining 11%
stake in Elena’s business in FY2015, over and above ₹20.6 cr, which it paid in FY2011.
Nevertheless, when an investor notices the business performance of Elena’s acquisition, then she notices
that the ADF Foods Ltd has never made any profits in its USA subsidiary ever since it started reporting its
results from FY2012.
An investor notices that since FY2012, ADF Foods Ltd has continuously reported losses in its USA
subsidiary and until FY2019, it has had a total loss of ₹36.6 cr in USA subsidiary.
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As a result, an investor realizes that the acquisition of Elena done by ADF Foods Ltd in FY2011 does not
seem to be a great decision by the management. Moreover, this acquisition is proving to be a continuous
burden on the other profitable segments of the company.
Moreover, in the recent times, an investor notices that the company has realized that the brands acquired
by ADF Foods Ltd in the USA by the acquisition of Elena, i.e. PJ’s Organics and Nate’s are no longer
worth the value represented in the books. Therefore, the company has started to recognise impairment on
these brands.
In FY2019, the company recognized a loss of ₹10 cr due to impairment of its brands in the USA.
The consolidated profit of the Company for the Financial year 2018-19 would have been higher
but for one time impairment losses to the tune of Rs. 10 crores on account of impairment of
certain brands in our US subsidiary.
In FY2018, the company had reported impairment loss of about ₹2.4 cr on account of certain brands of the
subsidiary company. FY2018 annual report, page 148:
The indefinite life of the intangible assets are tested for impairment as a result of which impairment
of Rs. 243.30 lacs on certain brands held in the books of its subsidiary company is included in
current years amortization charge.
Moreover, in FY2020, the company again recognized an impairment loss of ₹0.35 cr due to certain brands
of the subsidiary company. Q4-result, May 2020, page 12:
Depreciation and Amortisation expense in consolidated financials for the quarter and year ended
March 31, 2020, includes an amount or Rs. 35.53 Lakhs on account of impairment of certain
brands held in books or its subsidiary company.
7) Case of Power Brands (Foods) Pvt. Ltd:

Power Brands (Foods) Pvt. Ltd (PBFPL) used to be a 99% subsidiary of ADF Foods Ltd.
Consolidated financial statement of the Company includes the Financial statement of it’s 100%
Subsidary Company, ADF Foods UK Limited., 99% Subsidary Company, Power Brands (Foods)
Pvt. Ltd., 100% Subsidary company, ADF Foods (Mauritius) Ltd and 100% Subsidary company,
ADF Foods (India) Ltd.
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As per the FY2010 annual report of ADF Foods Ltd, page 79, which incorporated the annual report of
PBFPL, the company disclosed that the promoters of ADF Foods Ltd are the shareholders of the remaining
stake.
FY2010 annual report, page 79, the section containing the annual report of PBFPL:
Name of the Related Party Relationship
 ADF Foods Ltd: Holding Company

 Ramesh H. Thakkar: Shareholder
 Ashok H. Thakkar” Shareholder
 Bimal R. Thakkar: Shareholder
 Bhavesh R. Thakkar: Shareholder
 Bimal R. Thakkar (HUF): Shareholder
 Bhavesh R. Thakkar (HUF): Shareholder
 Mishal A. Thakkar: Shareholder
 Miss Suchita A Thakkar Shareholder
Therefore, from the above disclosures, an investor notices that PBFPL was 99% owned by ADF Foods Ltd
and the promoters were a part of the remaining stake of PBFPL.
As per FY2010 annual report, page 74, PBFPL reported a loss of ₹2 cr in FY2010.
As per FY2011 annual report, page 70, PBFPL reported another loss of ₹2 cr in FY2011.
As per FY2012 annual report, page 93, PBFPL reported a loss of ₹1.94 cr in FY2012.
As PBFPL was reporting continuous losses, therefore, it does not come as a surprise to the investor when
she read in FY2013 annual report that shareholders of PBFPL have decided to dissolve the company.
Power Brands (Foods) Pvt. Ltd. (PBFPL), a 99.99% subsidiary of the Company, has gone
for voluntary liquidation vide special resolution passed by its’ Members’ on 5th November, 2012
It seems intuitive to the investors when they learn that ADF Foods Ltd has decided to dissolve PBFPL as it
was continuously making losses. However, an investor is confused when she reads that in this same year
(FY2013), ADF Foods Ltd acquired more shares of PBFPL for ₹3.3 cr and increased its stake from 99%
earlier to 99.99% now.
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The Company held majority shareholding in Power Brands (Foods) Private Limited (‘PBFPL’).
It presently holds 2,08,85,992 fully paid Equity Shares of Rs. 10/- each (including 20,75,992 Equity
Shares for Rs. 330.08 lacs acquired in Financial Year 2012-13).
Therefore, an investor is not able to understand the reasons for acquiring additional shares by paying out
₹3.3 cr to other shareholders just before PBFPL’s liquidation. An investor may note that this acquisition of
0.99% stake by ADF Foods Ltd by paying ₹3.3008 cr valued PBFPL at ₹333.41 cr. (3.3008 / 0.0099 =
333.41).
An investor may note that at the date of liquidation of PBFPL (Nov. 5, 2012), the closing share price of
ADF Foods Ltd on BSE was ₹62.55, which gives it a market capitalization of ₹126 cr considering 2.02 cr
shares of the company existing at Nov. 5, 2012. (P.S. Promoters exercised 1,800,000 warrants on January
23, 2013, which increased the total number of shares to 2.2 cr at the end of FY2013).
Therefore, an investor notices that while acquiring 0.99% stake from the other shareholders of PBFPL at
₹3.3 cr, ADF Foods Ltd valued PBFPL at a valuation of ₹333.41 cr, which was more than 2.5 times the
valuation of total ADF Foods Ltd. Please note that the market valuation of ADF Foods Ltd included the
value of its 99% existing stake in PBFPL.
In addition, when an investor reads further about the liquidation proceedings of PBFPL, then she notices
that over time, ADF Foods Ltd received only two major assets from PBFPL, which included the brand
“Ashoka” and property at Sewree, Mumbai.
In FY2012, ADF Foods Ltd disclosed to the shareholders that it has received the brand Ashoka from
PBFPL, which it said that is valued at ₹29.4 cr by an independent valuer.
By virtue of the above distribution, the Company received Ashoka brand, which was valued at Rs.
2,935.99 lacs by an independent valuer in lieu of its investment in PBFPL’s equity shares of Rs.
2,211.08 lacs. Accordingly, the Company has capitalised the said brand in its books at Rs.
2,935.99 lacs, after adjusting the same against the investment value of Rs. 2,211.08 lacs and
carrying the balance of Rs. 724.91 lacs to the credit of the statement of profit and loss as an
exceptional item.
The company mentioned that it has capitalized the brand at ₹29.35 cr in its books, which is visible in the
FY2013 annual report of the company. In the FY2013 annual report, page 69, the company added ₹29.35
cr in the Gross Block under “Additions/adjustments during the period” in the intangible assets section.
The company also disclosed that it has recorded the excess value of ₹7.24 cr as a profit under the exceptional
item in the profit and loss statement. An investor would appreciate that this recognition of profit by ADF
Foods Ltd is tantamount to revaluing its own intangible asset and then recognizing it as a profit.
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In FY2015 annual report, ADF Foods Ltd disclosed to the shareholders that it has received an immovable
property from PBFPL as well as its 99.99% share of the cash present with PBFPL. ADF Foods Ltd also
disclosed that the complete value from PBFPL is now realised; indicating that there is nothing more
expected to be received from PBFPL.
During the current Financial Year, the voluntary liquidator, with the prior approval of the
members vide their special resolution dated 10 th November 2014, distributed
PBFPL’s immovable property situated at Sewree, Mumbai and part of cash and bank balance to
its Shareholders in proportion to their respective shareholding in PBFPL while retaining certain
other current assets to meet with it’s contingent and other liabilities. The excess value of assets so
received over the investment value in Equity Shares of PBFPL has been accounted for in the
Company’s Statement of Profit & Loss under the head exceptional item.
Consequently, the investment in Equity Shares of PBFPL stands fully realised.
To ascertain the value of the immovable property received by ADF Foods Ltd from PBFPL in FY2015, an
investor needs to analyse the fixed assets schedule of the annual report on page 122. This is in anticipating
a similar treatment for the immovable property received from PBFPL in line with the treatment of brand
Ashoka received by ADF Foods Ltd in FY2013.
An investor notices that in FY2015 annual report, the fixed assets schedule indicates the addition of total
gross tangible fixed assets of ₹21.23 cr (= 19.40 cr + 1.83 cr), which includes the addition in fixed assets
due to operationalization of greenfield manufacturing capacity at Nadiad.
FY2015 annual report, page 122 (the figures are mentioned in ₹ lacs):
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During the year the Company’s new manufacturing plant at Nadiad has become fully
functional…..
In FY2013 annual report, on page 8, the company had intimated to the shareholders that the expansion
project at Nadiad would cost about ₹20 cr.
Your Company’s Greenfield project in Nadiad which is spread over 45,000 square feet., would be
operational by end of the financial year 2013-14 and the same would increase manufacturing
capacity of the Company’s core products such as pickles, pastes and chutneys. The
approximate project cost would be Rs 20 crores.
Therefore, an investor notices in the fixed assets section of the FY2015 annual report shared above, the
addition for ₹19.40 cr seems on account of operationalization of the greenfield capacity expansion at Nadiad
and the other addition of ₹1.83 cr seems to be the value of the immovable property received by ADF Foods
Ltd from PBFPL.
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Therefore, if an investor analyses the total value of assets, both tangible and intangible, received by ADF
Foods Ltd from PBFPL, then she notices that it included brand Ashoka valued at ₹29.35 cr in FY2013 and
immovable property valued at ₹1.83 cr in FY2015. This totals to ₹31.18 cr (=29.35 + 1.83).
As the company had stated that the realization of assets/value from PBFPL is now complete, therefore, an
investor may consider ₹31.18 cr as the total value of 99.99% stake held by ADF Foods Ltd in PBFPL
valuing total PBFPL at ₹31.183 cr (=31.18 / 0.9999). Moreover, an investor would notice that the value of
₹31.183 cr includes ₹29.35 cr assigned to the value of Ashoka brand by an “independent valuer”. The
investor would appreciate that the valuations of brands are always subjective and their value differs from
one person to another.
When an investor compares this value of ₹31.183 cr of PBFPL realised now with the value of ₹333.41 cr
at which ADF Foods Ltd had purchased 0.99% stake from its other shareholders by paying them ₹3.30 cr
in FY2013 just before its liquidation started.
Therefore, it looks like a case where ADF Foods Ltd gave an exit to the other shareholders of PBFPL at a
higher valuation just before its liquidation than the value, which ADF Foods Ltd could recover from
PBFPL.
8) Important information missing from the annual reports of ADF Foods Ltd.
While searching about the ADF Foods Ltd on the internet, an investor finds a report prepared by Nirmal
Bang in August 2016 after their meeting with the management of the company (Source: Nirmal Bang
website, Click here). From reading this report, an investor notices that the management of the
company highlighted some of the challenges faced by it in the USA business.
The report mentions that one of the issues faced by the company in the USA was in 2014 when one of the
previous promoters of Elena Foods who still held 11% stake in the business, changed the recipe of one of
the products without management’s approval and as a result, ADF Foods faced a big recall of its product
from many stores. It resulted in a big hit on the US business.
Nirmal Bang report on ADF Foods Ltd, August 2016, page 2:
Year 4- In 2014, one of the previous partners materially modified the product recipe without
appropriate management approval which led to product recall by most stores, delivering a big
blow to the US business of ADF Foods.
An investor would appreciate that this is a major development related to the business of the company.
Product recalls like this hit the image of the brand as well.
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However, an investor notices that the company did not disclose this important development to the
shareholders in any of its annual reports.
An investor would note that this incidence of a product recall that hampers the brand as well, was a very
important development and this development should have been intimated to the shareholders in the annual
report.
Investors may contact the company directly for any further details/clarifications in this regard.
9) Independent directors of ADF Foods Ltd:

While reading about the composition of the board of directors and the disclosures made by ADF Foods Ltd
in this regard, an investor notices a few incidences that provide insights.
In FY2019 annual report, page 52, ADF Foods Ltd made the following disclosure about one of its
independent directors, Mr. Jay Mehta:
Mr. Jay Mehta resigned as Independent Director on 27th September, 2018 and was again
appointed as an Additional Director in the category of Non-Executive Non-Independent Director
on 12 th February, 2019.
The company disclosed that in FY2019, the status of Mr. Jay M. Mehta changed from an independent
director to non-independent director. The position is still non-executive director, which rules out that Mr.
Jay Mehta has taken some active role in the company that might have necessitated a change of status from
independent to the non-independent director.
As per FY2019, page 50, the number of shares of ADF Foods Ltd held by Mr. Jay Mehta during FY2019
are constant at 50,000 shares with no purchase or sale of shares during the year.
Therefore, without any change in shareholding or any change in the executive status of the director, the
company disclosed that the person would now be classified as a non-independent director.
Such changes bring questions in the mind of an investor about whether the director was really an
independent director all the while he was on the board of directors previously.
10) Signs of weak internal control processes at ADF Foods Ltd:

While reading the annual reports of the company, an investor comes across a few instances where ADF
Foods Ltd did not fulfil its mandatory requirements like filing of disclosures with stock exchanges or paying
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off the dues of lenders on time. These instances though seem small but might indicate weaknesses in the
internal control processes in the company.
The secretarial audit report of the FY2019 annual report highlighted some of the lapses on part of the
company when it omitted out names of sons of the chairman, Mr. Bimal R. Thakkar from the list of
promoters in the shareholding details.
Mr. Shivaan Thakkar (3,000 equity shares representing 0.01% of total paid-up capital) and Mr.
Sumer Thakkar (2,000 equity shares representing 0.01% of total paid-up capital), being sons of
Mr. Bimal Thakkar, Promoter of the Company was not disclosed under promoter and promoters
group in shareholding pattern filed by the Company with the Stock Exchange(s).
In addition, after the buyback was complete, then there were delays in filing the changed shareholding
pattern as well as returns of the buyback to the stock exchanges and SEBI.
There was delay in filing of revised shareholding pattern of the Company pursuant to capital
restructuring by way of Buy-back of Equity Shares by the Company resulting in a change
exceeding two per cent of the total paid-up share capital.
There was delay in filing of return of Buy-back by the Company with Securities and Exchange
Board of India as per Section 68 of the Companies Act, 2013.
In FY2016, the company filed its returns but did not submit the accounts of some of its subsidiaries to the
Registrar of Companies. FY2016 annual report, page 38:
The financial statements [Standalone and Consolidated] of the Company for the financial year
ended March 31, 2015 were filed with the Registrar in Form AOC-4 as per the provisions of
Section 137 of the Companies Act, 2013. However, accounts of the subsidiary companies of the
Company which have been incorporated outside India were not attached inadvertently.
In FY2018, the secretarial auditor highlighted that the company did not comply with two statutory
guidelines. First, it conducted the annual general meeting (AGM) without the presence of the chairman of
the audit committee and second, it did not remit the dividend from its foreign subsidiary in stipulated time.
The Annual General Meeting of members of the Company duly convened on August 23, 2017.
However, the Chairman of the Audit Committee was not present at the meeting.
There was a delay in receipt of dividend remittance from foreign subsidiary company of the
Company.
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Previously, on a few occasions, ADF Foods Ltd disclosed that at the year-end, the company had not repaid
its interest due to the lenders on time.
 In FY2011, interest accrued and due was ₹3.45 lac (page 65 of FY2011 annual report),
 In FY2015, interest accrued and due was ₹0.22 lac (page 97 of FY2016 annual report),
 In FY2016, interest accrued and due was ₹0.16 lac (page 97 of FY2016 annual report)
In addition to the above instances where the failure was to meet the statutory and contractual obligation, at
other times, an investor notices that there were instances of damages in the production plants due to fire.
 In FY2012, loss of stock due to the fire of ₹41 lac (page 80 of the FY2012 annual report)
 In FY2013, loss of stock due to the fire of ₹48 lac (page 76 of the FY2013 annual report)
In addition, in the FY2013 annual report, the company provided ₹4.1 cr for estimated losses on the “onerous
contracts” (FY2013 annual report, page 87). An onerous contract means an order/contract where the
company knows that the cost of fulfilment would exceed the money to be received indicating that it is a
certain loss. Onerous contracts may indicate lapses in proper processes of verifying the economic worth of
orders before committing to the customer.
An investor should be aware of the signs of weaknesses in the control processes of any company. This is
because there have been instances in the corporate world where the companies with weak internal controls
were hit by frauds later.
Many times, the lack of strong processes in the companies leads to significant issues being undetected for
a long period. Investors may remember the case of National Peroxide Ltd where the lack of strong processes
provided the opportunity to the senior management to siphon off the money by a continuing financial fraud
for almost 10 years.
11) A lawsuit against ADF Foods Ltd for violating health and safety code in the
USA:
In FY2019 annual report, ADF Foods Ltd intimated its shareholders that in the USA a lawsuit was filed
against the company for alleged violation of health and safety code in California. In addition, the company
also mentioned that it is exploring a consent agreement in this case.
During the year the subsidiary received the notice of violation from Centre for Environmental
Health (CEH), a non-profit California Corporation which has filed a law suit against ADF Foods
(USA) Ltd. & certain others non-affiliate Companies as defendants (‘’Defendants’’) with the
Superior Court of California, County of Alameda. The plaintiff in its complaint has alleged that
the Defendant and distributors and Importers who have violated California’s Proposition 65,
Health & Safety Code § 25249.5, et seq…..
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The Subsidiary is currently consulting with its legal counsel & exploring filling a consent
agreement with CEH. Approximate liability expected is US$ 130,000 (Including US$ 30,000
attorney fees) Amounting to Rs.89.89 lakhs.
When an investor finds out that the company is exploring the consent agreement in the case, then she doubts
whether the company knew that it violating the health and safety code and as a result, instead of contesting
the allegation, it is settling them.
As per Q4-FY2020 results, page 12, the company paid ₹67.88 lac to settle the lawsuit.
It also includes expense aggregating to USD 95,000 equivalent to Rs. 67,88 Lakhs. The same is
towards litigation settlement amount and legal fees In respect of a lawsuit filed In US.
An investor may contact the company directly to understand the reasons for settlement in this case. She
may ask whether the company knew beforehand that it was in violation of the health and safety code.
The Margin of Safety in the market price of ADF Foods Ltd:

Currently (July 7, 2020), ADF Foods Ltd is available at a price to earnings (PE) ratio of about 13.9 based
on FY2020 consolidated earnings. The PE ratio of 13.9 provides some margin of safety in the purchase
price as described by Benjamin Graham in his book The Intelligent Investor.
Analysis Summary
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Overall, ADF Foods Ltd seems a company that has grown its business at a pace of 10% year on year for
the last 10 years (FY2010-2019). However, upon closer analysis, an investor notices that the business of
the company has gone through some very different phases during this period. During FY2010-2014, the
company increased its sales very fast even when it suffered a significant drop in profit margins. As a result,
most of the growth during this period was funded by debt and equity dilution instead of business profits.
Thereafter, since FY2015, the sales growth of the company stalled. The company started focusing on
reducing its operating costs and as a result, the profit margins of the company started improving. In the
absence of sales growth, the company used its profits to reduce debt and return money to shareholders by
way of buybacks. Now, in recent years, the company has witnessed its sales and profitability increase.
ADF Foods Ltd operates in an intensely competitive business environment where many domestic and
international players compete for market share. The competition becomes more intense because of many
unorganized players selling unbranded packaged food products. As a result, the customer always has the
option to buy from many suppliers. This results in very low pricing power in the hands of ADF Foods Ltd
and other packaged food manufacturers.
As a result, whenever the cost of raw material and other input costs increase, then the manufacturers have
to take a hit on their profit margins because they are not able to pass on the increase in costs to the customers.
Over the years, ADF Foods Ltd witnessed its operating profit margins decline from 16% to 8% within a
couple of years. In addition, the major raw material of the company is agricultural products where price as
well availability depends on vagaries of nature like the monsoon, natural calamities etc. as well as
government policies as well as political factors. As a result, the raw material costs of the company keep on
fluctuating significantly and similarly, its profit margins see wide fluctuations year on year.
The business operations of ADF Foods Ltd are working capital intensive because it has to buy its seasonal
raw materials in a short period to last it throughout the year, which increases the inventory requirements.
Nevertheless, the company has kept its working capital position stable over the years without any significant
deterioration.
ADF Foods Ltd witnessed significant changes at its promoter levels after the death of is chairman Mr.
Ramesh Thakkar in FY2014. Over the years, his younger brother Mr. Ashok Thakkar and one of the sons,
Mr. Bhavesh Thakkar quit the company along with selling the majority of their shareholding in the
company. Currently, Mr. Bimal Thakkar, son of Mr. Ramesh Thakkar manages the company along with
his son, Mr. Shivaan Thakkar. At all the times, an investor notices that members of different generations of
the promoter family are a part of the company, which has ensured that there is no leadership vacuum in the
company even at the times of apparent differences in the senior members.
An investor notices that when some of the promoters from Mr. Ashok Thakkar and Mr. Bhavesh Thakkar
sections sold their shares in the company, then the majority of their shares were purchased by entities related
to an investor, Sanjay Dangi. Analysis of news items from the past indicates that Mr. Sanjay Dangi had
been involved in manipulations of stock prices of some companies by colluding with their promoters. At
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times, Mr. Dangi was fined by SEBI for these activities. An investor needs to be aware of this aspect and
possible ramifications and risks that may arise due to it.
During FY2017, the promoters of the company, Mr. Bhavesh Thakkar section bought the shares of ADF
Foods Ltd before the buyback was announced to the public and then sold the shares after the buyback
announcement when the stock prices increased. SEBI held them guilty and in turn, fined them for insider
trading. Nevertheless, Mr. Bhavesh Thakkar has resigned from the company in May 2018.
ADF Foods Ltd had issued warrants to its promoters at multiple occasions in the past. At times when the
promoters decided not to exercise the warrants when the stock price of ADF Foods Ltd declined after
allotment of warrants, then the company quickly issued another larger set of warrants to the promoters at a
lower price. In addition, an investor notices that every time when the promoters of ADF Foods Ltd exercised
their warrants and in turn, had a payment obligation towards the company, then at each of these occasions,
the company paid out inter-corporate deposits of a similar amount to some counterparties. An investor may
due deeper due diligence for these inter-corporate deposits.
At one occasion in FY2013, ADF Foods Ltd acquired a 0.99% additional stake in one of its subsidiaries,
Power Brands (Foods) Pvt. Ltd (PBFPL), where it already had 99% stake. It paid ₹3.30 cr to acquire 0.99%
additional stake from its promoters at a valuation of ₹331 cr, which was even higher than the total market
value of ADF Foods Ltd, which already included the value of 99% stake of PBFPL. Moreover, an investor
noticed that soon after the acquisition of shares in PBFPL, the subsidiary filed for liquidation. Upon
liquidation, when the assets of the company were distributed to shareholders (ADF Foods Ltd is 99.99%
shareholder), then the company got a total value of about ₹31.2 cr, which included ₹29.4 cr for brand
Ashoka and ₹1.83 cr of immovable property. Therefore, it looks like a case where the actual value of PBFPL
was about ₹31.2 cr where the company gave exit to the promoters from PBFPL by buying out their stake
just before the liquidation at a valuation of ₹331 cr.
ADF Foods Ltd acquired a US-based food manufacturer in FY2011 for about ₹20 cr. However, over the
years, the company has continued to lose money in its US business. Until FY2019, it has already lost more
than ₹36 cr in its US business. In addition, it has realised that the brands acquired in the US are not as
valuable as thought earlier and as a result; it has impaired the value of these brands in recent years. In
addition, the company faced a lawsuit in the US for violating the health and safety code and as a result, it
had to pay damages and legal costs.
Moreover, the US business suffered a major blow when in 2014, one of the partners of the company changed
the recipe of a product and as a result, the product had to be recalled from the store. It hit the business and
the brand of the company. However, the management of the company intimated about this incidence to the
equity research analysts of Nirmal Bang and did not include its details in the annual report of the company.
Over time, an investor notices that at occasions, ADF Foods Ltd had failed to comply with statutory
guidelines like disclosing names of promoter family members who held shares of the company in the details
of promoter shareholding. At another occasion, it did not file details related to buyback at time. At times, it
did not submit accounts of its subsidiaries to the Registrar of Companies. At other occasions, it did not
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repay its lenders on time and as a result, it had interest accrued and due at the year-end. An investor also
notices multiple incidences of loss of goods due to fire at its plants. At times, it entered into contracts where
fulfilling the contract involved sure shot loss (onerous contracts). When seen in conjunction, these
incidences indicate that the company needs to strengthen its control process in its business & operations.
Going ahead, an investor should keep a close watch on the profitability of the company as well as the
developments related to its US operations.
These are our views on ADF Foods Ltd. However, investors should do their own analysis before making
P.S:
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8) Filatex India Ltd

Filatex India Ltd is an Indian manufacturer of polyester, nylon & polypropylene multifilament yarn.
While analyzing the past financial performance data of Filatex India Ltd, an investor would notice that in
the past the company formed subsidiaries on two occasions.
The first time, in FY2012, the company formed a subsidiary named Filatex Synthetics Private Limited.
During the year under review, the Company namely ‘Filatex Synthetics Private Limited‘ was
incorporated on 9th March, 2012 as its subsidiary Company and no transaction / business has
taken place during the financial year 2011-12. Therefore, the subsidiary’s financial statement has
not been prepared and consolidated with the annual accounts of the Company.
However, during FY2012, the subsidiary company did not have any business. Therefore, Filatex India Ltd
did not prepare the financial statements of the subsidiary company. As a result, it did not prepare any
consolidated financial statements as well.
In the next year, in FY2013, Filatex India Ltd sold the shares of the subsidiary company.
During the year under review, your Company has sold its shares in the said subsidiary company,
consequently it is no more subsidiary of your company. Thus your Company doesn’t have any
subsidiary.
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As a result, even though the company had a subsidiary in FY2012-FY2013, but it seems that the subsidiary
did not have any business. As a result, Filatex India Ltd prepared only standalone financial statements
during FY2012 as well as FY2013.
The second time, in FY2016, the company formed a wholly-owned subsidiary in Singapore, Filatex Global
Pte Limited.
Filatex Global Pte Limited, Singapore was incorporated on 3rd Nov, 2015 as a Wholly Owned
Subsidiary of the Company. No material transaction/ business has taken place during the financial
year ended 31st March, 2016
However, this time, Filatex India Ltd started presenting its consolidated financial statements incorporating
the financial performance of its subsidiary company in Singapore.
Nevertheless, the Singapore subsidiary also stayed without any business activities, and in FY2019, Filatex
India Ltd dissolved the subsidiary company.
Filatex Global Pte Limited, Singapore is a Wholly Owned Subsidiary of the Company as on
date. No material transaction/ business has taken place during the financial year ended 31st
March, 2019. The Board of Directors of the Company in their meeting held on 25.08.2018 decided
to dissolve it. Accordingly Filatex Global Pte Ltd has filed an application for striking off to
Accounting and Corporate Regulatory Authority (ACRA) on March 07, 2019. The total financial
impact of liquidation of Filatex Global Pte Ltd is Rs. 11.68 lakhs which has been charged off to
the statement of profit & loss in year ending March 31, 2019.
An investor would notice that even in the case of the second subsidiary, Filatex India Ltd did not conduct
any business in the subsidiary company and after a few years of formation, disposed of the subsidiary.
Nevertheless, this time, Filatex India Ltd prepared its consolidated financials from FY2016 to FY2019.
Subsequent to FY2019, the company stopped preparing consolidated financials and in all the quarterly
results for FY2020, Filatex India Ltd has prepared only the standalone financial statements.
Ideally, we believe that while analysing any company, an investor should always look at the company as a
whole and focus on financials, which represent the business picture of the entire group. Consolidated
financials of any company, whenever they are present, provide such a picture.
Therefore, in the analysis of Filatex India Ltd, we have used standalone financials from FY2010 to FY2015,
consolidated financials from FY2016 to FY2019, and standalone financials for the last 12 months (Jan-Dec
2019).
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10 years:
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Financial and Business Analysis of Filatex India Ltd:

While analyzing the financials of Filatex India Ltd, an investor would note that in the past, the company
₹399 cr. in FY2010 to ₹2,874 cr in FY2019. However, the sales have declined slightly to ₹2,821 cr in the
12 months ending Dec. 2019 (i.e. Jan 2019-Dec. 2019).
In the last 10 years (FY2010-2019), the sales growth of the company has not been consistent and it faced
periods of decline in its sales.
The company witnessed a decline in its sales in FY2012 when the sales of the company declined from ₹486
cr in FY2011 to ₹473 cr in FY2012. Thereafter, the company again witnessed a decline in its sales in
FY2015 and FY2016. The sales of the company declined from ₹1,769 cr in FY2014 to ₹1,278 cr in FY2016.
Similarly, when an investor analyses the profitability of the company over the last 10 years (FY2010-
FY2019), then she notices fluctuating cyclical patterns in the profit margins as well.
The operating profit margin (OPM) of the company used to be 10% in FY2010, which consistently declined
to 2% in FY2014. Thereafter, the OPM increased to 9% in FY2017. The OPM has since then declined to
8% in the 12 months ending Dec. 2019 (i.e. Jan 2019-Dec. 2019).
Such kind of fluctuating business performance indicates to an investor that the business performance of
Filatex India Ltd is exposed to cyclical factors.
she acknowledges the need for a deeper understanding of the business of Filatex India Ltd to understand
the factors influencing the business performance of the company. This is because, once an investor has
understood the key factors for Filatex India Ltd, then she would be able to have a view about the expected
During her analysis of the company, an investor should pay a special focus on the annual reports of the
company for the years in which it witnessed a decline in its sales. For example, in FY2016, Filatex India
Ltd explained the reasons for the decline in its sales.
During the year under review, the Company achieved turnover of Rs. 127823 lacs as compared to
Rs. 157276 lacs in the previous year resulting in decrease of approx. 19%. Decrease in turnover is
due to decline in the prices of finished goods consequent upon decrease in the price of raw
material and deep fall in crude prices.
From the above explanation, an investor can relate that the decline in the sales turnover of the company
was due to a decrease in the prices of its products, which is linked to the price of its raw materials, which
in turn, is linked to the crude oil prices.
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The company also explained the linkage between its sales and the crude oil prices in the press release for
the Q3-FY2020 results of the company.
Commenting on the performance for nine months for the financial year 2019‐20, Mr.
Madhusudhan Bhageria, Chairman & Managing Director, Filatex India Ltd. said, This year
the revenues are slightly less than the same period last year. The drop is due to lower crude prices
which have a direct impact on key raw materials i.e. PTA & MEG.
From the above discussion, an investor would appreciate that the company’s sales revenue is dependent on
the crude oil price.
When the crude oil prices increase, then the raw material prices of the company increase. In such a case,
the company increases the prices of the final goods to its customers, and its sales turnover increases.
On the contrary, when the crude oil prices decrease, then the raw material prices for the company decreases.
In such a case, the company has to reduce the selling price to its customers and in turn, its sales turnover
decreases.
Let us see the movement of crude oil prices for the last 10 years and try to understand whether we can find
this correlation in the movement of crude price and the sales turnover of the company.
The below chart from Macrotrends shows the movement of crude oil prices over the last 10 years.
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In the above chart, an investor would notice the following phases/major trends of the crude oil price
movements, and an investor can relate these with the sales turnover movement of Filatex India Ltd.
 2010-2011: Crude oil prices: Increase | Sales turnover of Filatex: Increase

 2011-2012: Crude oil prices: Decrease | Sales turnover of Filatex: Decrease
 2014-2016: Crude oil prices: Sharp decrease | Sales turnover of Filatex: Sharp decrease
 2019-2020: Crude oil prices: Decrease | Sales turnover of Filatex: Decrease over last 12 months
Therefore, an investor notices that the movement of the sales turnover of the company has a direct
correlation with the movement of crude oil prices. In addition, an investor would appreciate that the frequent
capacity expansion projects undertaken by the company would also have a significant in increasing the
sales turnover of the company.
Looking at the above information, an investor can estimate that going ahead whenever there is an upwards
movement in the crude oil prices, then she may expect the sales turnover of Filatex India Ltd to increase.
On the contrary, if in the future, during any period, there is a decline in crude oil prices, then she may expect
the sales turnover of Filatex India Ltd to decrease.
While an investor is able to understand the parameters influencing the sales turnover, she needs to do further
analysis to find out the factors influencing the cyclical fluctuating pattern of profit margins of Filatex India
Ltd.
The management communicated in the press release for Q3-FY2020 results that it passes on both the
increase as well as the decrease in its raw material costs to its customers and as a result, the profitability
margin stays constant.
Commenting on the performance for nine months for the financial year 2019‐20, Mr.
Madhusudhan Bhageria, Chairman & Managing Director, Filatex India Ltd. said, This year the
revenues are slightly less than the same period last year. The drop is due to lower crude prices
which have a direct impact on key raw materials i.e. PTA & MEG. However, the EBITDA margin
is almost the same as compared to the previous period as the variations be it increase or decrease
in raw material prices is passed on to customers.
Looking at the above statement, an investor would expect that Filatex India Ltd is in a position of strength
and has its profit margins protected. An investor would expect that the business model of Filatex India Ltd
is immune to crude oil prices/raw material price fluctuations.
From the above explanation, an investor would think that if the crude oil prices increase, then Filatex India
Ltd increases the prices to its customers and protects its profit margins. Similarly, if the crude oil prices
decrease, then Filatex India Ltd decreases the prices to its customers and again protects its profit margins.
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However, looking at the huge fluctuations in the profit margins of Filatex India Ltd over the last 10 years
(FY2010-FY2019), an investor notices that there is more to the business model of the company than simply
passing on the crude oil price changes to its customers and protecting its profit margins.
When an investor reads the available information about Filatex India Ltd in the form of its annual reports,
and credit rating reports etc., then she gets to understand the important factors like competition in the
industry and the bargaining power/negotiating power of different players in this business.
The credit rating agency, CARE, in its July 2017 report (page 2) of Filatex India Ltd mentioned that the
company has a very low bargain power with its suppliers, as its suppliers are very large entities.
These raw materials are derivatives of crude oil and its price is dependent on movement of crude
oil prices. Furthermore, key raw material has to be purchased from bigger players;
therefore, bargaining power of the company remains low. Hence, any adverse volatility in the raw
material prices may affect the company’s margins.
While reading the transcript of the conference call of the company in Feb 2020 discussing Q3-FY2020
results (page 7), an investor notices that these large suppliers of the company are Reliance, Indian Oil, and
Mitsubishi.
Yes, the same vendors like Reliance, Indian Oil and Mitsubishi, they are supplying at reduced
prices now. So normally they supply on the import parity basis, So they were charging a small
premium because of anti-dumping duty. So now premium has gone away so they are now supplying
at the import parity.
An investor notices that the large suppliers Reliance, India Oil etc. have very high bargaining power over
players like Filatex India Ltd. When the Govt. of India implemented an anti-dumping duty on the import of
PTA, an important raw material for man-made fiber, then these suppliers increased their prices for
supplying PTA in line with the anti-dumping duty even though they were producing PTA within India. And
players like Filatex India Ltd had to pay a higher price.
It indicates that the suppliers of raw material in the man-made fiber industry are very large and powerful.
Therefore, Filatex India Ltd does not have any bargaining power over these suppliers.
Filatex India Ltd highlighted this aspect to its shareholders in FY2016 annual report, page 34:
Challenges and Threats
iii) Low bargaining power against large suppliers of key raw materials
From the above discussion, an investor has understood the bargaining power dynamics between Filatex
India Ltd and its suppliers. Now, let us focus on the bargaining power dynamics between Filatex India Ltd
and its customers.
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While analysing the period of FY2013-FY2014 when Filatex India Ltd witnessed its operating profit margin
(OPM) decline sharply to 2% and it reported net losses in FY2014, then an investor notices that the company
has highlighted a lot of challenges and risks to its shareholders.
The profit margins of the industry eroded in last two years mainly due to addition of large capacity
of Polyester POY and import of Nylon Filament Yarn (NFY). Substantial import duty concessions,
under FTAs signed by the Government of India with ASEAN member countries has become
the bane of the industry and emerged as a major threat for the Synthetic Fiber Industry.
The company faced very tough challenges in FY2014 when it reported net losses. It even had to let go of
many employees and in turn, reduce its workforce.
As a part of rationalization exercise, the company has managed to reduce its workforce to 1338
as compared to 1535 in the previous year.
From the above disclosure by the company, an investor notices that the synthetic fiber industry faced large
overcapacity and intense competition from low priced imports.
Filatex India Ltd highlighted to the shareholders that the industry is facing tough competition from cheaper
imports from China leading to reduced demand for the yarn producers.
Currently domestic textile industry is passing through a bit of upheaval phase due to unabated
cheaper imports of fabric from China. This has hit the domestic off take of Domestic Producers of
fabrics & fibres.
An investor would appreciate that when an industry faces intense competition from domestic as well as
international manufacturers, then obviously, its players would have poor bargaining power over its
customers.
The credit rating agency, Brickwork highlighted the low negotiating power of synthetic yarn manufacturers
over their customers in its report for Filatex India Ltd in March 2019, page 4:
FIL operates in a highly commoditized and fragmented yarn industry marked by large number of
organized players coupled with low entry barriers. Intense competition limits the pricing
abilities of the players in the industry. Furthermore, the industry is characterized by players
having low bargaining power against large suppliers. Additionally, the presence of dominant and
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integrated players with better bargaining power limits the pricing flexibility of players operating
in the segment.
Brickwork’s report highlights that the synthetic yarn industry has a commodity product with low barriers
to entry. The industry has intense competition from many players. Moreover, the industry has a few very
large and integrated players like Reliance Industries Ltd, which produce its own raw material as well as
fiber. Such large players do not let smaller players enjoy any bargaining power with the customers who buy
yarn.
Filatex India Ltd also highlighted the intense competition along with its low negotiating power as a
weakness and threat in its FY2019 annual report, page 27:
Weaknesses
 Competitive landscape in India

 Commodity nature of product portfolio
 Low bargaining power against large suppliers of key raw materials
Threats
 Cheaper Imports from neighbouring countries enjoying free trade
Looking at the above discussion, an investor would appreciate that Filatex India Ltd operates in an industry,
which has very low bargaining power with its suppliers as well as its customers.
The suppliers of the raw material to the company are very large companies like Reliance, Indian Oil etc.
who extract the prices that they desire from players like Filatex India Ltd. In the past, when Govt. of India
imposed anti-dumping duty on the import of one of the raw materials (PTA), then these domestic suppliers
(Reliance, India Oil) increased their prices of domestically produced PTA and Filatex India Ltd had to agree
to pay a higher price.
Filatex India Ltd also has low negotiating power with its customers because the synthetic yarn industry is
highly competitive with a commodity product having low entry barriers. Therefore, the customers have
many choices to buy from different Indian players as well as from cheaper imports.
As a result, while the suppliers of Filatex India Ltd can increase the prices at any time, Filatex India Ltd is
not able to increase the prices to its customers as per its will. As a result, we notice that at times, Filatex
India Ltd had to take a significant hit on its profit margins like in the periods of FY2014 when it reported
an operating profit margin of 2% and it reported net losses.
Therefore, even though an investor notices that the final customer prices of Filatex India Ltd are linked to
its raw material prices in turn linked to crude oil prices, still it does not mean that the company has the
power to protect its profit margins. It may be a case that when the crude oil prices fall, then Filatex India
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Ltd has to reduce its prices by a higher fraction but when the crude oil prices increase then it can only
increase them by a lower fraction. In such a case, an investor would notice that despite the sales turnover
fluctuating in line with crude oil prices, the profit margins of the company would take a hit.
An investor noticed a similar situation in FY2018 when the raw material prices for the company were on
an increase but the company had to give competitive discounted prices to its customers in order to generate
sales volume. The July 2018 report by the credit rating agency, CARE, page 2, reflects such a tough business
situation for Filatex India Ltd.
Although, the PBILDT grew in absolute terms, the margins moderated to 8.62% in FY18 as against
9.33% in FY17 largely on account of competitive prices offered by the company to boost the
sales coupled with higher raw material prices.
An investor would appreciate that when the companies operate in commodity product businesses with
intense competition with lower barriers to entry having large suppliers with huge bargaining power and
customers with many choices to buy, then such companies are bound to face tough business phases. Such
companies have to take a hit on their profit margins during business down phases.
Filatex Industries Ltd seems to be one such company.
Going ahead, investors should keep a close watch on the profitability margins of the company.
While looking at the tax payout ratio of Filatex India Ltd., an investor notices that for most of the last 10
years (FY2010-2019), the tax payout ratio of the company has been in line with the standard corporate tax
rate prevalent in India. This is because; the company has been disclosing tax in the profit & loss statement
(P&L) as per the standard corporate tax rate. However, the company has been paying a lesser tax to the
income tax department at the rate of minimum alternate tax (MAT).
This practice has led to the accumulation of deferred tax liabilities (DTL) in the balance sheet of Filatex
India Ltd, which is the difference between the standard corporate tax rate and MAT. It effectively means
that in the P&L, a company has shown a higher tax (standard corporate tax rate), which it has not yet paid
to the income tax (IT) dept. because it is paying a lower rate to the IT dept. at MAT. Therefore, it is carrying
the difference as a liability that it would have to settle/adjust/pay in the future.
In September 2019, the govt of India decreased the rate of the standard tax rate as well as the rate of MAT.
The standard corporate tax rate was reduced from 30% to 22% and the MAT rate was reduced from 18.5%
to 15%. (Source: Government reduces corporate tax rate to 22%: Business Standard)
An investor would notice that the amount of deferred tax liabilities (DTL) depends upon the difference
between the standard corporate tax rate and the MAT.
Before the recent changes in the tax rate, this difference used to be 11.5% (30% – 18.5%, excluding
cess/surcharges etc.). Now with the decline in standard corporate tax rate and the MAT, the tax difference
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that is the basis of deferred tax liabilities (DTL) for the past periods, has declined to 3.5% (22% – 18.5%,
excluding cess/surcharges etc.).
An investor would note that for the past periods, where the company has already paid MAT at 18.5%, the
differential has declined from 11.5% to 3.5% as calculated above. For the future periods, when the
companies would pay MAT at 15%, the differential for which the DTL would be calculated would be 7%
(22%, the new corporate tax rate – 15%, the new MAT rate).
An investor would notice that with the change in the differential basis of the deferred tax liabilities (DTL),
the companies had to recalculate the deferred tax liabilities that they need to settle/adjust/pay in future in
lieu of their past profits. Moreover, an investor would also appreciate that as the tax differential has reduced
from 11.5% to 3.5%, therefore, the deferred tax liabilities of the companies would reduce.
This reduction in the liability means that in the past, the companies have deducted a higher amount of tax
from their P&L and created a DTL. However, now with the reduction in the standard tax rate itself from
30% to 22%, they will have to settle a lesser amount in the future.
This requires a reversal in the liability (DTL) created, which has now turned out to be an excess liability.
As this liability was created by deducting a higher tax expense (30%) from the P&L in the previous year,
now the opposite adjustment would be to add the excess portion of the DTL back to the P&L. The original
tax expense entry in the previous periods had the impact of reducing the reported profits (PAT). Now, this
reversal entry for adjusting the excess DTL would have an impact of increasing the reported profits.
Filatex India Ltd did this adjustment in the Q2-FY2020 results reported by it when it reported a more than
200% jump in its net profits after tax (PAT) for the quarter on QoQ basis. The company reported a PAT of
₹61.8 cr in Q2-FY2020 against a PAT of ₹20.3 cr in Q1-FY2019. The main reason for such a sharp jump
in PAT is a reversal of DTL of ₹34.7 cr.
Q2-FY2020 results, page 5:
The Company expects to utilise the deferred tax balances over subsequent periods which have
accordingly been re-measured using the tax rate expected to be prevalent in the period in which
the deferred tax balances are expected to reverse. Consequently, the Company has reversed
deferred tax liabilities amounting to Rs. 3,470.07 Lakhs in the current period financial results at
the estimated effective tax rate.
The company highlighted this aspect of deferred tax adjustment and the impact of the reduction in MAT in
the future in its conference call in Nov. 2019, page 8:
So, from 34.9% to 25 point some percent. So that difference gets reversed. So, that is why a jump
in profits. But MAT we now continued to pay at 15% plus 12% surcharge, not at the old rate of
18.5. So, that is the cash flow advantage of around 4%.
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Operating Efficiency Analysis of Filatex India Ltd:
a) Net fixed asset turnover (NFAT) of Filatex India Ltd:

When an investor analyses the net fixed asset turnover (NFAT) of Filatex India Ltd in the past years
(FY2010-19), then she notices that the NFAT of the company has declined from 4.86 in FY2011 to 3.07 in
FY2019.
An investor would notice that the NFAT is calculated as Sales / Net Fixed Assets.
If an investor looks at the denominator, then she notices that one of the key reasons for the reduction in the
NFAT is the continuous capital expenditure done by the company in order to increase its manufacturing
capacity over the last 10 years. The capital expenditure has led to an increase in net fixed assets from ₹95
cr in FY2010 to ₹928 cr in FY2019.
In addition, if the investor looks at the numerator (sales), then she notices that the sales of the company
depend on the volume of yarn produced and the product price, which is dependent on the crude oil price.
An investor notices that over the last 10 years, the crude oil price has declined from about $80 per barrel to
now $30 per barrel.
Therefore, even if the company kept on utilizing its fixed assets (plant and machinery) with the same
efficiency i.e. producing the same kg. of product per machine from the newly added capacities, even then
the decline in the crude oil prices would ensure that the sale turnover of the company would be
comparatively lesser than the situation if the crude oil prices had stayed at FY2010 levels.
This decline in the product prices linked to crude oil prices seems to be the key reason for the decline in the
NFAT of the company.
An investor would appreciate the magnitude of this issue when she reads the transcript of the conference
call of the company in February 2020, page 6:
It depends on the price of the raw material like now also this quarter we have done 30% more
volume than last year quarter, but the top line is 2% to 3% lower than of last year. The price of
the raw material plays a lot of role in the topline,…
The management of the company intimated the shareholders that in Q3-FY2020, the company sold more
than 30% higher volume of products when compared to the previous year; however, due to the decline in
product prices (linked to crude oil prices), it reported a 2-3% decline in sales in Q3-FY2020 when compared
to the previous year.
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Therefore, an investor would appreciate that even if the company keeps on using its assets with the same
efficiency of production, a decline in the crude oil prices can result in a reduction in sales turnover and in
turn a decline in NFAT.
b) Inventory turnover ratio of Filatex India Ltd:

Filatex India Ltd had been witnessing an improvement from 12.4 in FY2011 to 15.7 in FY2019.
This improvement reflects efficient inventory management by the company.
An investor gets to understand some of the steps taken by the company for efficient inventory management
in the FY2019 annual report, page 25-26:
The two basic raw materials viz. PTA & MEG are purchased from both domestic and foreign
suppliers. This year the company decreased its imports and purchased a majority from
domestic players. This allowed the company to maintain less stock as lead time decreased.
Therefore, holding levels were lower as compared to previous year and Inventory Turnover ratio
improved from 32 days to 23 days.
An investor notices that in FY2019, Filatex India Ltd focused on purchasing its raw material from domestic
suppliers instead of importing it from overseas. As a result, it had to keep less inventory with itself as it
could buy additional raw material from domestic suppliers at a short notice (lower lead time). This has
improved the inventory utilization efficiency and hence improved the inventory turnover ratio.
c) Analysis of receivables days of Filatex India Ltd:

While analysing the receivables days of the company, an investor notices that the receivables days of Filatex
India Ltd show two contrasting trends. During FY2011-2016, the receivables days of Filatex India Ltd
increased from 18 days in FY2011 to 52 days in FY2016. Thereafter, the receivables days declined and in
the FY2019, Filatex India Ltd reported receivables days of 17 days.
An investor would appreciate from the above discussion on the business of Filatex India Ltd that the
company operates in a very tough and competitive environment where the customers of the company have
many domestic and international options to buy products. As a result, if Filatex India Ltd wished to sell
more products from its expanded capacity, then it would have to give generous terms like cheaper prices as
well as higher credit period to its customers. It seems that the increase in receivables days of the company
from FY2011 to FY2016 is an attempt by the company to sell products from is expanded manufacturing
capacity.
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The credit rating agency, CARE has highlighted this working capital intensive aspect of the business
operations of Filatex India Ltd in its report for the company in July 2018, page 2:
FIL has working capital intensive nature of business operations. The key raw material Purified
Terephthalic Acid (PTA) and Mono-Ethylene Glycol (MEG) are sourced against LC or very low
credit period while the sales is made through dealers at a credit period upto 60 days thus
necessitating high working capital requirement.
However, the recent improvement in the receivables days of the company indicates that in recent years, the
management has taken some active steps to improve its receivables days.
In FY2015, FY2016, and FY2017, the company recognized losses on the receivables that were outstanding
for long and where it acknowledged that there is little hope of recovering the same.
Additionally, in FY2019, the company decided to decrease the credit terms to the customers when it realized
that the demand for its products in the market is reviving.
The company decided to decrease the credit period to its customers due to slightly higher demand
for its products in the market. This led to an improvement of Debtor Turnover ratio from 35 days
to 18 days.
Nevertheless, if seen from a complete period over the last 10 years (FY2010-2019), an investor notices that
the receivables days’ position of Filatex India Ltd has remained nearly stable at 17-18 days. Receivables
days of the company deteriorated during the decade but it managed to bring it under control by the end of
the decade.
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Looking at the inventory turnover ratio as well as at receivables days of Filatex India Ltd, an investor would
notice that the company has been able to keep its working capital position under control and not let it
deteriorate over the last 10 years (FY2010-2019). As a result, it has not witnessed a lot of money being
stuck in the working capital.
Over FY2010-19, Filatex India Ltd Limited reported a total cumulative net profit after tax (cPAT) of ₹265
cr. During the same period, it reported cumulative cash flow from operations (cCFO) of ₹642 cr. An investor
notices that the company has very high cCFO when compared to the cPAT over the last 10 years (FY2010-
2019).
Learnings from the article on CFO will indicate to an investor that the cCFO of Filatex India Ltd is
 Interest expense of ₹339 cr (a non-operating expense) over FY2010-2019, which is deducted while
 Depreciation expense of ₹221 cr (a non-cash expense) over FY2010, which is deducted while
Therefore, an investor would appreciate that during FY2010-2019, Filatex India Ltd has kept its working
operations.
The Margin of Safety in the Business of Filatex India Ltd:

target growth.
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While analysing the SSGR of Filatex India Ltd, an investor would notice that the company has consistently
had a low SSGR (negative to 4%) over the years. One of the key reasons for a low SSGR for the company
has been its low profitability. The net profit margin (NPM) of the company has been consistently low at
0%-3% over the last 10 years. The NPM even turned negative in FY2014 when Filatex India Ltd reported
a net loss of ₹8 cr.
depends on the net profit margin (NPM) of a company.
Where,

Therefore, an investor would notice that Filatex India Ltd has continuously had a low SSGR (negative to
4%) over the last 10 years (FY2010-2019). However, an investor would appreciate that the company has
been growing at a rate of 25%-30% over the years.
the rate of 25%-30% from its business profits. As a result, investors appreciate that Filatex India Ltd would
have to raise money from additional sources like debt or equity to meet its investment requirements.
While analysing the past financial performance of Filatex India Ltd, an investor notices that the company
has to rely on both additional debt as well as equity funding to meet the requirement of funds to grow at
25-30% over the last 10 years.
 From Debt: The total debt of the company increased from ₹35 cr in FY2010 to ₹605 cr in
FY2019 indicating a net inflow of ₹570 cr (= 605 – 35) from debt.
o The total debt includes the unsecured loans provided by the promoters to the
company.
 From Equity: In addition, the company raised ₹102.05 cr from equity issuances on the
following occasions in the last 10 years:
o FY2011-12: the company raised a total ₹30.3 cr from the promoter group by way
of allotting shares against warrants and in additional action, by issuing additional
equity shares to the promoter group.
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The Company has received an amount of Rs.3,029.30 lacs towards issuance of fresh Equity and
conversion of Warrants and the same has been utilized towards part financing of acquisition of
land, construction of building, procurement of plant & machinery for the project of Polyester Poly-
Condensation cum POY.
 FY2014: the company raised a total of ₹12.95 cr by way of allotting 8,000,000 warrants to the
promoter group and converting a part of these warrants into equity shares (face value of ₹10/- each)
during the year.
The Company had received Rs. 500/- lacs as application money being 25% of the issue price
from 80,00,000 warrant holders and has further received Rs. 795/- Lacs towards balance amount
being 75% of the issue price from the holders of 42,40,000 warrants for which the warrant holders
exercised the option to convert them into equity shares.
 FY2015: The company received the balance ₹7.05 cr from the promoter group upon exercise of
remaining warrants issued in FY2014. The total value of the 8,000,000 warrants issued at ₹25/- per
share, was ₹20 cr. Out of this, the company had received ₹12.95 cr in FY2014. The remaining ₹7.05
cr was received in FY2015.
The Company, during the financial year 2013-14, had converted 42,40,000 warrants into
equivalent number of equity share and balance 37,60,000 warrants were converted during the
year under review.
 FY2016-17: During FY2016, the company allotted 11,500,000 warrants to the promoters’ group at
an exercise price of ₹45 per share. In FY2017, the warrants were converted into equity shares (face
value of ₹10/- each) and in total, the company received ₹51.75 cr from the warrants allotment and
their conversion.
During the year the company has allotted 11,500,000 Convertible Warrants on preferential basis
to the promoters/others to be converted at the option of warrant holders in one or more tranches,
within 18 months from the date of allotment (i.e. March 16, 2016) of warrants into equivalent
number of fully paid equity shares of the company of the face value of Rs. 10/- per share at
an exercise price of Rs. 45/- per share (including premium of Rs. 35/- per share).

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During the year, the Company on 30th July, 2016 has allotted 1,15,00,000 Equity Shares on
preferential basis to the Promoter Group and others upon conversion of 1,15,00,000 convertible
Warrants.
Therefore an investor would note that the company raised a total of ₹102.05 cr from issuing additional
shares over the last 10 years (102.05 = 30.3 + 12.95 + 7.05 + 51.75). When added with the increase in total
debt of about ₹570 cr over the last 10 years, an investor notices that during FY2010-2019, Filatex India Ltd
had to infuse additional capital of ₹672.05 cr (= 102.05 + 570) from equity and debt to meet the funds
needed for its growth of 25%-30% over last 10 years.
An investor would appreciate that Filatex India Ltd had to raise additional funds from equity and debt
because the inherent business model of the company allows it to grow only at a rate of 3-4% from its
business profits (Self-sustainable growth rate, SSGR), whereas the company grew its sales at a higher rate
of 25%-30%.
Therefore, it does not come as a surprise to the investor that the company has to rely on additional money
from debt and equity to meet its growth requirements.
Moreover, the company has taken permission from its shareholders in its annual general meeting in 2019,
to raise additional ₹250 cr by way of issuing new shares. FY2019 annual report, page 44:
The Board of Directors, accordingly, at their meeting held on 2nd August 2019 has recommended
to the shareholders to give their consent…..to raise funds through issuance of Equity Shares and
/ or Global Depository Receipts (“GDRs”).…..upto an amount of Rs. 250 crores (Rupees Two
Hundred Fifty Crores) in Indian Rupees and / or an equivalent amount in any foreign currency….
Therefore, an investor would appreciate that the company is attempting to grow at a speed faster than what
its internal business profit generation can afford. As a result, it has to rely on continuous additional cash
infusion by way of debt and equity dilution.
b) Free Cash Flow (FCF) Analysis of Filatex India Ltd:

While looking at the cash flow performance of Filatex India Ltd, an investor notices that during FY2010-
19, the company had a cumulative cash flow from operations of ₹642 cr. During this period it did a capital
expenditure (capex) of ₹1,111 cr. As a result, an investor would note that over FY2010-2019, Filatex India
Ltd had a negative free cash flow (FCF) of ₹469 cr. ( = 642 – 1,111).
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debt that it had for FY2010-2019. Please note that the amount of interest capitalized by Filatex India Ltd is
already reflected in the amount of capital expenditure.
As a result, the company had a total cash shortfall of ₹808 cr (= 469 + 339).
The company met this shortfall from the following sources:
 Additional debt: ₹570 cr as discussed above.

 Additional equity: ₹102.05 cr as discussed above.
 Non-operating income of ₹79 cr over FY2010-2019.
Therefore, an investor would notice that the growth achieved by the company during the last 10 years
(FY2010-2019) surpassed the ability of the internal cash generation ability of the company from its cash
flow from operations. As a result, the company had to rely on additional debt and equity to meet its funds’
requirements.
any company.
Additional aspects of Filatex India Ltd

On analysing Filatex India Ltd and reading its publicly available past annual reports and reading other
public documents an investor comes across certain other aspects of the company, which are important for
any investor to know while making an investment decision.
1) Management Succession of Filatex India Ltd:

Filatex India Ltd was founded by Late Sh. Ram Avatar Bhageria and currently, his three sons Madhu
Sudhan Bhageria, Purrshottam Bhaggeria & Madhav Bhageria are leading the company.
Mr. Ram Avatar Bhageria established Filatex India Ltd in 1990 and he was associated with the company
until his death in 2017, the leadership of the family extended with his sons continuing with the management
of the company.
The three brothers Madhu Sudhan Bhageria, Purrshottam Bhaggeria & Madhav Bhageria are now 60 years,
58 years, and 56 years of age respectively.
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While reading the transcript of the conference call held by the company in February 2020, an investor
notices that the next generation of the Bhageria family has joined the company and is playing an active part
in the day-to-day management of the company.
In the conference call, on page 10, Ms. Stuti Bhageria mentions that she and her brother have joined the
company and leading various initiatives.
Stuti Bhageria: So I think I mean both for me and for my brother one of the things which we plan
to do is to make the company a lot more technically savvy because obviously before we joined, the
company’s employee average age is more towards the 40-50 year.
Such transition of leadership indicates that the company has put in place a management succession plan in
which the new generation of the promoter family is being groomed in business while the senior members
of the promoter family are still playing an active part in the day-to-day activities.
2) Shareholding of Filatex India Ltd with friends & relatives who are not
classified as promoters by legal definition:
While analysing the issuance of warrants by Filatex India Ltd, an investor notices that in FY2017 (on July
30, 2016), the company allotted 11,500,000 shares to “Promoter Group and others” on the conversion of
warrants.
During the year, the Company on 30th July, 2016 has allotted 1,15,00,000 Equity Shares on
preferential basis to the Promoter Group and others upon conversion of 1,15,00,000 convertible
Warrants. The paid up share capital of the Company increased to Rs. 43.50 crores from Rs. 32.00
crores.
Therefore, an investor notices that out of the total 11,500,000 shares, a part has been allotted to the
promoters and the remaining has been allotted to “Others” who are not classified as promoters.
While analysing the change in the promoters’ shareholding over FY2017, an investor notices that as per the
annual report, the number of shares held by promoters increased by 5,200,000 from 20,025,495 to
25,225,495 during FY2017. The company reported that the percentage shareholding of the promoters in
FY2017 declined by 4.59% from 62.58% to 57.99.
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An investor would appreciate that the percentage shareholding of the promoters declined in FY2017 despite
getting 5,200,000 shares from warrants conversion because the “Other” non-promoter shareholders
received the remaining 6,300,000 shares (=11,500,000 – 5,200,000).
To understand the entities that received these 6,300,000 shares, an investor needs to understand the change
in the non-promoter shareholding of the company from June 30, 2016, to Sept 30, 2016. This is because, as
per the above discussion, the company had allotted these shares on July 30, 2016.
When an investor compares the details of non-promoter/public shareholders in the shareholding details filed
by Filatex India Ltd for June 30, 2016 (Source: BSE) and Sept 30, 2016 (Source BSE), then she notices
the following changes:
 Nishit Fincap (P) Ltd: increase of 1,500,000 shares

 ANM Fincap Private Limited: increase of 1,400,000 shares
 Satsai Finlease Private Limited: increase of 2,000,000 shares
 Savita Holdings Private Limited: increase of 1,407,757 shares
Large public shareholders of Filatex India Ltd at June 30, 2016:
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Large public shareholders of Filatex India Ltd at Sept 30, 2016:
An investor would notice that among themselves, Nishit Fincap (P) Ltd, ANM Fincap Private Limited,
Satsai Finlease Private Limited, and Savita Holdings Private Limited had an increase of 6,307,757 shares
(= 1,500,000 + 1,400,000 + 2,000,000 + 1,407,757).
An investor can assume that it is highly probable that these four entities would have received the majority/all
of the remaining 6,300,000 shares allotted by Filatex India Ltd on July 30, 2016, to “Other” non-promoter
shareholders.
While looking for details of these “other” non-promoter entities, an investor notices that as per the corporate
database Zaubacorp, on May 18, 2020, the directors of all these four entities are the same two persons:
 Vimal Kumar Bhageria and

 Ankit Bhageria
Directors of Nishit Fincap (P) Ltd on May 18, 2020 (Source: Zaubacorp)
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Directors of ANM Fincap Private Limited on May 18, 2020 (Source: Zaubacorp)
Directors of Satsai Finlease Private Limited on May 18, 2020 (Source: Zaubacorp)
Directors of Savita Holdings Private Limited on May 18, 2020 (Source: Zaubacorp)
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Looking at the above information, it seems that on July 30, 2016, Filatex India Ltd allotted 5,200,000 shares
to the promoter group and the remaining 6,300,000 shares to the entities controlled by Mr. Vimal Kumar
Bhageria and Mr. Ankit Bhageria.
Apart from the common surname “Bhageria” of Vimal and Ankit with the promoters of Filatex India Ltd,
and investor notices that the fact that the entities controlled by them were granted warrants on preferential
basis along with the promoter group. It might also indicate that Mr. Vimal Kumar Bhageria and Mr. Ankit
Bhageria share a special relationship with the promoters of Filatex India Ltd.
While analysing the previous instances of equity allocation on preferential basis, an investor notices that in
FY2011, when Filatex India Ltd sought permission to issue additional 2,858,603 shares to raise funds via
equity dilution, then Nishit Fincap (P) Ltd, and ANM Fincap Private Limited were in the list of entities who
got the shares on a preferential basis. The company allotted shares to these entities in FY2012.
An investor notices that in the above table, out of the total 2,858,603 shares to be allotted to the “non-
promoter” category, 900,000 shares were allotted to Nishit Fincap (P) Ltd (500,000), and ANM Fincap
Private Limited (400,000).
In addition, from the above table, if an investor analyses the details of the entity, RMP Holdings Pvt. Ltd
mentioned at S. No. 1 in the table that is allotted 900,000 shares, then she notices that the directors of RMP
Holdings Pvt. Ltd are also Mr. Vimal Kumar Bhageria and Mr. Ankit Bhageria.
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Directors of RMP Holdings Pvt. Ltd on May 18, 2020 (Source: Zaubacorp)
Therefore, an investor notices that in FY2012, when the company allotted 2,858,603 shares on preferential
basis, then out of these shares a total of 1,800,000 (= 500,000 + 400,000 + 900,000) shares representing
about 63% of total share issuance were allotted to the entities controlled by Mr. Vimal Kumar Bhageria and
Mr. Ankit Bhageria.
It might be one such case where Mr. Vimal Kumar Bhageria and Mr. Ankit Bhageria are close friends or
relatives of the promoters of Filatex India Ltd, who are willing to put in money in the company when it
needs equity. However, they do not fall under the definition of promoter group as per the current law.
An investor may do a further due-diligence of this situation. This is because, if Mr. Vimal Kumar Bhageria
and Mr. Ankit Bhageria are relatives/close family friends of the promoters and are willing to vote as per
the views of the promoters, then the effective promoter control on the company at March 31, 2017, would
be the sum of promoter shareholding declared in the annual report (57.99%) and the stake owned by the
four entities controlled by Mr. Vimal Kumar Bhageria and Mr. Ankit Bhageria (17.61% = 5.54 + 4.23 +
4.60 + 3.24):
 Nishit Fincap (P) Ltd: 5.54%

 ANM Fincap Private Limited: 4.23%
 Satsai Finlease Private Limited: 4.60%
 Savita Holdings Private Limited: 3.24%
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If an investor adds up the shareholding of promoters as per the FY2017 annual report (57.99%) and the
shareholding of the entities controlled by Mr. Vimal Kumar Bhageria and Mr. Ankit Bhageria (17.61%),
then she arrives at a total of 75.6% (= 57.99 + 17.61).
An investor may contact the company directly to seek clarifications about the relationship of Mr. Vimal
Kumar Bhageria and Mr. Ankit Bhageria with the promoters of Filatex India Ltd.
As mentioned above, if Mr. Vimal Kumar Bhageria and Mr. Ankit Bhageria are relatives/close-family
friends of the promoters and are willing to vote as per the views of the promoters, then the effective
promoter control on the company may be higher than the reported promoters’ shareholding of Filatex India
Ltd.
3) Debt is shown as inflow under cash flow from operations by Filatex India Ltd:
While analysing the FY2012 annual report, an investor notices that the company has included an increase
in the current maturity of long-term borrowing (CMLTB) as an inflow under cash flow from operations
(CFO).
An investor can ascertain it via the following steps.
In the cash flow statement for FY2012, an investor notices that the company has disclosed ₹20.64 cr as an
inflow on account of “Increase / (decrease) in trade & other payable / provisions” in the CFO under
“Movements in working capital”.
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From the above information, an investor notices that the company has included ₹20.64 cr as an inflow on
account of “Increase / (decrease) in trade & other payable / provisions” in the CFO.
While looking at the balance sheet of the company for FY2012, an investor notices that the only item that
can lead to an inflow of ₹20.64 cr is “other current liabilities”. In FY2012, the other current liabilities of
Filatex India Ltd increased by ₹27.92 cr from ₹23.66 cr in FY2011 to ₹51.58 cr in FY2012 (51.58 – 23.66
= 27.92).
In the above balance sheet, an investor would notice that apart from the other current liabilities, there is no
other section that indicates an increase by ₹20 cr or more. The common parameter of trade payable had an
outflow of ₹8.58 cr as the trade payables had decreased from ₹19.46 cr in FY2011 to ₹10.88 cr in FY2011
(19.46 – 10.88 = 8.58).
Therefore, an investor can assume that the inflow of ₹20.64 cr shown in the CFO calculations under
“Increase / (decrease) in trade & other payable / provisions” is related to other current liabilities. If an
investor mergers the impact of “Other current liabilities” and “trade payables”, then she arrives at a net
impact of the increase/inflow of ₹19.34 cr (= 27.92 – 8.58), which approximates to the inflow of ₹20.64 cr
shown in the CFO.
While ascertaining the component of other current liabilities that has led to the inflow/increase of ₹20.64
cr in FY2012, an investor should analyse the detailed note to the financial statements.
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FY2012 annual report, pages 39-40:
While analysing the other current liabilities section, an investor notices that out of the total increase in other
current liabilities of ₹29.72 cr, the major component is the increase in current maturity of long term
borrowing (CMLTB) of ₹18.72 cr, from ₹11.75 cr in FY2011 to ₹30.47 cr in FY2012 (30.47 – 11.75 =
18.72). The rest of the parameters of other current liabilities lead to an increase of ₹9.38 cr from ₹11.72 cr
in FY2011 to ₹21.10 cr in FY2012.
Therefore, an investor would appreciate that in the ₹20.64 cr of inflow shown by Filatex India Ltd in the
CFO calculations under “Increase / (decrease) in trade & other payable / provisions” has a full contribution
from the CMLTB, which is nothing but debt component.
Therefore, an investor would appreciate that in FY2012, Filatex India Ltd included the debt inflow as an
inflow under cash flow from operations, which had the impact of showing a higher CFO than it actually is.
An investor can crosscheck this finding by ascertaining the cash flow from financing activities of Filatex
India Ltd for FY2012.
In the summary balance sheet for FY2012, an investor notices that the long term borrowings (LTB) have
increased from ₹28.39 cr in FY2011 to ₹186.32 cr in FY2012 representing an increase of ₹157.93 (= 186.32
– 28.39). Similarly, the short-term borrowings (STB) show an increase of ₹2.66 cr from ₹40.41 cr in
FY2011 to ₹43.07 cr in FY2012.
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An investor would appreciate that the data of LTB and STB shown in the summary balance sheet excludes
the current maturity of long term borrowing (CMLTB). This is because, in the summary balance sheet, the
CMLTB is shown under other current liabilities.
When an investor analyses the cash flow from financing activities of Filatex India Ltd, then she notices that
the data of inflow from the borrowings of the company in FY2012 corresponds only to the inflow/increase
calculated by the investor above using only the LTB and STB data from the summary balance sheet without
factoring in the CMLTB.
From the above cash flow from financing activities (CFF) table, an investor notices that the CFF table
shows a net inflow from LTB of ₹157.93 cr, which exactly matches the increase in LTB calculated above
from the summary balance sheet data.
 Proceeds from LTB: ₹163.87 cr

 Repayment of LTB & STB: ₹5.94 cr
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 163.87 – 5.94 = 157.93
Similarly, the inflow from STB in the CFF is ₹2.66 cr, which matches with the increase in STB calculated
above from the summary balance sheet data.
As an investor would appreciate that the LTB and STB data in the summary excludes the current maturity
of long term borrowing (CMLTB), which is shown under other current liabilities.
Therefore, if an investor takes a comprehensive view from all the calculations done by us in the above
discussion, then she would appreciate that the data in the CFF only corresponds to the LTB and STB as per
the summary balance sheet data. Therefore, the CFF data misses the impact of the current maturity of LTB,
which is an increase/inflow of ₹18.72 cr included in the other current liabilities.
At the same time, the calculations of the CFO include the impact of CMLTB through other current
liabilities.
Therefore, the net impact of these accounting assumptions is that the inflow/increase due to CMLTB of
₹18.72 cr is shifted from cash flow from financing activities (CFF) to cash flow from operating activities
(CFO).
This effectively inflates/increases the CFO by ₹18.72 cr and deflates/decreases the CFF by ₹18.72 cr.
4) Use of accounting assumptions to report higher profits/lower losses by Filatex

India Ltd:
While analysing the past annual reports of Filatex India Ltd, an investor notices that at multiple occasions,
the auditor of the company has highlighted that the accounting assumptions used by the company have led
to higher profits (or lower losses) than the situation if the company had used the normally prevalent
assumptions.
Please note that by using the accounting assumptions highlighted by the auditor, Filatex India Ltd may not
have done anything against the law. However, the auditor would have highlighted the instances where if
the company would have used the commonly prevalent accounting assumptions, then its reported profits
would have been lower or its reported losses would have been higher.
In FY2014, Filatex India Ltd reported a net loss of ₹8 cr. However, when an investor reads the auditor’s
report in the FY2014 annual report, page 30, then she notices that the company had reported its profit higher
by ₹18.9 cr by using certain accounting assumptions, which the auditor highlighted in its report in the
annual report.
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…the company has added Rs.1996.66 lacs for the year ended March 31, 2014 on account of foreign
exchange difference to the cost of qualifying assets and charged depreciation of Rs 106.98 lacs for
the year ended March 31,2014, consequently loss for the year would have been higher by Rs
1889.68 lacs,…
The auditor mentioned that if the company would not have followed this practice, then its loss would have
been higher by ₹18.9 cr. i.e. the reported loss of the company in FY2014 would have been ₹26.9 cr instead
of the reported loss of ₹8 cr (26.9 = 8 + 18.9).
In FY2013, the year when the net profit of the company had fallen sharply from ₹14 cr in FY2012 to ₹2 cr
in FY2013, the auditor of the company highlighted that the company has used certain accounting
assumptions. As per the auditor, if the company had not used these assumptions, then its profit for the year
would have been lower by ₹8.08 cr.
…..the company has added Rs.852.02 lacs for the year ended March 31, 2013 on account of foreign
exchange difference to the cost of qualifying assets and charged depreciation of Rs 43.47 lacs for
the year ended March 31,2013, consequently profit for the year would have been lower by Rs
808.55 lacs,…
Therefore, as per the auditor, if the company did not follow the accounting assumptions that it did, then its
profit would have been lower by ₹8.08 cr. It means that instead of the profit of ₹2 cr reported by the
company in FY2013, it would have reported a net loss of ₹6.08 cr (= 2 – 8.08) in FY2013.
The observation by the auditor in the FY2013 annual report of Filatex India Ltd was picked up by National
Stock Exchange (NSE). As a result, NSE sent a letter to Filatex India Ltd on Dec 26, 2014, to restate its
financials by incorporating the observations highlighted by the auditor in the annual report.
The company has received letter dated 26th December, 2014 from National Stock Exchange
(NSE) advising the company to restate its Financial Statements for the financial year 2012-13
subsequent to the auditors qualification…….
Subsequently, the Qualified Audit Review Committee (QARC) of Securities & Exchange Board of India
(SEBI) had a hearing of the matter. After the hearing, QARC asked Filatex India Ltd to restate its financials
as per the auditor’s observations.
Filatex India Ltd then appealed against the QARC/SEBI order in the Securities Appellate Tribunal (SAT).
SAT upheld the appeal of Filatex India Ltd and quashed the order of SEBI.
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Subsequent to the auditors’ qualification relating to treatment of foreign exchange difference

during FY 2012-13 onwards, SEBI/QARC vide its letter dated November 05, 2015 advised the
company to give effect to Auditors’ said Qualification for the Financial Years beginning from FY
2012-13. The company filed an appeal before the Securities Appellate Tribunal (SAT) at Mumbai,
which vide its order dated 29th March, 2016 has quashed the orders of SEBI and hence the
company is no more required to take any action on the said qualification.
Therefore, an investor may note that the company may not have violated any law by using its accounting
assumptions. However, an investor may make her own adjustments while doing the financial analysis of
the company.
5) Hedging of foreign exchange fluctuation rate risk by Filatex India Ltd:

While reading about Filatex India Ltd, an investor notices that at any point of time, the company is exposed
to foreign exchange rate fluctuation risk due to the foreign currency loans taken by it on which it needs to
pay interest and principal repayments, and due to its export sales for which it needs to collect sales
receivables.
The credit rating agency, CARE, highlighted this risk in its report for the company in July 2017, page 1:
The strengths, however, continue to be constrained by exposure to volatility in raw material prices
and foreign currency fluctuation risk.
Another credit rating agency, Brickwork, highlighted the foreign exchange fluctuation risk for Filatex India
Ltd in its report in March 2020, page 3-4:
FIL is also exposed to foreign exchange fluctuation risk on account of part of its term debt in
foreign currency and external commercial borrowings.
Filatex India Ltd has also acknowledged foreign exchange fluctuation risk as a concern in its past annual
reports.
RISKS AND CONCERNS: The Company perceives the following main business risks:
a) Unfavorable Exchange rate fluctuation
While reading the annual reports of the company, an investor notices that the company has consistently
mentioned the use of derivatives/forward contracts as a risk-mitigating (hedging) method to protect it from
adverse foreign exchange fluctuations.
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The Company uses derivative financial instruments including forward exchange contracts to
hedge its risk associated with foreign currency fluctuations.
The company has continued with its policy of using derivatives/forward contracts for hedging its foreign
currency risk.
The Group uses derivative financial instruments, such as forward currency contracts to mitigate
its foreign currency risks and interest rate risks.
Therefore, from the above information, an investor believes that Filatex India Ltd recognizes its foreign
exchange fluctuation risk and has taken steps to mitigate/hedge it using derivatives/forward contracts.
However, an investor notices that despite the above-mentioned hedging policy, Filatex India Ltd has had
significant losses due to foreign exchange fluctuations.
In FY2014, when the company reported a net loss of ₹8 cr, one of the major factors contributing to the poor
performance of the company was the loss of ₹16.33 cr due to foreign exchange fluctuations.
Credit rating report by CARE for Filatex India Ltd, July 2017, page 2:
The company was impacted for exchange fluctuation losses of Rs.16.33 crore during FY14 which
had impacted its profitability.
In the next year, FY2015, the company reported another loss of ₹4.06 cr due to foreign exchange
fluctuations and then again a loss of ₹3.23 cr in FY2016 due to foreign exchange fluctuations.
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These losses on the foreign exchange movement resulted despite the company paying hefty amounts on the
forward contracts. The company paid a premium of ₹12.38 cr in FY2015 and ₹12.8 cr in FY2016.
Even in the latest quarterly results (Q3-FY2020), the company intimated in its conference call in February
2020, page 3, that it had a loss of ₹7 cr due to foreign exchange fluctuations.
The other factor lowering the net profitability is adversity of foreign exchange rate which eroded
the profitability by around Rs. 7 crores.
Looking at the above information, an investor would appreciate that the hedging policy of Filatex India Ltd
to mitigate the foreign exchange rate fluctuations leaves room for improvement.
If the company is able to improve its hedging policy to make it more effective, then it can save its precious
capital in an environment where the company had to rely on continuous debt and equity funding to meet its
growth requirements.
6) Did Filatex India Ltd had a restructuring of its debt with IDBI Ltd in
FY2008?
While reading the FY2012 annual report, an investor gets to know that Filatex India Ltd had issued 841,397
shares to IDBI Ltd on Sept 18, 2007, as a part of a negotiated settlement.
Aggregate number of equity shares issued for consideration other than cash during the period of
five years immediately preceding the reporting date:
8,41,397 equity shares of Rs. 10/- each issued to IDBI Limited as per terms of negotiated
settlement with them at a premium of Rs. 13.77 per share on 18th September, 2007.
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A reading of the FY2010 annual report (page 11), indicates to an investor that in the past IDBI Bank Ltd
also had a nominee director, Shri Inderpal S. Kalra on the board of Filatex India Ltd.
The Remuneration Committee constituted earlier needs to be reconstituted in view of the

withdrawal of nomination of Shri Inderpal S. Kalra by IDBI Bank Limited.
There are no details available in the publicly available annual reports of Filatex India Ltd from FY2010 to
FY2019 about the negotiated settlement between the company and IDBI in FY2008.
However, an investor would appreciate that in most prevalent business parlance, a settlement between a
financial institution and a company (a borrower) that leads to allotment of equity shares for a consideration
“other than cash” and the nomination of a director by the financial institution on the board of the borrower
company, is a result of the debt-restructuring package.
Therefore, it might be a case of Filatex India Ltd taking a loan from IDBI and then defaulting on it. As a
result, IDBI might have restructured the debt of Filatex India Ltd and in turn, it might have accepted 841,397
shares of the company for a consideration “other than cash” and nominated a director on the board of Filatex
India Ltd.
An investor may contact the company directly to understand more details about the negotiated settlement
between Filatex India Ltd and IDBI.
If this settlement between the company and IDBI turns out to be a debt restructuring, then it should not
come as a surprise to the investor.
This is because, from the discussion above in the sections of self-sustainable growth rate (SSGR) and free
cash flow (FCF), an investor would appreciate that the business of the company does not generate cash
sufficient to the growth aspirations of the promoter family. As a result, the company has to raise funds from
debt from lenders, unsecured loans from promoters’ family, friends, and relatives as well as equity dilution
by way of warrants and preferential allotment of equity shares.
An investor would appreciate that if a business keeps on growing at a pace that is not sustainable by its
business profits/operating cash flow, then one day, the debt burden is expected to become excessive that
might result in the company being unable to repay its debt. Such a situation may lead to the companies
defaulting to their lenders resulting in negotiated settlements/debt restructuring.
While reading the past annual reports of Filatex India Ltd, an investor comes across incidences that indicate
the probability of liquidity stress faced by the company like using short-term funds for long-term purposes.
In FY2013 annual report, page 33:
According to the information and explanation given to us and on the basis of overall examination
of the Balance Sheet of the company, we report that the funds amounting to Rs.2811.92 lacs raised
on short term have been used for long term investment.
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An investor would note that on many occasions such usage of short-term funds for long-term investments
by companies has led to liquidity crunch, which in many instances has led to their bankruptcy.
Therefore, going ahead, an investor should keep a close watch on the capital expenditure of Filatex India
Ltd along with the sources that the company uses to fund the capital expenditure. If the company relies on
additional debt or equity dilution, then an investor may take a decision accordingly.
7) Project Execution by Filatex India Ltd:

While analysing the past performance of the company, an investor notices that Filatex India Ltd has been
able to execute its capacity expansion projects at frequent intervals.
The company had started its production with a single manufacturing facility at Noida for 500 tonnes per
annum (TPA). Over the years, the company kept on adding manufacturing capacities at Dadra and Dahej.
In recent years, the company has been on an aggressive capacity expansion path.
 FY2018: total manufacturing capacity of 237,000 TPA (FY2018 annual report, page 2).
 FY2019: total manufacturing capacity of 328,300 TPA (FY2019 annual report, page 4).
 FY2020: total manufacturing capacity of 383,000 TPA (Investors’ presentation, February 2020,
page 3).
Therefore, an investor would notice that Filatex India Ltd has been able to execute its capacity expansion
projects at regular intervals.
As per the credit rating agency, CARE, Filatex India Ltd completed its expansion project for bright polymer
in Dahej within the estimated cost and time. July 2018 report, page 2:
The company has successfully completed the bright polymer project in Dahej within the estimated
cost and time.
As per the credit rating report by Brickwork for Filatex India Ltd in March 2020, the company completed
the expansion of the polymerization capacity at Dahej ahead of schedule in FY2020. (Page 2):
The expansion scheme to increase its polymerization capacity of 150 MT/day through
debottlenecking and adding machines for producing 170 MT/day of POY at Dahej unit
has commenced its commercial operations w.e.f. 19.09.2019 as against the COD approved as
April 2020.
From the above information, an investor may appreciate that the management of the company is able to
efficiently execute the capacity expansion projects.
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The Margin of Safety in the market price of Filatex India Ltd:

Currently (May 18, 2020), Filatex India Ltd is available at a price to earnings (PE) ratio of about 4.70 based
on the last four quarters standalone earnings from Jan 2019 to Dec 2019. The PE ratio of 4.70 provides
some margin of safety in the purchase price as described by Benjamin Graham in his book The
Analysis Summary
Overall, Filatex India Ltd seems a company that has been growing its business at a fast pace of 25-30%
year on year for the last 10 years (FY2010-2019). However, the business performance of the company over
this period has been cyclical. The company’s performance has alternated between good periods and poor
performance periods. At times, the company witnessed increasing sales along with improving profit
margins. However, at times, like in FY2014, the company reported net losses.
The fluctuating performance of the company is primarily due to the high dependence of the raw material
and product prices on crude oil prices, which follows a cyclical pattern as well as due to the intense
competition in the industry from domestic manufacturers as well as cheaper imports. The synthetic yarn
manufacturers face low negotiating power with both their suppliers as well as with their customers. As a
result, such companies are deeply affected by economic cycles. Therefore, they show cyclical behavior in
their sales turnover growth as well as profit margins.
Filatex India Ltd has been growing at a pace, which is much faster than what its inherent business profits
can sustain. As a result, the company has to rely on a continuous infusion of additional funds by way of
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debt from financial institutions, loans from promoters, equity infusion etc. to supplement its cash flow from
operations so that it can meet its funds’ requirements for capital expenditure.
The reliance on debt seems to have reached excessive levels in the past when it seems that the company
had to enter into a restructuring package with IDBI where it had to issue equity to IDBI as well as it had to
accept a nominee director of IDBI on its board.
While analysing the equity infusion in the company, an investor notices that apart from the promoters, two
persons sharing the surname of the promoters, Mr. Vimal Kumar Bhageria and Mr. Ankit Bhageria have
played a significant part by subscribing to the preferential issue of warrants as well as equity shares via the
entities controlled by them in the past.
Currently, these companies controlled by Mr. Vimal Kumar Bhageria and Mr. Ankit Bhageria are classified
as non-promoter entities. However, an investor may take clarifications from the company whether they are
close friends/relatives of the promoter who are not classified as promoters as per the law. If yes, then the
investor would appreciate that the promoters control more stake in the company than their disclosed
shareholding in various corporate announcements.
While analysing the financials of Filatex India Ltd, an investor gets to know certain instances where the
company has followed different accounting assumptions than the commonly found ones for different other
companies. The company had classified financing inflow as an inflow under cash flow from operations in
FY2012. On other occasions, the company showed a higher profit and a lower loss by following accounting
assumptions, which the auditor did not agree to.
The auditor of Filatex India Ltd highlighted these accounting assumptions leading to higher profits in the
annual report. As a result, SEBI asked the company to restate its financials. The company got a reprieve
from the SAT when it quashed the SEBI order.
The hedging policy of the company to mitigate foreign exchange rate fluctuation risk has a scope for
improvement. The company had been paying a significant amount as premium for forward exchange
contracts. However, still, the company had faced significant losses because of foreign exchange rate
fluctuations.
Going ahead, an investor should keep a close watch on the profitability margins of the company as well as
the capital expenditure. The investor should focus on the sources of funds used by the company to meet its
capital expenditure. The investor should read the annual report of the company thoroughly to understand if
the company has followed the accounting assumptions properly or the auditor has highlighted any
accounting practice that might have the impact of increasing profits/cash flow from operations.
These are our views on Filatex India Ltd. However, investors should do their own analysis before making
P.S:
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How to Use Screener.in "Export to Excel" Tool

Screener.in is one of the best resources available to equity investors in Indian markets. It is a website, which
provides the investors with the key information about companies listed on Indian stock exchanges (BSE
and NSE).
We have been using screener.in as an integral part of our stock analysis and investments since last many
years and have been continuously impressed by the tools offered by it that cut down the hard work of an
investor. Some of these features, which are very useful for equity investors are:
 Filtering of stocks based on multiple objective financial parameters. Investors can share these
parameters in the form of “Saved Screens”.
 Company information page, which collates the critical information about a company on one single
page including balance sheet, profit & loss, cash flow, quarterly results, corporate announcements,
links to annual reports, credit rating reports, past stock price movement etc. A scroll down on the
company page provides an investor most of the critical information, which is needed to make a
provisional opinion about any company.
 Email alerts to investors for new stocks meeting their “Saved Screens”
 Email alerts to investors on updates about companies in their watchlist.
All these features are good and have proved very beneficial to investors. However, there is one additional
feature of screener.in, which we have found unique to screener.in. This feature is “Export to Excel”.
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“Export to Excel” feature of screener.in lets an investor download an Excel file containing the financial
data of a company on the investor’s computer. The investor can use this excel file with the data to do a
further in-depth analysis of the company.
The most important part of the “Export to Excel” feature is that it allows the investor to customize the Excel
file as per her preferences. The investor can create her own ratios in the excel file. She can arrange the data
as per her preferred layout in the excel file and when she uploads her customized excel file in her account
at screener.in, then whenever she downloads the “Export to Excel” sheet for any company, she gets the data
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.
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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:
 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.
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Balance Sheet:
This is the section, where investors get most of the queries as screener.in groups the annual report items
differently while presenting the data to investors. Let’s understand the data in the balance sheet section of
the “Data Sheet” of “Export to Excel” file taking the example of FY2016 data of Omkar Speciality
Chemicals Limited:
Balance Sheet Screener.in "Data Sheet"
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Balance Sheet (Annual Report FY2016)
 Equity Share Capital: It represents the paid up share capital taken directly from the balance sheet
(₹20.58 cr.).
 Reserves: It represents the Reserves & Surplus taken directly from the balance sheet (₹160.87 cr.).
 Borrowings: It represents the entire debt outstanding for the company on 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.
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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 netblock 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 on 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” on the
balance sheet.
o In the case of Omkar Speciality Chemicals Limited, there are no current investments,
therefore, the “Investments” (₹13.91 cr.) in the “Data Sheet” of “Export to Excel” file is
equal to the Non-Current Investments in the balance sheet (₹13.91 cr.)
 Other Assets: It represents (₹242.25 cr.) the sum of rest of the assets:
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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"
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Profit & Loss Statement Annual Report FY2016
 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”.
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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.
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
to 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.
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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.
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
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 Other Income: ₹8.89 cr. taken directly from the P&L statement. For some companies, it might be
shown as non-operating income in the P&L statement.
 Depreciation: ₹4.28 cr. taken directly from the P&L statement.
 Interest: ₹16.52 cr. taken directly from the P&L statement.
 Profit before tax: ₹33.37cr. taken directly from the P&L statement.
 Tax: It represents the sum total of all the tax-related entries in the P&L statement including all
credits, debits and previous year adjustments. E.g. for Omkar Speciality Chemical Limited, the tax
for FY2016 (₹11.16 cr.) represents the sum of:
o Previous year adjustments of ₹0.50 cr.
o Current Tax of ₹6.99 cr.
o Deferred Tax of ₹5.81 cr.
o MAT Credit Entitlement of negative ₹2.14 cr. This effectively adds to the profit of the
company for the period.
o Total of all these entries: 0.50 + 6.99 + 5.81 – 2.14 = ₹11.16 cr. is equal to the “Tax” in
“Data Sheet” in screener.in. Investors might find a small difference for various companies,
which might be due to rounding off.
 Net profit: ₹22.21 cr. taken directly from the P&L statement.
 Dividend Amount: It represents the entire dividend paid/declared/proposed for the financial
year without considering the dividend distribution tax. We may get to know about this figure
from the Reserves & Surplus section of the annual report. E.g. for Omkar Speciality Chemical
Limited, the dividend amount (₹3.09 cr.) in the “Data Sheet” of screener.in has been taken from
the reserves & surplus section of the annual report on page 88:
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Cash Flow:
 The data for three key constituents of the cash flow statement i.e. Cash from Operating Activity
(CFO), Cash from Investing Activity (CFI) and Cash from Financing Activity (CFF) are taken
directly from the cash flow statement in the annual report
 Net Cash Flow is the sum of CFO, CFI and CFF for the financial year.
 Sometimes, investors may find small differences in the data, which might be due to rounding off.
Cash Flow Statement Screener.in "Data Sheet"
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Cash Flow Statement Annual Report FY2016
Quarterly Results:
Quarterly Results Screener.in "Data Sheet"
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Quarterly Results March 2017, Company Filings to Stock Exchange
 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
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 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.
 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
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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.
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.
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Given below is the screenshot of the “Profit & Loss” sheet of the default “Export to Excel” template
provided by screener.in
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”
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(For large resolution image of this sheet: Click Here)
Further Reading: Stock Analysis Excel Template (Screener.in): Premium Service
The above-customized template helps us to do a very quick assessment of any company on the checklist of
parameters that we use for stock analysis. This is because this customized template provides us with our
preferred ratios etc. in one snapshot like a dashboard, which makes decision making very quick and easy.
Readers would be aware that we use a checklist of parameters, which contains factors from Financial
Analysis, Business Analysis, Valuation Analysis, Management Analysis and Margin of Safety calculations.
The customized template screenshot shared above allows us to analyse the following parameters out of the
checklist in a single view:
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Financial Analysis:
 Sales growth
 Profitability
 Tax payout
 Interest coverage
 Debt to Equity ratio
 Cash flow
 Cumulative PAT vs. CFO
Valuation Analysis:
 P/E ratio
 P/B ratio
 Dividend Yield (DY)
Business Analysis:
 Conversion of sales growth into profits

 Conversion of profits into cash
 Creation of value for shareholders from the profits retained: Increase in Mcap in last 10 yrs. >
Retained profits in last 10 yrs.
Management Analysis:
 Consistent increase in dividend payments
Margin of Safety:
 Self-Sustainable Growth Rate (SSGR): SSGR > Achieved Sales Growth Rate
 Free Cash Flow (FCF): FCF/CFO >> 0
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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.
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:
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 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:
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”
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 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:
 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.
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 The presence of the file name summary indicates that the correct file has been selected by the
investor for the upload.
 Now, click on the button “Upload” on the webpage.
 Clicking on the “Upload” button will upload the excel file customized by the investor in her
account on the screener.in website and take her to the homepage/dashboard of the screener.in
website.
From now on whenever the investor downloads the data of any company from screener.in by clicking the
button “Export to Excel”, then she would get the data in the format prepared by her in her customized Excel
file containing all her custom ratios and formulas, formatting and the layout as selected by her.
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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”
 Upon clicking the button “Reset Customization”, the web page will ask “Are you sure you want to
reset your Excel customizations?”
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 If the customer is sure about deleting her customized excel file, then she should click on the button
“Confirm Excel Reset” on the web page.
 Clicking the “Confirm Excel Reset” button will delete the customized Excel file from the
investor’s account and reset the excel file to the default Excel template file of screener described
above.
 From now onwards, whenever the investor downloads the data of any company from screener.in
by clicking the button “Export to Excel”, then she would get the data in the default Excel format of
screener.in.
There is no limit on the number of times an investor can upload her customized excel file or change it or
delete it by resetting the customization. Therefore, an investor may do as many changes and iterations as
she wants until she gets her preferred excel sheet prepared, which would help her a lot in her stock analysis.
With this, we have come to an end of this article, which focussed on the key feature of the screener.in
“Export to Excel”, the reconciliation of the financial data in the “Data Sheet” with the annual report,
quarterly results file etc. and the steps to customize the Excel file and upload the customized Excel file in
the investor’s account on screener.in.
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Premium Services
At www.drvijaymalik.com, we provide following premium services to our readers:
1. Follow Dr Vijay Malik's Portfolio with Latest Buy/Sell Transaction Updates

2. "Peaceful Investing" Workshop-on-Demand
3. Stock Analysis Excel Template (compatible with Screener.in)
4. E-book: “Peaceful Investing – A Simple Guide to Hassle-free Stock Investing”
5. E-books: “Company Analyses” : Live Examples using Peaceful Investing Approach
6. "Peaceful Investing" Workshops
The premium services may be availed by readers at the following dedicated section of our website:
http://premium.drvijaymalik.com/
Brief details of each of the premium services are provided below:
1) Follow Dr Vijay Malik's Portfolio with Latest Buy/Sell Transaction

Updates
This premium service has been commenced as an information source for the investors who wish to know
about the stocks that we are buying currently or the stocks that we have sold recently. This is purely an
information source and services like advising individual clients on portfolio allocation etc. are not a part of
this service.
Our stock portfolio has its origins in August 2011, when we invested our initial savings from the first job
after MBA (2009-11). We have been able to invest in some of the fundamentally good stocks at the initial
stage of their growth phase, which were later on discovered by research/brokerage houses and witnessed
investments from institutional investors.
The recognition of stocks by key market players have helped to generate significant gains for the portfolio
as the underlying stocks got re-rated and increased in value. A few such examples are Ambika Cotton Mills
Limited, Vinati Organics Limited, and Mayur Uniquoters Limited etc.
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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.
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:
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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:
% 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
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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.
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:
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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 stock etc. 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:
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.
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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 of 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 a simple manner, which are easily understood by investors from a non-finance background.
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 the 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.
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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 of the
company, its historical performance and its current state of affairs.
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Screenshot of large resolution output of the Analysis Sheet: Click Here
2) Description sheet:
This sheet contains details about description and interpretation of about each of the more than 40
parameters. It is advised that investors should read this sheet in detail before starting with the analysis of
companies by using this template.
Screenshot of the Description Sheet: Click Here
3) Instructions sheet:
This sheet contains details about the steps by step approach to getting started with this sheet on the
screener.in website, change in settings for Microsoft Excel to resolve common issues and other instructions
for the buyers.
Screenshot of the Instructions Sheet: Click Here

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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
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”
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- Jiten (via email)
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
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8. Guidelines for creation a portfolio of stocks with ideal number of stocks

9. Guidelines for monitoring stocks in the portfolio
and many more.
All these articles are separate write-ups, which are available to all the readers at www.drvijaymalik.com.
A lot of readers have asked whether there exists an e-book compiling all these articles, which could be
downloaded by the readers so that the articles could be read in a sequence even when the reader is offline.
The key stock investing articles were collected as a book and offered as a key study material guide to each
of the participants of all the “Peaceful Investing” workshops being conducted by us.
The feedback from the workshop participants about the book has been very good. The readers have found
the book very useful to learn stock analysis.
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Many other readers of www.drvijaymalik.com have asked for this book to be made available even for the
members who have not be able to attend the “Peaceful Investing” workshop.
As a result, the book “Peaceful Investing – A Simple Guide to Hassle-free Stock Investing” has been made
available as a premium download to the investors. Investors who wish to get the book may download it from
the following link:
For details of all the articles contained in the book, please read this article.
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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.
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:
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6) “Peaceful Investing” Workshops

“Peaceful Stock Investing” workshops are full day workshops (9 AM to 6 PM) held on selected Sundays.
The workshops are focused on stock selection and analysis skills, which would make us much more
confident about our stock decisions. It ensures that our faith would not shake with day to day market price
fluctuations and we would be able to reap true benefits of stock markets to fulfil our dream of financial
independence.
The workshops focus on the fundamental stock analysis of stocks with a detailed analysis of various sources
of information available to investors like annual reports, quarterly results, credit rating reports and online
financial resources.
You may learn more about the workshops, pre-register/express interest for a workshop in your city by
providing your details on the following page:
Pre-Register & Express Interest for a Stock Investing Workshop in Your City
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Disclaimer & Disclosures

Registration Status with SEBI:
I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013
Details of Financial Interest in the Subject Company:
Currently, on the date of publishing of this book, August 6, 2020, I do not own stocks of any of the
companies discussed in the detailed analysis 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 the practical
application of our stock analysis approach “Peaceful Investing” and NOT as a research report on the
companies mentioned here.
The articles and the book should be used by the readers to improve their understanding of our stock analysis
approach “Peaceful Investing” and NOT as an investment recommendation to buy or sell stocks of these
companies.
All the best for your investing journey!
Regards,
Dr Vijay Malik
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DrVijayMalik Company Analyses Vol 7

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Copyright © Dr Vijay Malik. All Rights Reserved.

Company Analyses (Vol. 7)

Live Examples of Company Analysis using “Peaceful Investing” Approach

Copyright © Dr Vijay Malik. All Rights Reserved.

Copyright © Dr Vijay Malik.

All rights reserved.

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

Printed in the Republic of India

Copyright © Dr Vijay Malik. All Rights Reserved.

Important: About the book

All the best for your investing journey!

Regd. with SEBI as an Investment Adviser

Copyright © Dr Vijay Malik. All Rights Reserved.

Important: About the Book ........................................................................................................................... 4

Copyright © Dr Vijay Malik. All Rights Reserved.

1) Rain Industries Ltd

Company website: Click Here

Financial data on Screener: Click Here

Copyright © Dr Vijay Malik. All Rights Reserved.

Financial and Business Analysis of Rain Industries Ltd:

Copyright © Dr Vijay Malik. All Rights Reserved.

Copyright © Dr Vijay Malik. All Rights Reserved.

A.1) Calcined Pet Coke (CPC):

A.2) Coal Tar Pitch (CTP):

Copyright © Dr Vijay Malik. All Rights Reserved.

B) Advanced materials segment:

The construction industry is one of the key consumers of Naphthalene.

2014 annual report, page 58:

Resin sales are dependent on the automotive industry among others.

2019 annual report, page 37:

Copyright © Dr Vijay Malik. All Rights Reserved.

2011 annual report, page 25:

Copyright © Dr Vijay Malik. All Rights Reserved.

RAIN’s consolidated revenue increased in 2013 to INR115bn (2012: INR53.4bn) primarily

2014 annual report, page 56:

2016 annual report, page

2017 annual report, page 101:

Copyright © Dr Vijay Malik. All Rights Reserved.

2018 annual report, page 10:

We began 2018 by continuing to ride a wave of momentum that began in mid-2017, as

2018 annual report, page 10:

2018 annual report, page 123:

2019 annual report, page 151:

Copyright © Dr Vijay Malik. All Rights Reserved.

May 2020 conference call transcript, page 7:

Commodity Price Fluctuations: RCCVL’s profitability remains exposed to fluctuations in

Copyright © Dr Vijay Malik. All Rights Reserved.

Copyright © Dr Vijay Malik. All Rights Reserved.

2009 annual report, page 8:

2014 annual report, page 9:

In 2015, the company closed its manufacturing facility in China.

2014 annual report, page 8:

2018 annual report, page 12:

2019 annual report, page 82:

Copyright © Dr Vijay Malik. All Rights Reserved.

2019 annual report, page 34:

Copyright © Dr Vijay Malik. All Rights Reserved.

2019 annual report, page 85:

Oversupply will continue to impact naphthalene business.

2019 annual report, page 82:

Copyright © Dr Vijay Malik. All Rights Reserved.

2019 annual report, page 84:

Copyright © Dr Vijay Malik. All Rights Reserved.