DrVijayMalik Company Analyses Vol 5-1

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com
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Copyright © Dr Vijay Malik. All Rights Reserved.

www.drvijaymalik.com
Company Analyses (Vol. 5)
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) HEG Ltd ................................................................................................................................................... 6
2) Kokuyo Camlin Ltd ................................................................................................................................ 41
3) Quick Heal Technologies Ltd ................................................................................................................. 72
4) Navkar Corporation Ltd........................................................................................................................ 105
5) Sreeleathers Ltd. ................................................................................................................................... 133
6) Associated Alcohols And Breweries Ltd .............................................................................................. 173
7) Sharda Motor Industries Ltd ................................................................................................................. 208
8) Shri Jagdamba Polymers Ltd ................................................................................................................ 240
9) Gandhi Special Tubes Ltd .................................................................................................................... 264
10) Kanchi Karpooram Ltd ....................................................................................................................... 280
How To Use Screener.In "Export To Excel" Tool .................................................................................... 306
Premium Services ..................................................................................................................................... 331
Disclaimer & Disclosures ......................................................................................................................... 347
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1) HEG Ltd
HEG Ltd is one of the leading graphite electrode manufacturers in India. This case study of HEG Ltd
provides good insights into cyclical industries.
Company website: Click Here
Financial data on Screener: Click Here
While analyzing the past financial performance data of the company, an investor would notice that until
FY2009, HEG Ltd used to disclose only standalone financials. However, in FY2010, the company
established a subsidiary, HEG Graphite Products and Services Limited. Therefore, since FY2010, the
company is preparing both standalone as well as consolidated financials. The consolidated financials
presented by HEG Ltd reflect the impact of financial performance of its subsidiary as well as the associate
companies of LNJ Bhilwara group in which it has made significant investments.
We believe that while analysing any company, the investor should always look at the company as a whole
and focus on financials, which represent the business picture of the entire group. Therefore, while
analysing HEG Ltd, we have analysed standalone financials for FY2009 and consolidated financials from
FY2010 onwards until FY2018.
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Financial Analysis of HEG Ltd:

While analyzing the financials of HEG 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 ₹1,021 cr. in
FY2009 to ₹2,748 cr in FY2018. However, an investor would notice that the sale performance of the
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company over the last 10 years has been very fluctuating. HEG Ltd witnessed its sales increase from
₹1,021 cr. in FY2009 to ₹1,619 cr in FY2013. However, from FY2014 onwards, the company faced a
very difficult time and as a result, its sales started declining year on year. Sales of the company declined
to ₹859 cr in FY2017. In FY2018, the company witnessed a revival in its performance and could increase
its sales significantly to an all-time high of ₹2,748 cr.
Such a huge variation in the performance of the company was not limited to only sales/revenue. HEG Ltd
witnessed significant changes in profitability as well. The operating profit margin (OPM) of the company
declined consistently from 36% in FY2009 to 9% in FY2017. The resultant decline in the net profit
margin was even higher. The net profit margin (NPM) of the company reduced from 17% in FY2010 to
net losses in FY2017.
However, all of a sudden the business performance of the company in terms of overall sales, as well as
profit margins, improved in FY2018. HEG Ltd reported an OPM of 63% and an NPM of 40% in FY2018.
An investor would notice that the business performance of HEG Ltd has witnessed cyclical nature during
the last 10 years (FY2009-18). In the initial years, the company was growing with reasonable profit
margins but then it faced tough times in subsequent years, which resulted in declining sales and profit
margins (leading to losses as well). Thereafter, the performance of the company improved in recent times
in terms of both sales and profitability.
Such fluctuating performance is a highlight of companies operating in any cyclical industry, where
initially many players go for expansion of capacities in the hope of high demand in future. However, over
time, the assumptions of increased demand prove incorrect due to internal/external factors. As a result, the
anticipated demand increase does not materialize and instead the existing demand of the products
declines. Therefore, the industry faces a situation of apparent oversupply and the sale volume as well as
the sales price decline. The players find that their business operations have become less
profitable/unviable. Therefore, many players go out of business/shut down their capacities, which results
in a decline in the manufacturing capacity in the industry and shifts the balance of demand-supply
equilibrium in favour of the suppliers/manufacturers.
As a result, when the demand for the product revives in the business cycle, the remaining players find that
they have gained the negotiating power due to limited supply. Therefore, the remaining players witness
increased orders at higher prices leading to higher sales revenue with improving profit margins. This is
the typical business cycle, which has played out in many cyclical industries over the years and it seems
that the industry of HEG Ltd, the graphite electrode industry has gone through a similar cycle in the last
10 years (FY2009-18).
Moreover, an investor would notice that the graphite electrode industry is highly dependent on the steel
industry, which is its most significant customer. The steel industry is highly cyclical in nature, which is
impacted by intermittent periods of rising and falling end product as well as raw material (iron ore etc.)
prices. When an investor analyses the dependence of graphite electrodes industry on the steel industry,
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which is cyclical in nature, then she can interpret that the graphite electrodes industry is also expected to
show cyclical patterns in its performance over the years.
An analysis of expansion strategies of HEG Ltd by reading its annual reports indicates that in and prior to
2008 economic crisis, the company announced its expansion plans of 20,000 TPA in August 2008 (from
60,000 TPA to 80,000 TPA). This was the period when the global steel industry was on an uptrend in the
business cycle. This period witnessed some larger mergers & acquisitions in the steel sector like Arcelor-
Mittal (2006) and Tata-Corus (2007).
As per an article by Televisory Research, the period of 2003-2007 was the one where many graphite
electrode manufacturers around the world increased their capacity:
An increase in the steel production through EAF route led to an increase in the demand of graphite
electrodes. This increase augured well for industry participants leading to capacity additions and high
utilisation levels (although capacity utilisation exhibited a declining trend due to the addition of new
capacities at a faster pace than demand growth, capacity utilisation remained high for the industry). A
healthy demand also led to improved realisations and profitability for graphite electrode manufacturers
during the period.
An investor would appreciate that such positive sentiment regarding the steel industry led to many
graphite electrode manufacturers including HEG Ltd increase their capacity. However, soon thereafter,
the 2008 financial crisis struck and the business cycle in the steel sector took a downturn. As a result,
HEG Ltd had to scale down its expansion plans from 20,000 TPA to 6,000 TPA.
FY2009 annual report, page 13:
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The company initially scaled down its expansion plans in FY2009 and deferred the addition of remaining
14,000 TPA manufacturing capacity. However, it did not wait for long and next year (FY2010)
announced that it would go ahead with the expansion plans for 14,000 TPA.
HEG Ltd continued with its expansion plans whereas the outside environment was becoming challenging.
The company acknowledged it in its FY2012 annual report when its capacity expansion was completed.

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One of the features of cyclical industries is that during good times many players increase manufacturing
capacity. These manufacturing capacities take some time to become operational and by the time these
capacities are completed, the business cycle takes a turn. Thereafter, the demand of the product declines
but the industry is ready with higher manufacturing capacity.
When an investor reads the annual report of the next year, FY2013, then she realizes that the above-
mentioned scenario played out in the graphite electrode industry as well.
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HEG Ltd acknowledges that the capacity additions by the graphite electrodes manufacturers along with
the dismal performance of the steel industry has created an oversupply situation in the industry.
Moreover, the company fears that the situation is going to worsen in future. This is because more graphite
electrode manufacturing capacity (130,000 TPA) is going to be completed in the coming year, which will
further reduce the prices of graphite electrodes.
In FY2014, the graphite electrode industry is faced with challenging times of high manufacturing capacity
and declining demand. As a result, the sales volume as well as the sales price decline.
The same aspect was highlighted by the credit rating agency, India Ratings in its April 2015 report of
HEG Ltd:
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In such a situation, it does not come as a surprise to the investor when she reads that a few graphite
electrode manufacturers shut down their manufacturing capacities.
The pain of the downturn in the business cycle of the graphite manufacturing industry extends further and
the prices decline to such a level that any production of graphite electrodes becomes a loss-making affair
for the manufacturers. In such times, closing down of the manufacturing capacity seems to be the best
alternative to many producers.
On the face of it, an investor may feel that such cyclical turn of events in the cyclical industries is
predictable. An investor would believe that the events are following a predictable pattern of player
announcing capacity expansions during good times. The capacities become operations in 2-3 years.
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However, by then, the industry cycle has taken the downturn. As a result, the industry faces a situation of
oversupply, which leads to lower sales volumes as well as lower sales price. Therefore, players report
losses and then shut down capacity.
Such turn of events may seem highly predictable. However, predicting the timing of such events is not
predictable. Even the promoters/managers who earn their livelihood by operating in these cyclical
industries day and night, many times get their predictions wrong.
In the case of HEG Ltd, an investor would appreciate that the timing of going ahead with the capacity
expansion of 14,000 TPA, which was completed in FY2012, may not be the best. On the similar lines, in
FY2014, the management of the company expected that the troubled times for the industry are over in
FY2014 and things should improve going ahead.
However, looking at the financial performance of the company in the coming years of FY2015, FY2016
and FY2017, an investor would notice that the worst was not behind the company in FY2014. The worst
was yet to come in future years.
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HEG Ltd reported losses in its graphite electrode business in FY2016 and FY2017 and it reported losses
on the consolidated level in FY2017.
The management acknowledged in FY2017 annual report that the last five years (FY2012-2017) have
been very tough for the graphite electrode industry.
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In light of the above analysis, an investor would appreciate that the graphite electrode industry like its
customer (steel industry) is a cyclical industry in which the event tend to alternate with good and bad
phases. In good phases, the companies go for capacity expansion, which later on leads to over capacity.
The oversupply, later on, leads to lower sales and prices resulting in losses for manufacturers, which then
shut their plants.
Thereafter, the oversupply situation corrects itself by way of closure of plants by the manufacturers and
the manufacturers find that the demand for their products is increasing. This increased demand is an
indication of the return of good times and the manufacturers see the sales volume and sales prices
increasing. This increase in demand for the products leads to the next phase of capacity additions by the
manufacturers and thereby start of a new business cycle.
When an investor analyses the current turn of events for graphite electrodes manufacturing industry, then
she notices that in the current good times, HEG Ltd has already announced new capacity addition, which
it plans to complete over next 2.5 years.
BSE announcement by HEG Ltd dated November 26, 2018:
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Such turn of events in the cyclical industries has been playing out in sequence year after year. However, it
is highly difficult for investors to predict the timing of these events. We notice that at times, even the
promoters/managers who have spent their lives working in these industries get their timings wrong.
However, these cyclical events keep on repeating year after year.
Every time, there are different events, which act as catalysts for the turn of cyclical events. In 2008, the
good times in the steel industry as well as the graphite electrode industry ended due to the housing credit
crisis in the US, which percolated to most of the developed world. Similarly, in 2018, the recovery of the
graphite electrode industry seems to be the result of the Chinese crackdown on polluting basic oxygen
furnace (BOF) steelmaking plants in the country, which has led to the increase of electric arc furnace
(EAF) steelmaking plants. However, investors should remember that in cyclical industries, the fortunes of
industry players keep on changing in business cycles. Every time, there are different triggers, which mark
the start or the end of different phases of business cycles. However, the above-mentioned business phases
keep on repeating one after another.
Therefore, an investor would appreciate that the recent good performance of all the graphite electrode
manufactures including HEG Ltd is an expected turn of events in the complete scheme of industry
business cycles. The alternating turnout of good and bad times has taken place multiple times in the
cyclical industries in the past and may take place multiple times in the future as well.
Therefore, while analysing any cyclical industry including graphite electrodes, an investor should analyse
the long-term financial performance to understand how the business performance plays out under
different phases of the cycle. Investors should not extrapolate performance over a short period of a few
years into the future. Investors should always keep in mind that in the cyclical industry, bad times follow
good times and vice versa.
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Operating Efficiency Analysis of HEG Ltd:
a) Net fixed asset turnover (NFAT) of HEG Ltd:
When an investor analyses the net fixed asset turnover (NFAT) of HEG Ltd, then she notices that the
NFAT of the company has witnessed a continuous decline over the years from 2.21 in FY2013 to 0.94 in
FY2017 before increasing to 3.19 in FY2018.
The decline in the NFAT coincides with the period when the graphite electrodes industry hit the downturn
soon after HEG Ltd completed its capacity expansion of 14,000 TPA in FY2012. The sales decline of
FY2013-17 witnessed the NFAT decline from 2.21 to 0.94. The cyclical recovery of the company in
FY2018 witnessed the sales as well as NFAT improve.
b) Inventory turnover ratio of HEG Ltd:
An investor would note that over the years, the inventory turnover ratios (ITR) of the HEG Ltd has been
ranging from 2.2 to 2.7, which is low considering other manufacturing industries. Low inventory turnover
of HEG Ltd is a result of the long manufacturing process of graphite electrodes.
Moreover, as per the website of HEG Ltd, it holds a lot of inventory in its warehouses around the world
so that it may deliver the electrodes to its customers “just in time”.
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An investor would appreciate the decision of the company to hold inventory in its own warehouses near
customer locations increases the needs for investment in inventory by the company and in turn decreases
the inventory turnover of the company.
In the recent year (FY2018), the inventory turnover has increased to 7.1. However, this improvement is
not a result of any technological advance, which might have decreased the manufacturing time drastically.
This improvement in the ITR is a result of sharp increase in the sales price of graphite electrodes, which
has resulted in significant increase in the numerator in the ITR calculation formula used by us
(Sales/average inventory for the year).
c) Analysis of receivables days of HEG Ltd:
An investor would notice that over the years, receivables days of HEG Ltd has been ranging from 120
days to 150 days indicating that the customers of the company demand significant credit period. An
investor would notice that the customers of graphite electrode manufacturers are steel manufacturers,
which usually are very large corporates. These large customers usually have a lot of negotiating power
and therefore, demand high credit period from the suppliers. Therefore, in the graphite electrode industry
including HEG Ltd, the receivables days tend to be high.
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While looking at the overdue details of the receivables of HEG Ltd in the FY2018 annual report, an
investor notices that almost 25% of the receivables of the company are overdue with the customers failing
to pay them at agreed upon dates. Some amount of receivables are due for more than 2 years from the
time these were to be paid by the customers to HEG.
The working capital intensive nature of the graphite electrode manufacturing business is also highlighted
by the credit rating agency, India Ratings in its report for HEG Ltd in Dec 2018:
The recent improvement in the receivables days in FY2018 to 89 days seems to be a result of the newly
found negotiating power in the graphite electrode manufacturers, which is due to the recent increase in the
demand for their products.
Moreover, when an investor analyses the receivables days along with inventory turnover, then she notices
that despite low ITR and long receivables days, HEG Ltd has been able to keep its working capital
requirements stable and under control. The working capital position of the company has not deteriorated
over the years. It means that HEG Ltd has been able to convert its profits into the cash flow from
operations without the money being stuck in 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 FY2009-18.
An investor would notice that over FY2009-18, HEG Ltd Limited has reported a total cumulative net
profit after tax (cPAT) of ₹1,748 cr. whereas during the same period, it reported cumulative cash flow
from operations (cCFO) of ₹2,593 cr indicating that it has converted its profits into cash. The cCFO of
HEG Ltd is significantly higher than its cPAT primarily because of high depreciation and interest
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expenses, which are deducted while calculating PAT, while these are added back to PAT when
calculating CFO.
It is advised that investors should read the article on CFO calculation mentioned below, which would help
them understand the situations in which companies tend to have the CFO lower than their PAT and the
situations when the companies tend to have CFO higher than their PAT.
Margin of Safety in the Business of HEG Ltd:
a) Self-Sustainable Growth Rate (SSGR):
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.
An investor would notice that HEG Ltd has witnessed an SSGR ranging from -1% to 10% over the years.
The SSGR has increased recently because of a sharp increase in the profit margins in recent years.
However, as discussed above, the recent sharp increase in profitability might not be sustainable as it is a
result of the cyclical uptrend in the business cycle of the graphite electrode manufacturing industry.
The sales growth achieved by the company over the years is 10-12%, which is higher than its SSGR.
Therefore, investors would expect that the company would have to raise debt from additional sources to
fund its growth.
However, in the SSGR article shared above, we have highlighted a situation (Case C), where companies
that have SSGR less than the current growth rate but still manage to reduce debt over the years. In such
cases, efficient working capital management ensures that the company has a significant amount of CFO,
which is not stuck in the working capital needs of the company. As a result, the cash is available from the
internal sources for the capital expenditure needed for growth and reduce debt.
An investor is able to observe this aspect of the company’s business when she analyses the cumulative
cash flow position including free cash flow for the company over the last 10 years (FY2009-18).
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b) Free Cash Flow Analysis of HEG Ltd:
While looking at the cash flow performance of HEG Ltd, an investor notices that during FY2009-18, the
company had a cumulative cash flow from operations of ₹2,593 cr. However, during this period it did a
capital expenditure (capex) of ₹740 cr. As a result, it had a free cash flow of ₹1,853 cr. (2,593 – 740).
While analysing the past annual reports of HEG Ltd, an investor would notice that the company has used
this FCF in various manners:
1. Dividend payments to the shareholders: The company has used the FCF to pay a dividend of
about ₹521 cr. (excluding dividend distribution tax) to the shareholders.
2. Reduction of debt: HEG Ltd used the FCF to reduce its debt by ₹585 cr over the years from
₹882 cr in FY2009 to ₹297 cr in FY2018.
3. Buyback of shares: HEG Ltd did two rounds of buyback of equity shares in the past 10 years
(FY2009-18).
1. The first buyback was done in FY2009 for ₹48.5 cr.
2. The next buyback of shares was done in FY2011-2012 for ₹67.5 cr.
4. Investment in group companies/associates: Over the years, HEG Ltd has made about ₹120 cr
of additional investments in associates/promoter group companies like Bhilwara Energy Ltd and
Bhilwara Infotechnology Ltd, which is currently visible as a part of the cash & investments of
₹250 cr available with the company.
Free cash flow (FCF) is one of the main pillars of assessing the margin of safety in the business model of
any company.
Additional aspects of HEG Ltd:

On analysing HEG Ltd, an investor comes across certain other aspects of the company:
1) Management Succession of HEG Ltd:
While analysing the annual reports of HEG Ltd, an investor notices that apart from the chairman of the
company, Mr. Ravi Jhunjhunwala (age 63 years), another member of Jhunjhunwala family, Mr. Riju
Jhunjhunwala (age 39 years) is present in the board of directors as a non-executive director. As per the
annual report of the company, Mr. Riju Jhunjhunwala is the managing director of RSWM Ltd and
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Bhilwara Energy Ltd and is a relative of Mr. Ravi Jhunjhunwala. However, the annual report of HEG Ltd
does not clearly specify the relationship between Ravi and Riju Jhunjhunwala.
When an investor analyses the notice to the 2016 AGM of RSWM Ltd (click here), page 7, then she
notices that Riju Jhunjhunwala is the son of Mr Ravi Jhunjhunwala.
It indicates that the company/LNJ group 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.
Presence of a well thought out management succession plan is essential in case of promoter run
businesses as it provides for smooth transition of leadership over the generations and provides continuity
in the business operations of any company.
2) Proposed capital expenditure for the upcoming manufacturing capacity expansion:
On November 26, 2018, HEG Ltd announced to the stock exchanges that it plans to execute an expansion
of its manufacturing capacity by 20,000 TPA. The company highlighted that the expansion would cost
about ₹1,200 cr and would be completed in 30 months i.e. in 2021.
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While analysing the past annual reports of HEG Ltd, an investor notices that in FY2012, the company has
completed its last capacity expansion of 14,000 TPA at a cost of ₹225 cr.
An investor would notice that if she assumes inflation of about 6% on the capital costs from the last
capacity expansion in FY2012 to the proposed completion of newly announced capacity expansion in
FY2021 (i.e. 9 years = 2021 – 2012), then the proposed expansion should cost about ₹543 cr. [calculation
= (225 * 20,000/14,000)*(1.06)^9 = 543]
Therefore, by a simple assessment, it seems that the estimated cost of ₹1,200 cr for the proposed capacity
expansion of 20,000 TPA to be completed in 2021 seems high when compared to the expansion projects
completed by HEG Ltd in the past.
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An investor may seek clarification from the company in this regard to understand the reasons for the
significant increase in the cost of capacity expansion over and above the normal expected inflationary
increases of about 6% per year.
3) Management of foreign exchange fluctuations by HEG Ltd:
While analysing past annual reports of the company, an investor notices that HEG Ltd has suffered large
losses to the tune of hundreds of crore rupees due to foreign exchange (forex) fluctuations over FY2008-
18.
FY2009 annual report, page 47: HEG Ltd classified forex losses in the administrative and other expenses:
From FY2012 onwards, HEG Ltd started classifying forex losses under “Exceptional Items”.
FY2013 annual report, page 102: Exceptional forex losses in FY2012 and FY2013:
FY2015 annual report, page 118: Exceptional forex losses in FY2014 and FY2015:
An investor would notice that the exceptional item of foreign exchange losses has started to appear
regularly over FY2012, FY2013, FY2014 and FY2015.
Overall, during FY2008-18, HEG Ltd reported losses of ₹327 cr due to foreign exchange fluctuations in
its profit and loss statements. The net impact on the profits after factoring in the forex gains of total ₹47 cr
during some years during FY2008-18 was a loss of ₹280 cr on account of foreign exchange fluctuations.
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An investor may note that the above analysis of the impact of net foreign exchange losses of ₹280 cr is
only considering the amounts disclosed in the profit and loss statement (P&L) of HEG Ltd over these
years.
In addition to the forex fluctuations disclosed in the (P&L), HEG Ltd has capitalized a significant amount
of foreign exchange fluctuations in the fixed assets by way of capitalization of pre-operative expenses in
the capital work in progress (CWIP) and other fixed assets. An investor would note that the amounts,
which are capitalized during any year, do not reflect in the profit & loss statement in the year.
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During FY2012-2018, HEG Ltd seems to have capitalized the impact of foreign exchange fluctuations of
about ₹192 cr in fixed assets as part of CWIP, building and plant & machinery.
Considering the above significant amount of losses incurred by HEG Ltd including the ₹327 cr disclosed
in the P&L during FY2008-18, an investor would expect that the company should improve its foreign
exchange management practices by adopting better hedging policies so that such large amount of forex
losses may be avoided. This, in turn, would lead to value addition to the equity shareholders of the
company.
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4) High barriers to entry did not help the graphite electrode manufacturers in tough times:
While analysing the graphite electrodes industry, an investor notices that multiple sources highlight it as
an industry with high barriers to entry.
The credit rating agency, India Ratings, in its report of HEG Ltd in April 2015, highlights the advantages
for existing players in the industry:
The management of HEG Ltd has discussed the factors leading to the high barriers to entry in detail in the
FY2018 annual report:
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The management of the company highlights the key factors like:
1. Closely guarded technology to produce graphite electrodes

2. High capital requirements to establish manufacturing plants
3. Difficulties in getting the raw material, needle coke and
4. Long time of 4-5 years to build and stabilize a graphite electrode manufacturing plant
have prevented a lot of new players to enter the manufacturing space of graphite electrodes.
An investor would notice that these claims of high barriers of entry to new players seem to give an
impression that the space of manufacturing graphite electrodes is a very coveted place, where only a few
selected players got access early on and now there is no entry for any new entrant. An investor would
expect that such a closely guarded club of graphite electrode manufacturers would face very limited
competition and in turn, would generate a significant amount of profits for their owners/shareholders in
all business situations. This is because in the business situations of monopoly and oligopolies where there
are only a few suppliers of a product, the existing players are able to charge their customers sufficiently
high prices to generate good profits in all the business environments as there is no fear of new
entrants/manufacturers entering the field and disturbing the equilibrium.
However, when an investor studies the graphite electrode manufacturing industry over the years, as has
been discussed above, then she notices that the only phases of supernormal profits for the graphite
electrode manufacturers have been the uptrends in the business cycle like FY2003-FY2007 and FY2018.
In the other phases of the business cycle i.e. from FY2008 to FY2017, the graphite electrode
manufacturing industry has witnessed:
 high competition,
 oversupply,
 declining demand,
 declining prices and
 business losses just like any other industry, which does not have such high barriers to entry.
Therefore, an investor should appreciate that even though it might be very difficult for any new player to:
 acquire the technology to produce graphite electrodes,

 arrange for huge capital to establish the manufacturing plant,
 get sufficient amount of needle coke to manufacture graphite electrodes and
 wait for many years to see a return on its investments
still, the dynamics of this industry are such that it has been prone to intense competition, over supply,
dumping by players below cost prices to hurt competition, periods of business losses just like any other
industry.
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An investor would notice that the high entry barriers to new entrants have not provided any sustained
supernormal profit characteristic to the graphite electrode manufacturers. An investor may notice the
following factors:
 The main end user of graphite electrodes is the steel manufacturing industry. In the phases of a
downturn in the steel manufacturing business, the demand, as well as prices of graphite
electrodes, fall sharply and then the manufacturers go bankrupt/close plants. This happens
frequently after every few years whenever the business cycle enters a downturn.
 Even though as claimed, no new entrant has entered the graphite electrode manufacturing space
in the last 40 years, the industry dynamics are such that the existing manufacturers over time have
created an oversupply. As a result, they have dumped their products in other markets below the
cost of production. Therefore, frequently, the govt. of different countries have to put anti-
dumping duties on imports. Consider the following examples:
2010-Dec-17, European Union puts an anti-dumping duty on import of graphite electrodes from India
(Global Trade Alert):
2015-Feb-16, India puts an anti-dumping duty on imports (Economic Times)
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2018-Aug-11, Russia extends anti-dumping duty on graphite electrodes imports from India (Steel Mint)
As a result, an investor would notice that despite high entry barriers to entry for new players, in the
graphite electrodes industry, the existing players themselves have created a sufficiently tough
environment that there is no guarantee of sustained good profits for the manufacturers. As discussed
above, the graphite electrode manufacturers have generated supernormal profits for limited periods, which
have coincided with the upturn in the business cycle like FY2003-FY2007 and FY2018.
The recent phase of high profits in the industry may also come to an end whenever the newly announced
capacity expansions get completed and the temporary shortage of the electrodes resolves. There are
already some signs indicating developments in this direction:
 India has removed anti-dumping duty on imports of graphite electrodes in Sept 2018 (HEG Ltd,
Feb 2019 results presentation, page 6):
 China is increasing the production of graphite electrodes and has in fact completed the capacity
increase of graphite electrodes before the new electric arc furnace (EAF) steel plants, which are
expected to use these new graphite electrodes could be completed. (HEG Ltd, Feb 2019
conference call, page 5-6). As a result, an investor would appreciate that there will a tendency of
China to export the surplus graphite electrode production until the EAF steel plants become
operational.
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 The management of HEG acknowledges that high profitability periods like FY2018 occur rarely
and it expects that the profit margins may moderate going ahead as manufacturing costs and the
raw material prices are increasing (FY2018 annual report, page 34):
The management informed the analysts in the Nov. 2018 conference call that in FY2019, the prices of
coal tar pitch, which is a significant portion of the raw material for graphite electrodes has risen to 2.5 to 3
times of the prices in FY2018.
Nov. 2018 Conference call, page 6-7:
Therefore, an investor would appreciate that the recent high-profit performance of the graphite electrode
industry is a phase in the business cycle, which may give way to moderate profits as the new
manufacturing capacities come up, imports increase, cost of manufacturing and raw material prices
increase. We believe that while analysing graphite electrode manufacturers, an investor should keep in
mind the impact of business cycles on their performance.
5) HEG Ltd: Claims of lowest cost producer do not reflect in business performance:
While reading the past annual reports of HEG Ltd., an investor notices that year after year, the company
has claimed itself as one of the lowest cost producers of graphite electrodes in the world.
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Investors expect that when an industry is faced with tough times, then the lowest cost producers in the
industry are able to perform better than their competitors do. Investors expect such manufacturers to keep
generating profits while their competitors make losses as the sales volumes and sales prices decline
because of their lowest costs of production.
However, when an investor observes the performance of HEG Ltd during the downturn phase of graphite
electrode industry FY2016 and FY2017 and compares HEG Ltd.’s performance with its Indian
competitor, Graphite India Ltd, then she expects that HEG Ltd would report profits and Graphite India
Ltd would have reported losses. This is because HEG Ltd is supposed to be one of the lowest cost
producers in the world. However, the performance of HEG Ltd and Graphite India Ltd during FY2016
and FY2017 indicates that during this industry downturn, Graphite India Ltd reported profits and it was
HEG Ltd, which reported losses in its graphite electrodes business.
HEG Ltd FY2017 annual report, page 115:
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Graphite India Ltd FY2017 annual report, page 157:
Looking at the above comparative performance of the two Indian graphite electrode manufacturers, an
investor notices that during the business downturn of the industry in FY2016 and FY2017, the claims of
HEG Ltd of being one of the lowest cost producers did not reflect in the comparative business
performance.
6) Investments by HEG Ltd in the promoter group companies/associate companies:
While analysing the past annual reports of HEG Ltd, an investor notices that the company has been
investing in the promoter group companies/associates on a regular interval. An investor would notice that
the company has invested money in the group companies even when it had debt outstanding on its books.
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Investing in the group companies when a company has debt outstanding may be interpreted as an
alternative use of funds where a company believes that helping group companies with investments is a
better option than increasing the value to the equity shareholders by repaying the debt of the company.
Investors may note that the enterprise value of any company accrues to lenders and equity shareholders.
Therefore, whenever a company reduces debt on its books, then the enterprise value accrues to the equity
shareholders.
Investors may make an opinion about whether investing money in the group companies is a preferable
option than repaying the debt of the company and increase value to the equity shareholders.
Moreover, while analysing the auditor’s report section of the FY2009 annual report of HEG Ltd, an
investor gets to know that the company provided a helping hand to the promoter group company/associate
by way of a short-term loan of ₹100 cr.
In addition, while analysing the contingent liabilities of HEG Ltd, an investor notices that the company
has given a guarantee to International Finance Corporation (IFC) for its investment in a group company
M/s AD Hydro Power Ltd.
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The investor notices that the guarantee is outstanding for more than 10 years. In FY2010, the amount of
financial guarantee was increased from ₹3.5 cr to ₹6 cr.
An investor would appreciate that a financial guarantee may indicate that in case IFC does not make
return on its investment (if invested in equity) or does not get its interest and principal repayments (if it
has given debt) from M/s AD Hydro Power Ltd, then IFC may ask HEG Ltd to pay it so that IFC can earn
the return on its money.
It is advised that an investor should keep in mind these transactions of HEG Ltd in the group/associate
companies while making her opinion about the company.
7) Error in the annual report of HEG Ltd:
There appears to be an error in the FY2013 annual report of HEG Ltd in the calculation of cash flow from
operating activities (CFO).
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While calculating net cash from operating activities by adjusting the tax payments done in the year, the
tax payments are deducted from the cash from operating activities.
In the FY2012, HEG Ltd has correctly deducted the tax payments of ₹4.82 cr from cash from operating
activities of ₹31.88 cr and arrived at the figure of ₹27.06 cr as net cash from operating activities.
However, in the calculations for FY2013, there is a mistake as HEG Ltd should have deducted tax
payments of ₹19.47 cr from the cash from operating activities of ₹134.70 cr and arrived at net cash from
operating activities of ₹115.23 cr (= 134.70 – 19.47). However, erroneously, for FY2013, the annual
report mentions the net cash from operating activities as ₹170.73 cr.
8) Graphite electrode manufacturing produces pollution:
While reading about HEG Ltd and graphite electrodes production, an investor would notice that the
production of graphite electrodes is a polluting process. An investor may find multiple instances of
information regarding its polluting nature.
 China in its crackdown on polluting industries closed around 300,000 TPA of graphite electrode
manufacturing capacity. FY2018 annual report, page 25:
 In India, recently the graphite electrode production plant of Graphite India Ltd in Whitefield,
Bengaluru was ordered to shut down due to its polluting nature (The New Indian Express).
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In light of the polluting nature of the graphite electrode production process, investors should be aware of
the risks, which any non-adherence to the environmental norms by the company or social activism can
bring for the company and in turn for its shareholders. An investor may remember that the copper
production plant of Vedanta Ltd/Sterlite in Thoothukudi, Tamil Nadu, is lying shut since about a year and
the company is losing about ₹5 cr per day because of the closed plant (The Times of India).
Margin of Safety in the market price of HEG Ltd:

Currently (March 9, 2019), HEG Ltd is available at a price to earnings (PE) ratio of about 2.78 based on
the past four quarters’ standalone earnings. However, an investor would remember that even the
management of the company has acknowledged that the current period of high profitability is a rare
instance. There is no certainty that the high-profit margins will continue in future. Therefore, we are not
able to provide any opinion about the valuation of the company based on the current share price and its
recent business performance. Investors may take their own decision about the valuations of the company.
Conclusion:
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Overall, HEG Ltd seems a company operating in a cyclical industry. As a result, HEG Ltd has witnessed
its business performance varying from very high profitability and losses in the past decade (FY2009-18).
The company witnessed the impacts of cyclical upturn and downturns along with its industry peers.
Graphite electrode industry started expanding capacity when the industry witnessed the previous upturn
phase of 2003-2007 when its customer industry of steel manufacturing was in a boom phase. However,
the business cycle turned with the onset of the global financial crisis of 2008.
Investors would notice that in cyclical industries, most of the manufacturing capacity announced during
good times is completed after the good times are over. Similarly, in the case of graphite electrode industry
and HEG Ltd, its capacity expansion was completed in 2012 when the industry downturn had started. As
a result, the graphite electrode industry found itself saddled with overcapacity. During 2012-2017 period,
the industry faced declining sales with lower prices due to oversupply. Many graphite electrode
manufacturing plants became unviable and as a result, these plants were shut down during this period.
During this period, HEG Ltd was not spared and it reported losses in its graphite electrode division in
FY2016 and FY2017.
The reduction of supply by way of shut down of manufacturing capacity corrected the oversupply
situation of graphite electrodes, which is a typical case with all cyclical industries. Therefore, when the
demand revived in the ensuing upturn, the remaining graphite electrode manufacturers found themselves
in a position of negotiating power. As a result, all the manufacturers including HEG Ltd earned very high
profits in FY2018. In a standard template of responses of cyclical industries in the business upturn, the
manufacturers of graphite electrodes (HEG Ltd.) have announced capacity expansion plans. It seems that
the business cycle has turned a full circle from the last upturn of 2003-2007 to the current upturn of 2018.
It is anticipated as like any other cyclical industry and the response of the graphite electrode industry in its
previous business cycle, the manufacturing capacity will increase and in future, the high profits will come
down. The trend is visible by way of fast completion of graphite electrode plants in China even before the
completion of steel manufacturing plants, which will use the graphite electrodes produced by them. As a
result, China has started exporting graphite electrodes. Govt. of India has removed the import duty on
graphite electrodes in Sept 2018. This increased supply along with an increase in the cost of raw material
is expected to bring down the profit margins in future.
Such turn of events in cyclical industries, seem predictable in terms of a sequence of events/phases one
after another. However, it is difficult to determine the timing of onset/completion of these phases with
precision. As a result, many times, even the promoters/managers who earn their livelihood by working in
these industries also get the timing of their decision wrong. Therefore, it is difficult to predict the exact
time when the current upturn in the graphite electrode business cycle will end and the downturn will
begin. However, these cyclical phases have worked one after another in the past and it is expected to
follow this sequence in future.
Apart from the cyclical nature of its business, HEG Ltd is affected by less than optimal management of
foreign exchange exposure. The company has reported more than ₹300 cr of forex losses in FY2008-18 in
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the P&L because of foreign exchange fluctuations. These losses do not include the amount of foreign
exchange losses, which are capitalized and not deducted from the P&L in the year of their occurrence.
As mentioned above, HEG Ltd has announced a capacity expansion plan for ₹1,200 cr. This capital
expenditure seems very high when compared to the inflation-adjusted cost of similar expansion
undertaken by the company in the past.
It is advised that investors may seek clarifications from the company related to the seemingly high cost of
capital expenditure plan, investments in the group companies/associates and guarantees given for third-
party investments (IFC) in the associate company.
Investors should be aware of the risks of investing in companies dealing with environmentally polluting
manufacturing processes. Graphite electrode manufacturing is one such process, which has seen the
authorities closing down plants in various countries like China (about 300,000 TPA shut in last 2-3 years)
as well as India (Bengaluru plant of Graphite India Ltd closed down). Such risk of non-compliance with
environmental norms as well as social activism pose a serious concern to investors and they should factor
it while making an opinion about such companies.
Going ahead, investors should monitor the profit margins of HEG Ltd along with the progress of the
capacity expansion project within cost and time limits. Investors should monitor the foreign exchange
management by the company along with investments in associate/group companies.
These are our views on HEG Ltd. However, investors should do their own analysis before taking any
investment related decision about the company.
P.S.
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2) Kokuyo Camlin Ltd
Kokuyo Camlin Ltd is a leading manufacturer of stationery & related products owning brands Camel and
Camlin. The company is now a subsidiary of Kokuyo Co. Ltd of Japan.
While analyzing the past financial performance data of the company, an investor would notice multiple
aspects:
 The name of the company used to be Camlin Ltd until FY2011. In October 2011, Japanese
company Kokuyo Co. Ltd bought a majority stake in Camlin Ltd. Therefore, from FY2012
onwards, the name of the company was changed to Kokuyo Camlin Ltd.
 While reading the past annual reports of the company (the company website has annual reports
from FY2004 onwards), an investor realizes that the company has always had subsidiaries under
it; however, in many years, the company decided to publish only standalone financials as the
financial performance of its subsidiaries was very insignificant. For example in FY2009, the
company chose to publish only consolidated financial performance despite having two subsidiary
companies, Camlin North America INC, USA and Camlin International Limited:
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Moreover, when an investor studies the financial position of the subsidiary companies in the FY2009
annual report, page 66, then she realizes that the subsidiary companies have very insignificant business
activity with very low assets, liabilities, sales turnover and net profit/loss.
 From FY2010 onwards, Camlin Ltd formed another subsidiary Camlin Alphakids Ltd for its new
business activity of pre-school education. Therefore, the company started preparing consolidated
financials from FY2010 onwards.
We believe that while analysing any company, the investor should always look at those financials of the
company that represent the business picture of the entire group. Therefore, while analysing Kokuyo
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Camlin Ltd, we have analysed standalone financials for FY2009 and consolidated financials from
FY2010 onwards until FY2018.
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Financial and business analysis of Kokuyo Camlin Ltd:

While analyzing the financials of Kokuyo Camlin Ltd, an investor would note that in the past, the
company has been able to grow its sales at a rate of 8-9% year on year. Sales of the company increased
from ₹284 cr. in FY2009 to ₹630 cr in FY2018. The trend of the sales growth of the company over the
last 10 years seems consistent where the sales of the company have grown for almost each of the past 10
years. However, when an investor analyses the profitability of the company over the last 10 years, then
she notices that the sales growth of the company has not translated into profits for the shareholders.
While analysing the operating profit margin (OPM) of Kokuyo Camlin Ltd over the last 10 years
(FY2009-18), an investor notices that the OPM of the company has been highly fluctuating. The OPM
has ranged from a high of 9% in FY2010 to operating loss in FY2013. Moreover, the profitability
performance becomes worse when the investor focuses on the net profit margin (NPM) of Kokuyo
Camlin Ltd for the past 10 years (FY2009-18).
The company has reported NPM varying from a high of 4% in FY2010 to losses in three years (FY2012,
FY2013 and FY2014).
An investor would appreciate that such fluctuating profit margins indicate that Kokuyo Camlin Ltd does
not have pricing power over its customers. The company seems to find itself unable to pass on increases
in raw material and other costs to the customers. As a result, whenever the input costs increase, then the
company has to absorb it on its own, which leads to a reduced profit margin.
Moreover, the fact that the company had to report operating and net losses in multiple years indicate that
the company operates in an industry with intense cutthroat competition. In such industries, usually, the
products are a commodity in nature and there are many suppliers. As a result, whenever, a customer finds
that the price of the product of any company has gone up, then she can easily use the product of another
company.
The stationery industry seems to be one such industry, where if the price of products e.g. a pen increases
beyond a point, then the customer can easily replace the pen of one company with the pen of another
company without any material impact on the functionality. As a result, the stickiness of the customer with
a product of any particular company or brand seems low. Therefore, the companies find that they do not
have the ability to increase the prices of their products to maintain their profit margins whenever raw
material/input costs go up.
The credit rating agency, CRISIL in its May 2014 report for Kokuyo Camlin Ltd highlights this aspect of
the business:
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The near commodity nature of most of the products coupled with many brands/manufacturers including
unorganized players and cheaper Chinese imports has led to a situation where even the well-known
brands/companies report losses in times of high raw material/input costs. The companies are not able to
pass on an increase in input prices instead; they have to reduce prices due to cutthroat competition.
An investor gets to know this aspect of the business of Kokuyo Camlin Ltd in its FY2018 annual report,
page 47:
The investor notices that the credit rating agency, CRISIL, in its report of Kokuyo Camlin Ltd in
February 2019 has highlighted this aspect of the business. CRISIL also points out the fact that the low-
profit margins of the company lead to a situation where even a slight change in raw material costs affect
the profitability in a big manner.
However, while analysing the business performance of Kokuyo Camlin Ltd, when an investor reads the
past annual reports, then she notices that the situation of poor pricing power of stationery manufacturers is
not a recent development. In fact, the company has highlighted this tough aspect of this business since
long as the company has had years in which it reported losses in the previous years as well (FY2005 and
FY2006).
The below table of the financial performance of the company over FY2002-2008 taken from FY2008
annual report, page 55 shows that the company has had such fluctuating profit performance previously as
well.
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In the above table, an investor would notice that in FY2004, the company reported a sharp decline in its
profits, which was followed by net losses in FY2005 and FY2006.
In FY2004, the profits of the company declined by about 60% to ₹1.89 cr from ₹4.44 cr in FY2003. The
company explained to the investors that despite the increase in sales, the company reported losses. The
company said that the losses are due to increase in input costs and the company is not able to pass on
these costs to the customers due to intense competition.
The business situation worsened in future and the company still could not pass on the increase in input
costs to the consumers. As a result, the company reported losses in FY2005 and FY2006.
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The management accepted that the state of the competition in the industry is so severe that despite all
attempts by the management to cut costs and improve efficiencies, it is finding itself helpless to control
losses.
Over the years, the competitive situation in the business did not improve. In FY2011 annual report, when
the profitability of the company witnessed a decline, the company acknowledged that currently there are
many Indian and international players who are attempting to sell to the Indian consumer. This has led to a
great availability of choice for the consumer but in turn, it has taken away the pricing power from the
manufacturers.
This year of reduced profitability (FY2011) was followed by three consecutive years of net losses for the
company (FY2012, FY2013 and FY2014). The company lamented its inability to pass on costs to
customers in FY2013.
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The company attempted various cost reduction measures but despite all its attempts, it again reported a
loss in FY2014.
Looking at the above situation, an investor would appreciate that the times of increasing raw material
costs/commodity prices are bad for Kokuyo Camlin Ltd because it is not able to pass on the increase in
inputs costs to its customers and as a result, it ends up reporting losses. However, while analysing the
business performance of the company, the investor realizes that even the periods of declining commodity
prices do not do any good for the company.
In FY2017, the company disclosed that competitive situation has worsened due to the decline in
commodity prices. Kokuyo Camlin Ltd highlighted that due to low commodity prices:
 There was no possibility of an increase in the prices of its products.
 Manufacturers from the unorganized sector could import at a very low price. As a result, their
profitability increased significantly. Therefore, many unorganized players started importing
products under their own brands, which led to further competition to organized/branded
manufacturers.
 As a result, the company had to reduce the prices of many of its products.
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As a result, an investor would appreciate that the Kokuyo Camlin Ltd operates in an industry that has a
very tough business environment. As mentioned earlier, the intense cutthroat competition ensures that the
manufacturers of stationery and related products get impacted whether the commodity prices go up or
they go down.
When commodity/raw material/input costs go up, the players are not able to pass it on to their customers
and as a result report lower profitability or losses. When commodity prices go down, then due to the
resultantly increased competition, they have to reduce prices and again suffer on profitability.
As a result, investors would acknowledge that stationery & related products is not an easy industry to do
business. Perhaps, similar thoughts might have been in the minds of the Indian promoters of Camlin Ltd
(The Dandekar family) when they decided to give the majority stake in the company to Kokuyo Co. Ltd
when the opportunity came in FY2012.
Operating Efficiency Analysis of Kokuyo Camlin Ltd:
a) Net fixed asset turnover (NFAT) of Kokuyo Camlin Ltd:
When an investor analyses the net fixed asset turnover (NFAT) of Kokuyo Camlin Ltd in the last 10 years
(FY2009-18), then she notices that the NFAT of the company has been continuously in the range of 5.75-
6.50 over the years. The NFAT has declined to 4.84 in FY2018. However, this decline is a result of
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the capital expenditure done by Kokuyo Camlin Ltd on a new plant at Patalganga in Maharashtra, which
started operations in FY2018.
An investor would appreciate that whenever a company starts a new manufacturing plant, then it may take
some time before the plant reaches its optimal capacity utilization. As a result, during the initial phase, the
expenditure done by the company on the manufacturing plant may not prove to be fully efficient.
However, over time, the sales from the plant increase, which improves the efficiency ratios for the
company.
Therefore, going ahead, if the production and the sales from the Patalganga reach its optimal utilization
level, then the NFAT of Kokuyo Camlin Ltd may improve to match its historical trend.
b) Inventory turnover ratio of Kokuyo Camlin Ltd:
An investor would note that over the years, the inventory turnover ratios (ITR) of the Kokuyo Camlin Ltd
has been declining. The ITR used to be 6.5 in FY2010, which has come down to 4.2 in FY2018.
Declining inventory turnover over the years indicates that Kokuyo Camlin Ltd is witnessing a reducing
efficiency in its inventory management.
c) Analysis of receivables days of Kokuyo Camlin Ltd:
Over the years, Kokuyo Camlin Ltd has witnessed its receivables days deteriorate from 46 days in
FY2010 to 63 days in FY2015. The deteriorating receivables days seem to corroborate the poor
negotiating power in the hands of the company, which in the light of intensifying competition has to give
higher credit period to the customers/supply chain.
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When an investor looks at the inventory turnover and receivables days together, then she realizes that the
business of Kokuyo Camlin Ltd is becoming working capital intensive year after year.
In such a scenario, an investor would expect that the cash flow from operations of the company would lag
behind its profits indicating that most of the cash generated from business would be stuck in its working
capital. However, when an investor compares the cumulative net profit after tax (cPAT) and cumulative
cash flow from operations (cCFO) of the company for FY2009-18, then she notices that the company has
been able to convert its profits into cash flow from operations.
Over FY2009-18, Kokuyo Camlin Ltd has reported a total cumulative net profit after tax (cPAT) of ₹25
cr. whereas during the same period, it reported cumulative cash flow from operations (cCFO) of ₹73 cr
indicating that it has converted its profits into cash. The cCFO of Kokuyo Camlin Ltd is significantly
higher than its cPAT primarily because of high depreciation (₹92 cr) and interest expenses (₹83 cr),
which are deducted while calculating PAT, while these are added back to PAT when calculating CFO.
Margin of Safety in the Business of Kokuyo Camlin Ltd:
its target growth.
While analysing the SSGR of Kokuyo Camlin Ltd, an investor would notice that the company has
consistently had a negative SSGR (0% to -22%) over the years. While studying the formula for
calculation of SSGR, an investor would understand that the SSGR directly depends on the net profit
margin (NPM) of a company.
SSGR = NFAT * NPM * (1-DPR) – Dep
Where,
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 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)
An investor would notice that the NPM of Kokuyo Camlin Ltd has been consistently very low and even
negative (net losses) in the range of -3% to 4%. Therefore, the company consistently has a negative SSGR
over the years.
As a result, an investor would appreciate that the company does not seem to have the inherent ability to
grow from its business profits. However, the company has been growing at a rate of 8%-9% over the
years. As a result, investors would appreciate that Kokuyo Camlin Ltd will have to continuously raise
money from additional sources like debt or equity to meet its investment requirements.
Therefore, it does not come as a surprise to the investor when she notices that over the last 10 years
(FY2009-18), Kokuyo Camlin Ltd had to raise additional funds by multiple sources:
 Debt (₹99 cr.): Total debt has increased from ₹39 cr. in FY2009 to ₹138 cr. in FY2018 (99 = 138
– 39)
 Equity (₹162 cr.):
 Preferential allotment to Kokuyo in FY2012 (₹59 cr): In FY2012, as a part of a deal to

hand over majority shareholding to Kokuyo, the company allotted 6,934,000 equity
shares on preferential basis at a price of ₹85/- per share. (6,934,000*85 = ₹58.93 cr)
 Rights issue in FY2014 (₹103 cr): in FY2014, Kokuyo Camlin Ltd allotted 31,283,831
shares in the rights issue at ₹33 per share to raise ₹103 cr (31,283,831*33 = ₹103.24 cr)
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Therefore, an investor would appreciate that the poor business dynamics of the company limit the
business growth that it can generate from its inherent profitability (as reflected by negative SSGR). As a
result, in order to generate 8-9% of sales growth in the last 10 years, the company had to put in all its
business profits and in addition, it had to put in ₹261 cr (99+162) of outside funds to support the business
growth.
As discussed above, while reading the historical business performance of the company, an investor
notices that this business has not developed this cash guzzling nature recently. When an investor reads the
past annual reports (the company has annual reports from 2004 at its website), then she notices that in
FY2008 as well, the company had to raise equity to fund its expansion plans.
In FY2008, the company raised ₹21 cr by issuing 1,200,000 shares of ₹10 each in preferential allotment
to foreign institutional investors (FIIs) at a price of ₹175 per share (1,200,000*175 = ₹21 cr).
It indicates that the business of Camlin Ltd has been a continuous cash-consuming business ever since. As
a result, the company had to frequently resort to equity dilution and additional debt to meet the growth
requirements.
Therefore, it does not come as a surprise to investors that the company has a very irregular record of
dividend payments and it has not declared any dividend since almost the last 8 years. The last dividend
was declared by the company for FY2011.
An investor gets another evidence of the cash consuming nature of the business of Kokuyo Camlin Ltd
when she analyses the free cash flow position of the company.
b) Free Cash Flow Analysis of Kokuyo Camlin Ltd:
While looking at the cash flow performance of Kokuyo Camlin Ltd, an investor notices that during
FY2009-18, the company had a cumulative cash flow from operations of ₹73 cr. However, during this
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period it did a capital expenditure (capex) of ₹198 cr. As a result, it had a negative free cash flow of ₹125
cr. (198 – 73).
As per the discussion above, an investor would appreciate that Kokuyo Camlin Ltd raised an additional
debt of ₹99 cr to met this cash flow gap. Investors would note that over the last 10 years, the company
had debt on its balance sheet, which was consistently increasing. The company needed to pay interest on
this debt. Part of the interest, which was capitalized by the company as a part of the project cost is already
factored in the capital expenditure (capex) of ₹198 cr discussed above. Over and above the capitalised
interest, Kokuyo Camlin Ltd had to pay additional interest of ₹83 cr, which was expensed in the P&L.
Therefore, an investor would appreciate that the total cash flow gap for the company comes out to be
₹208 cr (125 + 83). The company used debt and equity (preferential allotment and rights issue) to meet
this cash flow gap.
Therefore, an investor would note that tough business dynamics of stationery and related products have
led to a situation where the maintenance of a growth rate of 8-9% has gone beyond the inherent
capabilities of the company. As a result, the company had to dilute its equity and raise additional debt.
In light of the above discussion, it seems that the Indian promoters of Camlin Ltd (The Dandekar family)
might have been happy when they would have got the proposal to hand over the majority stake in the
company to Kokuyo.
any company.
Additional aspects of Kokuyo Camlin Ltd:

On analysing Kokuyo Camlin Ltd, an investor comes across certain other aspects of the company:
1) Management Succession of Kokuyo Camlin Ltd:
An investor notices that the currently the majority shareholding is owned by Kokuyo Co. Ltd of Japan,
which will be one of the sources of leadership in the company. Moreover, the Indian promoters (The
Dandekar family), despite selling most of their shareholding in the company, are continuing in the
management position.
 Mr. Dilip Dandekar is currently Chairman & Executive Director of the company.
 Mr. Shriram Dandekar is currently Vice Chairman & Executive Director of the company.
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Therefore, investors would acknowledge that the Dandekar family continues to be a part of the key
management team of the company.
While analysing the annual reports of Kokuyo Camlin Ltd, an investor notices that the next generation of
the Dandekar family has also joined the business.
 Mrs. Aditi Dighe who is the daughter of Mr. Dilip Dandekar and is currently working as the
General Manager – Marketing in the company.
 Mr. Rahul Dandekar who is the son of Mr. Dilip Dandekar and is currently working as the
Deputy General Manager – Marketing in the company.
It indicates that the company has put in place a management succession plan in which the new generation
of leaders are being groomed in business while the senior members are still playing an active part in the
day-to-day activities.
Presence of a well thought out management succession plan is essential in businesses as it provides for
smooth transition of leadership over the generations and provides continuity in the business operations of
any company.
2) When Promoters prefer being Employees rather than Owners of the Company (i.e.
prefer paycheques to the dividend cheques):
While analysing the past business performance and related aspects, an investor gets interesting insights
about the faith of Indian promoters in their ownership of the company founded by their elders about 75
years back.
The investor finds that the Indian promoters of the company seem to have realized that the stationery and
related business is too tough to make money as owners of the company. An investor would acknowledge
from our discussion above that the business performance of the company has been very challenging.
Despite all efforts of the management, the company could not avoid losses. Despite a huge amount of
investment in plant & machinery as well as in advertising & promotions, the company is not able to
ensure consistent profitability. The company suffers when raw material/commodity prices go up as it
lacks the pricing power to pass on increased costs to customers. The company suffer again when the
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commodity prices go down as the already cutthroat competition intensifies further and the company has to
reduce the prices of its products.
The company’s business has been consuming cash at a fast pace. Apart from entire business profits, the
company consistently has to feed the business with additional funds from debt as well as equity just to
maintain nominal growth of 8-9%. Despite such significant funds infusion, the business has not generated
surplus cash for its shareholders.
Investors would appreciate that the phase of shareholders consistently putting in money in the company to
generate growth due to lack of sufficient business profits seems justifiable in startup companies, which
are yet to prove their business idea. This situation of consistent equity infusion seems strange for a
business, which has a history of more than 85 years.
Without a doubt, this is a tough business to operate and the promoters seem to be happy to let the
Japanese company Kokuyo take up majority stake when the opportunity came in FY2012. Kokuyo
infused money in the company by preferential allotment as well as gave an opportunity for the promoters
to sell a significant portion of their holding at a premium to the prevailing market price.
 On July 8, 2011, Kokuyo put in money in the preferential allotment of shares of the company
(10% stake) at a price of ₹85/- per share when the prevalent market price of the company was
₹72.5.
 On October 13, 2011, Kokuyo purchased additional shares in the open offer (20% stake) and
purchased 20.27% stake from Indian promoters at ₹110/- when the market price was ₹45.65.
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However, the stake sale by the Indian promoters did not stop on October 13, 2011, when they sold their
20.27% stake to Kokuyo. The Indian promoters kept on selling their stake to Kokuyo year after year.
During FY2014, when the company came out with the rights issue, then investors may notice that only
the stake of Kokuyo Co. Ltd went up in the company from 50.5% in FY2013 to 65.8% in FY2014.
During the year of the rights issue, the stake of Indian promoters declined from 13.4% in FY2013 to 9.2%
in FY2014. It indicates that the Indian promoters did not participate in the rights issue.
It seems that the Indian promoters have decided to completely exit from the company as shareholders as
they are continuously selling their stake to Kokuyo year after year and as disclosed below and their
current stake in the company at meagre 0.6%.
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An investor would appreciate that since the sale of the majority stake, the Indian promoters of the
company have only earning salary/remuneration from Kokuyo Camlin Ltd as the company has not
declared any dividend due to meagre profits.
Looking at the above table, the investor would notice that selling their stake in the company, the
remuneration of the Indian promoter has been consistently on the rise. The total remuneration taken by
the Indian promoters from Kokuyo Camlin Ltd has consistently increased year on year from ₹1.9 cr in
FY2013 to ₹3.2 cr in FY2018.
This is despite the fact that the profitability of Kokuyo Camlin Ltd has been very fluctuating during these
years. The company reported losses in FY2013 and FY2014 and the company reported a significant
decline in profitability in FY2017. However, it seems that by selling a stake in the company and taking
over the role of employees, the Indian promoters have ensured that their economic benefits stay healthy
irrespective of the financial/business performance of the company.
Previously, when the Indian promoters were the largest shareholders of the company, then their payout
from the company depended a lot on the business performance of the company. This is because payouts to
promoters like dividend are determined by the board of directors based on the company’s financial
performance. However, now as employees of the company, they seem to have ensured a healthy payout
whether sufficient profits are there or not. In case of insufficiency of profits, the company take approval
from the central govt. to provide them remuneration above the normal statutory limits.
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Based on above discussion, it seems that the Indian promoters after running the business for about 80
years decided that they are better off being employees of the company and taking a healthy payout as
salary/remuneration instead of being owners of the company and facing the uncertainty of dividends by
taking the business ownership risks. As a result, after Kokuyo took a majority stake in the company in
FY2012, the Indian promoters sold almost their entire shareholding in the company to Kokuyo over the
recent years.
It indicates that the Indian promoters have lost faith in owning this business or find the ability to produce
profits too uncertain that they have finally chosen the certain of pay cheques over the uncertainty of
dividend cheques from the company.
3) Camel and Camlin very expensive brands to maintain:
Kokuyo Camlin Ltd owns brands that are very well-known, old and established brands in India: Camel
and Camlin. Therefore, an investor would expect that the company should easily charge its customers
appropriate prices to protect its profits.
However, the above discussion about the very low pricing power of Kokuyo Camlin Ltd indicates that the
company is not able to price its goods properly at its wish to maintain its profitability. Instead of enjoying
healthy profitability due to established brands, at times, Kokuyo Camlin Ltd finds it tough to avoid losses.
This business behaviour puts under question the utility of brands for the business.
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When an investor analyses the amount of advertisement and sales promotion expenses done by Kokuyo
Camlin Ltd to maintain these brands, then she realizes that the company is spending a large amount of
money on these brands.
An investor would appreciate that the key reason for any company to spend money on advertising, sales
promotions and branding is to generate higher profits. Otherwise, the entire advertising spend is money
up in smoke (i.e. wasted).
Since FY2010, in the next eight years (FY2011-2018), Kokuyo Camlin Ltd spent an amount of ₹160 cr
on advertisement and sales promotions. However, if the investor notices the result of this expense of ₹160
cr on the profits of the company, then she realizes that in concrete profitability terms, there is no value
addition.
In FY2010, the company had reported a net profit after tax of ₹12 cr. After spending additional ₹160 cr
on advertisement and promotions over the next eight years (FY2011-18), the net result was that Kokuyo
Camlin Ltd.’s profits had declined to ₹10 cr in FY2018.
An investor may believe that the spending of ₹160 cr on advertising, sales & promotions is not entirely
wasted. It has kept the brand alive in customers’ mind and in turn, has resulted in the customer choosing
to buy Camel/Camlin products when she entered the shop. In the absence of this spending, the customer
may have believed that the brands Camel/Camlin are no longer in the market and as a result; she would
have bought products of other competitors.
The investor is right in the above assumption that the advertisement spending has led to the company
earning its sales revenue. However, this spending has not led to the generation of profits. In fact, despite
advertising, the company had to sell goods at prices where it is not able to make profits.
The investor is right in assuming that if the advertisement spending is stopped, then the sales of the
company will witness a decline and over time, it may find itself out of business. This aspect of the
business brings forward another face of the challenges of Kokuyo Camlin Ltd. The company has to keep
spending a huge amount of money on advertisement to just stay in the business.
The company’s situation is like a player who has to keep running on a fast-moving treadmill to stay in the
game irrespective of the fact whether the player has the energy/stamina/ability to bear this hardship or
not. The moment the player decides to take a break or slow down the speed of the treadmill, then she is
out of the competition.
From the above discussion, an investor would appreciate that Kokuyo Camlin Ltd has to keep spending
money on advertisement to stay in business irrespective of the fact whether it is making sufficient profits
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from its business to spend this money on advertisement. The company may have to raise debt, dilute
equity (i.e. beg, borrow or steal), but the advertisement spending is necessary to be in the business.
Otherwise, the brand will be out of the customers’ mind and the sales will decline. The high
advertisement spending by the companies in this business of very low pricing power seems a necessary
expense whether the companies are able to make profits or not.
No wonder that the brands Camel and Camlin are very expensive to maintain!
4) The company starts a new business; the promoters being the managers run the business
to the ground and then buy it themselves from the company at one-tenth of the investment:
While analysing the past business performance of the company, an investor notices that the company had
started a new business line of pre-schools in FY2010. The company formed a wholly owned subsidiary,
Camlin Alphakids Limited for this purpose and opened the preschool business in collaboration with
“Headstart Parade” an early child development centre.
The management of the company was enthused by this new initiative and wanted to grow it to be a new
revenue line. The Chairman of the company informed in its address to shareholders that the company has
opened one pre-school in Andheri in FY2010 and it planned to open two more in Mumbai region in
Thane and Kharghar soon.
FY2010 annual report, page 5, Chairman’s message:
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The company was very bullish on pre-school business and started putting additional money in the
subsidiary to grow the business.
The money was being put in the subsidiary in the form of equity (common shares and preferred shares) as
well as interest-free loans.
The subsidiary was not making money and the company justified the investments stating that the
management of the company is getting very good experience in running the pre-school business.
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When an investor might have thought that the monetary and time investment is done by the company in
the pre-school business would be bearing fruits, the company informed the investors that it is no longer
interested in running the preschool business in which it had invested ₹5.35 cr as the business is making
losses.
Moreover, the company intimated the shareholders that it is selling the business to promoters at one-tenth
of the investment value i.e. the company received a total of ₹50 lac in sales consideration for the total
investment done of ₹5.35 cr.
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An investor would appreciate that many times companies sell businesses, which are not making money.
Even Camlin Ltd has taken such a decision in the past like in FY2005 when the company decided to exit
the pharmaceutical business. However, in the case of pharmaceutical division, the business was
sold/handed over to a third party, Liva with the stock, receivables as well as transferring all the
employees.
The case of sale of Alphakids to the promoters of the company at a fraction of the invested value creates a
difficult situation. It is akin to seeding the new business and waiting out the initial tough establishment
phase of the new business within the company at its cost and once the initial phase is over, then buy the
business at a fraction of the cost.
Currently, as per the website of Alphakids, it has expanded to Mumbai, Bangalore, Hyderabad, Kolhapur
and Pondicherry.
As per the information available on the Alphakids website, the promoter family (Dandekars) still runs the
business and it has attracted investment from Goenka group:
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Alphakids International Preschool is one of the most renowned preschool chains in India and is ranked
among the top 4 by Education World in its latest survey. It is promoted by one of the founding families of
Camlin Pvt. Ltd., and the Goenka Family who are co promoters of a premium international school and
college in India.
5) Investment in multiple businesses written off by the company over the years:
When an investor analyses the business activities of the company over the years (since FY2004), then she
notices multiple instances where the company started business activities, established subsidiaries,
partnerships, marketing tie-ups etc. However, the company existed almost all of them at a later stage.
We have already discussed two such instances: pharmaceutical division (FY2005) and pre-school
business (FY2014) above. Let us look at a few other instances:
a) ColArt Camlin Canvas Pvt. Ltd:
In FY2006, Camlin Ltd formed a joint venture with ColArt Fine Art and Graphics Ltd. of UK for the
manufacturing and export of canvas products. ColArt Camlin Canvas Pvt. Ltd established a
manufacturing plant in Tarapur that started functioning in April 2006
However, within a few years of the start of the JV, in FY2011, the company disclosed that the JV has
been making losses and all the attempts to restructure the business/revive the investment have failed. The
company wrote-off its investment in the JV in FY2011.
FY2011 annual report, page 51-52:
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b) Camlin North America, Inc., U.S.A:
As per FY2004 annual report, Camlin Ltd started a business in the USA from Oct. 2003 via its wholly
owned subsidiary Camlin North America, Inc. USA.
In FY2013, the company wrote off the entire investment done in this subsidiary.
c) Camlin International Limited:
As per FY2004 annual report, Camlin Ltd was exporting to South Korea via Camlin International
Limited.
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However, it seems that the company stopped this activity in FY2008. This is because, in FY2018,
Kokuyo Camlin Ltd decided to write-off all its investment in Camlin International Limited and stated that
it had not done any business activity for the last 10 years.
It may seem like a situation where the promoters/management of the company has started many new
initiatives/businesses, failed in them and then kept on exiting/closing them down one after another. The
sequences seem to end now when they have sold off their almost entire stake in the main entity (Camlin
Ltd/Kokuyo Camlin Ltd) and have settled to be employees rather than shareholders.
6) Investing money in other listed companies while the company’s own businesses need
money:
By reading the discussions in the article until now, an investor would appreciate that the core business of
Camlin Ltd has been very cash consuming. The company has to resort to additional debt and equity
funding to meet the cash shortfall. In addition, the company has to close down its other business
initiatives for the want of funds.
However, at the same time in FY2011, the company invested additional money in Camlin Fine Chemicals
Ltd (probably by subscribing to the rights issue with a record date of August 2, 2010)
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An investor would appreciate that at a time when the company’s core business along with other initiatives
like pre-schools etc. need a lot of cash, then it may not be the best decision to invest money in other listed
entities.
7) Suboptimal capital allocation decisions by Kokuyo Camlin Ltd:
When an investor analyses the business profits generated by the company for its shareholders over the
years (FY2012-2018), then she notices that Kokuyo Camlin Ltd has not done a great job. The following
table indicates that the pretax return generated by the company on its equity has been consistently low.
The pretax business return generated by Kokuyo Camlin Ltd on the equity provided by shareholders is
about 1%-3% over the years with negative returns in FY2013-FY2014. The pretax return has only
recently increased to 6% in FY2018.
An investor notices that in the Indian context, shareholders can invest their money in a risk-free manner to
earn a pre-tax return of 7.51% provided by Government of India Securities 10-Years (2028) (Source: RBI
Website on April 11, 2019).
The next best risk-free alternative of deploying money, a fixed deposit with State Bank of India (SBI)
offers an interest rate of 6.85% (pre-tax return) on deposits exceeding ₹10 cr. (Source: SBI website on
April 11, 2019)
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An investor would note that a pretax (PBT) return of 1%-3% over the years with negative returns in
FY2013-FY2014, which is generated by earned by Kokuyo Camlin Ltd on its equity is low when
compared to other hassle-free and risk-free avenues like govt. securities or fixed deposits with banks.
Therefore, an investor may notice that instead of investing the money in the company, taking the business
risk of creating large plants & machinery, the added stress of selling the products in the market, an
investor may simply invest the money in govt. securities or fixed deposits and earn a higher return.
Margin of Safety in the market price of Kokuyo Camlin Ltd:

Currently (April 10, 2019), Kokuyo Camlin Ltd is available at a price to earnings (PE) ratio of about 59.5
based on standalone earnings of the last four quarters from January-December 2018. The PE ratio of 59.5
does not provide any margin of safety in the purchase price as described by Benjamin Graham in his
book The Intelligent Investor.
We recommend that an investor may read the following articles to assess the PE ratio to be paid for any
stock:
 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
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Conclusion:
Overall, Kokuyo Camlin Ltd seems like a company, which has been growing its sales at 8-9% year on
year in a very competitive industry. The sales growth has not translated into the growth of profits for the
shareholders. Kokuyo Camlin Ltd operates in an industry where most of the products are a commodity in
nature and a customer can easily replace the product of one company with the product of another
company without much impact on the utility. As a result, Kokuyo Camlin Ltd has very low pricing power
in the business.
The intense competition in the stationery manufacturers from both organized and unorganized sectors
along with the cheaper imports have ensured that whenever inputs/raw material prices go up, the
company’s profits take a hit. There have been multiple instances in the past when Kokuyo Camlin Ltd
reported losses because it could not pass on the increase in input costs to its customers. Moreover, the
competition in the industry is so intense that at the time of declining commodity prices also the companies
are not able to enjoy high profits. This is because the competition from unorganized players and dumping
from imports increases and as a result, the Kokuyo Camlin Ltd has to reduce prices of its products.
Therefore, the company suffers both in times of rising and declining raw material prices.
Investors may have an impression that the brands owned by Kokuyo Camlin Ltd, Camel and Camlin are
very well-known, old and established brands. Therefore, the company may have the ability to charge
higher prices and in turn enjoy superior profitability. However, upon analysis, investors come to know
that these brands are in fact very expensive to maintain where the company has to spend a very high
amount on advertising & sales promotions, which does not lead to superior profits. Investors saw that
over FY2011-2018, Kokuyo Camlin Ltd spent ₹160 cr on advertising & sales promotions whereas,
despite all this spending, the net profit of the company declined from ₹12 cr in FY2010 to ₹10 cr in
FY2018.
The business of Kokuyo Camlin Ltd, stationery & related products has proved to be very cash consuming
over the years. The requirement of funds to achieve a sales growth of 8-9% year on year has proved to be
beyond the inherent cash generating ability of the company. As a result, the company has to resort to
additional debt and equity funding to meet the fund requirements. The company has witnessed an increase
in debt over the last 10 years. Moreover, it has raised equity funds multiple times in the past, e.g. rights
issue in FY2014 and preferential allotment in FY2012 and FY2008. The continuous requirement of the
cash in the business has ensured that the company has not paid any dividend after FY2011.
The high cash requirements of the business & brands, suboptimal returns on the investments, inability to
ensure consistent profits seem to have led to the founder Indian promoter family giving up control over
the shareholding to a Japanese company (Kokuyo Co. Ltd.). Ever since Kokuyo acquired a majority stake
in the company in FY2012, the Indian promoters have shown signs that they are no longer interested in
being the owners of the business.
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Currently, the Indian promoters are working as employees in the senior management Kokuyo Camlin Ltd
and are earning salary/remuneration from the company. They did not participate in the rights issue in
FY2014 and they have been consistently selling their stake to Kokuyo year after year. Currently, their
stake in the company has come down to 0.55%. The Indian promoters seem to be happy with this
situation where they are able to get a paycheck from the company instead of relying on uncertain dividend
cheques.
Multiple decisions of the Indian promoters need to be kept in mind by investors before they make up any
final opinion about Kokuyo Camlin Ltd. These include the failure of multiple business initiatives with the
complete write-off of investments. The sale of the pre-school business by the company to the promoters at
a fraction of invested amount is also another such decision. An investor may believe that with a change in
the ownership, the company will have fewer such decisions. However, an investor may note that the two
key executive positions of Chairman and Vice Chairman are still occupied by the Indian promoter family
and the probability of similar decision in future cannot be completed denied.
We believe that going ahead; investors should keep a close watch on the profitability of Kokuyo Camlin
Ltd, debt levels and the related party transactions. In case, investors notice that the profitability of the
company does not improve and the cash requirements of Kokuyo Camlin Ltd are not coming down, then
they make take a decision accordingly.
These are our views on Kokuyo Camlin Ltd. However, investors should do their own analysis before
taking any investment related decision about the company.
P.S.

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3) Quick Heal Technologies Ltd
Quick Heal Technologies Ltd is an Indian company providing security software solutions like antivirus,
antispyware, antimalware etc. to retail consumers under brand Quick Heal and to enterprise & govt.
segment under brand Seqrite.
FY2011, Quick Heal Technologies Ltd used to disclose only standalone financials. However, since
FY2012, the company started reporting both standalone as well as consolidated financials. This is
because, in FY2012, Quick Heal Technologies Ltd formed its first subsidiary, Quick Heal Technologies
Africa Limited on Dec 2, 2011. As a result, it started reporting consolidated financials, which included the
business performance of QH, its African subsidiary as well as the other subsidiaries that it formed
subsequently.
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analysing Quick Heal Technologies Ltd, we have analysed standalone financials from FY2010-FY2011
and consolidated financials from FY2012-FY2019.
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Financial and business analysis of Quick Heal Technologies Ltd:

While analyzing the financials of Quick Heal Technologies 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; however, the growth has
nearly stagnated in the recent years. Sales of the company increased from ₹89 cr. in FY2010 to ₹315 cr in
FY2019.
While analysing the performance of the company in the past, an investor would notice that in the past, the
operating profit margin (OPM) of the company had declined consistently from 55% in FY2010 to 30% in
FY2017. In recent years, the OPM has recovered to 41% in FY2019. However, it is still below the level
of operating profits enjoyed by the company in the past.
While analysing the reasons for such a decline in the OPM, an investor gets to know that Quick Heal
Technologies Ltd operates in an industry, which is highly competitive. Many players offer software
security solutions, which seem to provide similar protection levels. Almost all the players claim to have
won multiple awards for their antivirus solutions. Therefore, in the end, the purchase decision turns out to
be based on the pricing of the product.
Quick Heal Technologies Ltd had elaborated on the tough competitive nature of its industry in its red
herring prospectus (RHP) before the initial public offer (IPO) in FY2016.
RHP, Jan 2016, page 18:
The company highlighted that many of its competitors are large global companies, which have a lot of
resources. These companies can price their software security products to their customers at a lower price
and even free of cost as a package. Moreover, the consumers perceive that all branded antivirus solutions
including Quick Heal provide a similar acceptable level of service.
Quick Heal Technologies Ltd highlighted that for the retail segment, it faces competition from companies
like AVAST and AVG, which offer basic antivirus free of cost and then offer to provide additional
services as a premium add-on.
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The company acknowledges that the retail consumer market for antivirus products faces very intense
competition from companies willing to provide a low priced or free solution. As a result, the competition
may even lead to the antivirus solution of Quick Heal Technologies Ltd as unmarketable.
The intense price-based competition of antivirus products leaves very low pricing power in the hands of
solution providers like Quick Heal Technologies Ltd. Investors could witness the lack of pricing power of
Quick Heal Technologies Ltd in FY2018 when the indirect tax on antivirus solutions was increased on
commencement of goods & services tax (GST).
Before GST, the products of Quick Heal Technologies Ltd used to come under value-added tax (VAT) at
6%. However, after the start of GST, its products came under 18% tax bracket. Quick Heal Technologies
Ltd had to bear the impact of higher indirect tax (GST) itself, as it could not increase the price of its
products. As a result, the profitability of the company took a hit.
Feb 2018 conference call, page 14:
An investor would also notice that such intense competition limiting the pricing power of the company is
not limited to the retail consumer segment of the antivirus industry. In the RHP, Quick Heal Technologies
Ltd clearly highlighted the extent of competition faced by it in the enterprise segment.
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Quick Heal Technologies Ltd mentioned that it competes with large global security solution players like
Symantec (Norton), McAfee etc. as well as other players like Microsoft and IBM, which have large
resources and can provide their solutions at a much lower price and even free of cost to the customer as a
part of service & maintenance and other packages.
Recently Airtel, one of the leading telecom service providers in India, has started offering a one-year
subscription of Norton antivirus (by Symantec) free of cost to its prepaid subscribers. (Source: Financial
Express: Airtel reportedly offering 1-year free Norton antivirus to subscribers)
In addition, the customer perceives the effectiveness of antivirus of these companies at a similar level as
Quick Heal. Therefore, the propensity of consumers to pay for paid antivirus products like Quick Heal
reduces in light of such competitive offers.
The company acknowledged that these large global players have many competitive advantages over
Quick Heal like better-known brands, large budgets; higher research & development (R&D) capabilities,
already established relationships with key customers and distributors as well as a large number of
patented technologies.
After three years, in FY2019, the competitive intensity of the antivirus industry has increased further. An
investor gets a glimpse into the extent of competition in the conference call of the company in May 2019.
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In the conference call, the management of Quick Heal Technologies Ltd intimates the analysts that the
prices of the products (licenses) are going down due to the competition.
May 2019 conference call, page 4:
The company intimated the investors that the antivirus industry is witnessing so much competition that
the players are willing to offer solutions at any price to gain business. The company confirms there is no
limit/floor to which the antivirus prices can decline.
May 2019 conference call, page 11:
In the FY2019, the company reported a decline in sales despite selling to a higher number of customers.
This is because the prices of the products of the company declined.
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Therefore, an investor would appreciate that whether it is a retail consumer segment or the enterprise
segment, the antivirus industry faces intense competition. There is hardly any pricing power in the hands
of the players. The competitors are willing to offer their products at very low prices, even free of cost. As
a result, we witnessed that Quick Heal Technologies Ltd could not increase the prices of its products
when it faced a higher indirect tax under GST.
Quick Heal Technologies Ltd has highlighted its large distribution network in different public disclosures.
As per the May 2019 results presentation, page 11, the company has more than 25,000 retail partners, 457
corporate partners, and 105 government partners.
However, when an investor analyses further, then she gets to know that these distribution partners are not
exclusive to the company and can easily sell any other competitive antivirus or their own solutions to the
customers. As a result, the distribution channel of the company is also the distribution channel of its
competitors. In addition, distributors can also turn competitors.
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An investor would appreciate that in such a situation, in order to grow its sales, Quick Heal Technologies
Ltd would have to spend a lot of money on advertisements and research & development so that the
customers get to know about the company and its products and perceive them to be of a higher quality.
Therefore, it does not come as a surprise to the investor that Quick Heal spends a lot of money on sales &
promotion and advertisement expenditure. Moreover, the company proposed to use the largest portion of
the money raised by the company in the IPO for advertisement & sales promotions.
RHP Jan 2016, page 103:
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Advertisement, sales & promotion, as well as most of the research & development expenditures, are a part
of the operating expenses of the company. As a result, the higher spending on these aspects increases the
operating expenses of the company. This leads to lower profit margins of the company.
Therefore, an investor would note that the antivirus industry has a highly challenging business
environment. It is an intensely competitive industry where most of the products are supposed to provide a
similar level of service and therefore, the players compete on pricing. Many players are willing to offer
their products at a very low price, even free of cost, which limits the pricing ability of other players.
As a result, Quick Heal Technologies Ltd has to bear the impact of the increase in taxes on its own, as it
could not increase the prices of its products when GST was implemented. The company had to spend a lot
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of money on advertisement and sales promotions, which has significantly reduced its profit margins over
the years.
In light of such intense competition, an investor may keep a close watch on the profit margins of the
company going ahead. It is also advised that investors should keep the intensely competitive nature of the
antivirus industry in mind when extrapolating the recent improvement of profit margins in the future.
The net profit margin (NPM) of Quick Heal Technologies Ltd has followed the trend of OPM over the
years.
Over the years, Quick Heal Technologies Ltd had a tax payout ratio in line with the standard corporate tax
rate prevalent in India.
Operating Efficiency Analysis of Quick Heal Technologies Ltd:
a) Net fixed asset turnover (NFAT) of Quick Heal Technologies Ltd:
When an investor analyses the net fixed asset turnover (NFAT) of Quick Heal Technologies Ltd in the
past years (FY2010-18), then she notices that the NFAT of the company has consistently declined from
10 in FY2010-FY2011 to 1.8 in FY2019.
Upon analysis, an investor notices that the primary reason for decline in the NFAT of the company is the
investment in fixed assets by the company. The net fixed assets of the company have increased from ₹13
cr in FY2010 to ₹165 cr in FY2019. The company did major additions to its fixed assets during FY2014
(₹80 cr), FY2015 (₹68 cr), FY2016 (₹36 cr), FY2017 (₹33 cr).
An analysis of the fixed assets schedule in the available annual reports (FY2016 onwards) indicates that
the company has invested most of the money in buildings and some money on computers and office
equipment etc.
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Therefore, an investor would notice that in FY2014-FY2017, Quick Heal Technologies Ltd has invested a
lot of money on creating the infrastructure like building, computer systems etc. However, the sales growth
of the company moderated as the company could increase its sales from ₹302 cr in FY2016 to only ₹315
cr in FY2019. As a result, the NFAT of the company witnessed a significant decline.
This illustrates the tough competitive business environment of the antivirus industry.
b) Inventory turnover ratio of Quick Heal Technologies Ltd:
Quick Heal Technologies Ltd carries a minimal amount of inventory. As per the RHP, Jan 2016, the
inventory and raw material consumption primarily consist of the hardware equipment for unified threat
management, which is not a large contributor to the revenue.
RHP Jan 2016, page 315:
As most of the other products sold by the company are software, therefore, the company needs to carry
very low inventory. As a result, Quick Heal Technologies Ltd has very high inventory turnover ratios in
the range of 40 to 100 over the years.
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c) Analysis of receivables days of Quick Heal Technologies Ltd:
An investor notices that the receivables days of Quick Heal Technologies Ltd have frequently stayed at
about 110 days and above. The receivables days declined to 86 days in FY2015. However, since then,
receivables days have again increased to 132 days in FY2019.
The actual level of receivables days observed by an investor is quite different from the normal credit
period the company claims to provide to its distributors, which is at 30-60 days.
The actual receivables days of 110 days and above when compared to normal credit period of 30-60 days
indicates that most of the buyers of antivirus products from Quick Heal Technologies Ltd delay their
payments beyond the agreed-upon credit terms.
To understand such behavior of buyers of Quick Heal Technologies Ltd, an investor needs to understand
the nature of these buyers.
As per the discussion in the May 2019 conference call, page 9, the management highlighted that the sales
revenue reported by the company is not the actual purchase by the end-users/consumers. Quick Heal
Technologies Ltd mentioned that the reported sales revenue is actually the sales to the distributor.
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Therefore, the sales of Quick Heal Technologies Ltd reflect sale to distributors and may not represent the
final sale to the consumer. An investor would also recollect from the above discussion that the distributors
of the company are not exclusive distributors to the company and have the ability to sell antivirus of
competing companies as well as their own antivirus products.
In such a situation, when the distributor can easily sell an alternative antivirus product to the consumer, it
is difficult to assume that Quick Heal Technologies Ltd would have the power to force strict receivable
collection from the distributors. In case of excessive follow up by the company for the collection of
receivables, a distributor can threaten to remove the products of Quick Heal Technologies Ltd from its
shelf/catalog.
In addition, the distributors do not buy antivirus products of Quick Heal Technologies Ltd for their own
consumption. The distributors are traders who earn revenue by selling these antivirus products to next tier
of distributors or consumers. Therefore, an investor can anticipate that the distributor who has bought
antivirus products from Quick Heal Technologies Ltd will normally hesitate to pay money to the
company unless it has sold the products to consumers/next tier of distributors. In case, the distributor is
not able to sell the products of Quick Heal Technologies Ltd to other consumers, then in most likely
cases, it will delay payments to the company.
This aspect of nature of sales of Quick Heal Technologies Ltd coupled with the negotiation power
wielded by the distributors exposes the company to high credit risk. In the case of lower sales, the
distributors may delay payments to the company or in some case may refuse to pay the money.
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An investor may think of a situation where a distributor has many compact discs (CDs) of Quick Heal
antivirus on its shelf, which it has taken from the company on credit. In case, the distributor finds that
these CDs are not selling despite being on the shelf from many months, then the investor may try to
imagine the willingness of the distributor to pay money to Quick Heal Technologies Ltd for these unsold
CDs at the end of credit period of 30-60 days. It is very likely that if Quick Heal Technologies Ltd puts
pressure for collection of receivables from the distributor for these unsold CDs on its shelf, then the
distributor may ask the company to wait until these CDs are sold, or take back the CDs. In any case, the
distributor has the option to sell other competing antivirus products to its consumers.
Therefore, an investor would appreciate that Quick Heal Technologies Ltd seems to have low power to
collect receivables from its buyers who are distributors. The company has highlighted this risk in its
FY2019 annual report, page 52.
An investor should keep in mind that the high credit risk in the collection of receivables by the company
has affected it in the past. The company disclosed in the red herring prospectus (RHP) in January 2016
before its IPO that one of its distributors refused to pay money to the company in FY2014 and it has to
bear a loss of ₹16.4 cr due to the same.
RHP, January 2019, page 327:
Moreover, the auditor of the company has also highlighted the high amount of trade receivables of the
company as a key audit matter in FY2019 annual report, page 92:
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In light of the above discussion, an investor would appreciate that Quick Heal Technologies Ltd is not in
a very strong position to collect money from its distributors for the sales reported by it in the financial
statements. The distributors tend to delay the payment due to the higher negotiating power enjoyed by
them. As a result, the company has continuously reported higher actual receivables days of more than 110
days than the normal credit period of 30-60 days.
An investor may appreciate that the temporary improvement in receivables days to below 100 in FY2015
and FY2016 might be a result of the impending IPO of the company in February 2016. Many times,
investors notice that the company disclose good financial performance for the periods preceding IPOs. In
many cases, financial performance declines after the IPO is completed.
In FY2016 annual report, page 44, Quick Heal Technologies Ltd mentioned that it takes an advance
payment from its buyers who are large revenue contributors (largest distributors).
However, an investor would appreciate from the above discussion that in the case of distributors with
strong negotiating power who can easily replace your product with the product of competitors, it is very
difficult to collect money as per credit terms. It is even more difficult to get full advance payments.
Therefore, it does not come as a surprise that the receivables days of the company have steadily increased
after IPO from 95 days in FY2016 to 132 days in FY2019.
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An investor would appreciate that delay in the payments by the distributors will influence the working
capital position of the company. The company will find incremental money being stuck in the working
capital.
This aspect of the business of Quick Heal Technologies Ltd gets established when an investor compares
the cumulative net profit after tax (cPAT) of the company with the cumulative cash flow from operations
(cCFO) for FY2010-19. She notices that the company has been able to convert its profits into cash flow
from operations.
Over FY2010-19, Quick Heal Technologies Ltd has reported a total cumulative net profit after tax (cPAT)
of ₹615 cr. whereas during the same period, it reported cumulative cash flow from operations (cCFO) of
₹543 cr.
Margin of Safety in the Business of Quick Heal Technologies Ltd:
its target growth.
While studying the formula for calculation of SSGR, an investor would understand that the SSGR directly
depends on the following factors.
Where,

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While analysing the SSGR of Quick Heal Technologies Ltd, an investor would notice that the company
has an SSGR of about 18-19%. However, the company has been growing at a rate of 10-15% over the
years. As a result, investors would appreciate that Quick Heal Technologies Ltd seems to be able to fund
its growth from its business profits without any need to raise money from additional sources like debt or
equity.
Therefore, it does not come as a surprise to the investor that the company has consistently stayed debt-
free over the last decade.
b) Free Cash Flow Analysis of Quick Heal Technologies Ltd:
While looking at the cash flow performance of Quick Heal Technologies Ltd, an investor notices that
during FY2010-19, the company had a cumulative cash flow from operations of ₹543 cr. However, during
this period it did a capital expenditure (capex) of ₹289 cr. As a result, it had a free cash flow of ₹254 cr.
(543 – 289), which it has utilized to pay dividends of about ₹130 cr to its shareholder and has kept the
remaining funds as cash & investments.
The presence of free cash flow indicates that Quick Heal Technologies Ltd has been able to meet all its
capital expenditure requirements from its cash flow from operations. As a result, the company could
expand its business and make investments in the advertisement, research & development, subsidiaries as
well as other companies and still stayed debt-free.
At March 31, 2019, the company had a cash & investments balance of about ₹525 cr, which includes
surplus cash left after dividends payment and unutilized IPO proceeds.
any company.
Additional aspects of Quick Heal Technologies Ltd:

On analysing Quick Heal Technologies Ltd, an investor comes across certain other aspects of the
company:
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1) The curious case of declining focus on research and development by Quick Heal
Technologies Ltd:
While an investor reads the public disclosures by Quick Heal Technologies Ltd, then she notices that the
company has highlighted its strong focus on research & development as one of the key competitive
strengths of the company.
In the investors’ presentation of May 2019 (page 8), Quick Heal Technologies Ltd highlighted that it has
significantly increased the strength of its research & development team from 138 employees in FY2012 to
356 employees in FY2019. On similar lines, Quick Heal Technologies Ltd highlighted that it has
increased investments in research and development from 8% of sales in FY2012 to 17% of sales in
FY2019.
Moreover, an investor would also recollect that one of the key usages of the IPO funds by the company
was mentioned as an investment in research & development.
2016 RHP, page 103:
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These disclosures give an impression that Quick Heal Technologies Ltd has a very strong focus on
research & development year on year. However, when an investor analyses deeper and studies the status
of research & development team of the company year on year, then she observes a different picture.
An investor notices that the total number of employees in the research & development team has been
declining consistently over recent years.
While analysing the annual reports of FY2016, FY2017, FY2018 and FY2019, an investor notices that
the total number of employees in the research & development team of Quick Heal Technologies Ltd has
declined year on year from 555 employees in FY2016 to 356 employees in FY2019.
An investor would appreciate that the decline of about 200 employees, which is about 35% of the team in
FY2016 seems a significant reduction in the R&D team. However, year after year, Quick Heal
Technologies Ltd has presented a picture of the increased size of R&D team by comparing the total
number of employees in the R&D team in that year with FY2012 when it had a smaller team of 138
employees in the R&D team. (See the presentation of data for FY2018 and FY2019 in the image).
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On the similar lines, an investor notices that year after year, Quick Heal Technologies Ltd has reported its
expenditure on R&D in comparison with the money spent on R&D in FY2012, which was low at 8% of
total sales.
An investor notices that the company has portrayed an increase in yearly R&D spending by comparing it
with FY2012.
While analysing the FY2017 annual report (page 74), an investor finds that in FY2017, Quick Heal
Technologies Ltd has spent 21.1% of total sales on R&D. The similar spending in FY2016 was 19.5%.
Therefore, an investor notices that the amount of money spent by Quick Heal Technologies Ltd on
research & development is in a continuous decline in recent years from 21.1% of total sales in FY2017 to
17% of total sales in FY2019. However, the company has presented a picture of increasing R&D
spending by comparing it to FY2012 when its R&D spend was very low.
Even in the terms of spending on R&D in INR (₹), an investor notices that the spending on R&D by
Quick Heal Technologies Ltd has declined since the IPO in FY2016. The R&D spending has declined
from about ₹64 cr in FY2017 to ₹54 cr in FY2019.
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In light of the above observations of declining size of the R&D team from 555 employees in FY2016 to
356 employees in FY2019 and the associated consistent decline of money spent by Quick Heal
Technologies Ltd on research & development, an investor may seek clarifications from the company
about the reducing focus on the R&D activities.
Going ahead, an investor may closely track the developments at Quick Heal Technologies Ltd related to
research & development.
2) Continuously declining number of employees at Quick Heal Technologies Ltd:
While analysing the annual reports of the company, an investor notices that the total number of
employees at the company has declined significantly over the years. The total number of employees has
declined from 1,394 in FY2016 to 1,037 in FY2019.
Moreover, the decline in the number of employees is consistent with year on year reduction in the total
number of employees 1,374 in FY2017 to 1,114 in FY2018 to 1,037 in FY2019.
An investor would notice that the consistent significant decline in the number of employees (25% since
FY2016) has come at a time when the company had raised additional resources from IPO to increase its
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business. Such a situation may indicate that Quick Heal Technologies Ltd is not able to grow its business
despite its intention and availability of money.
Such a situation may also highlight the intensely competitive scenario in the antivirus industry where it
does not seem possible for a company to grow just by raising more money from investors.
Going ahead, the investor may keep a close watch on the total number of employees of Quick Heal
Technologies Ltd along with attrition level of employees. Currently, the attrition level at the company is
about 22%, which indicates that almost one-fifth of the total employees leave the company every year.
3) Losses in almost all the investments done in subsidiaries and other companies by Quick
Heal Technologies Ltd in the last 5 years:
Over time, Quick Heal Technologies Ltd has done investments in subsidiaries as well as investments in
other companies like start-ups in order to generate value for its shareholders. However, when an investor
analyses the current state of these investments, then she notices that almost all of these investments have
lost value in recent years. Some of the investments have led to complete loss whereas others have led to a
partial loss of the investments.
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As per the above data, Quick Heal Technologies Ltd has suffered a complete loss of its investments in
startups:
 Smartalyse Technologies Private Limited and
 Wegilant Net Solutions Private Limited.
Moreover, it has suffered a significant loss in the value of its investments in almost all of its subsidiaries:
 Quick Heal Technologies Japan K.K., Japan

 Quick Heal Technologies America Inc., USA
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 Quick Heal Technologies (MENA) FZE, UAE
 Quick Heal Technologies Africa Limited, Kenya
Over the years, Quick Heal Technologies Ltd has recognized losses due to these decisions as exceptional
items in the profit and loss statement.
In light of such frequent losses in the investment decisions made by the company, an investor should keep
a close watch on the future investments to be done by the company. An investor would appreciate that
ideally investment decisions/capital allocation decisions should generate positive value for shareholders
and not losses on almost all the investment decisions.
4) Dispute for payment of a large sum of service tax:
While reading the annual reports of Quick Heal Technologies Ltd, an investor learns that the company is
facing a demand of ₹223 cr from the service tax department for selling antivirus software on compact
discs (CDs) without paying service tax on the same.
An investor would appreciate that the demand of ₹223 cr is significant in relation to the size of the
company as it can take away more than 40% of the existing cash & investment balance of the company.
Therefore, in order to understand more about the basis of this demand, an investor needs to explore
further.
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While reading the red herring prospectus (RHP) of January 2016 of the company before IPO, an investor
gets to know the argument of the service tax department for this large service tax demand.
RHP January 2016, page 331:
By reading the above section of the RHP, an investor gets to know that the dispute is related to
applicability of service tax on selling antivirus software on compact discs (CDs). Quick Heal
Technologies Ltd had been paid service tax for online antivirus sales. However, the company had not paid
service tax for the antivirus sales by CDs.
It seems that the argument of Quick Heal Technologies Ltd is that the service tax is not applicable on the
antivirus sold on CDs and instead excise duty is payable on these sales. However, these CDs are produced
in factories in Baddi in Himachal Pradesh and Rudrapur in Uttaranchal, which have excise exemptions.
Therefore, the company has not paid the indirect tax.
However, the service tax department has contended that the exemption of excise duty is only on the cost
of manufacture of the compact disc and not on the software/license key on the disc. An investor would
appreciate that when a consumer buys an antivirus product on a CD for about ₹1,000/-, then the cost of
the CD is hardly ₹10/- and the remaining ₹990/- is the price paid for the antivirus software.
Therefore, the service tax department is disputing the applicability of excise duty on the software written
on the CDs and is demanding service tax on the same.
The company has highlighted the sustainability of excise duty exemption on the sale of antivirus on CDs
as a key risk in the RHP at the time of IPO.
RHP, page 24:
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Going ahead, an investor may closely track the developments related to this dispute of applicability of
service tax on the sale of antivirus on CDs. This is because, in case, the decision of the courts/authorities
is against Quick Heal Technologies Ltd and it needs to pay the demanded liability, then it will have a
significant impact on the cash position of the company.
5) History of weaknesses in the internal controls at Quick Heal Technologies Ltd:
While reading the public documents for Quick Heal Technologies Ltd, then she notices that the auditor of
the company has repeatedly highlighted various weaknesses in the internal control systems of the
company. Such instances of weaknesses before the IPO (FY2016) are presented in the RHP filed by the
company in January 2016.
As per the RHP, page 62, in FY2011, the auditor reported that the internal audit system of the company
was not proper and its scope needed to be enlarged. The auditor also highlighted that the company had not
paid the tax deducted at source (TDS) and value-added tax (VAT) on time.
The management of the company responded that it has improved the internal audit process by appointing
a leading accounting firm as the internal auditor.
RHP, page 62:
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However, it seems that even the leading accounting firm was not able to strengthen the internal audit
system. This is because, in FY2014, the auditor again highlighted that the internal audit system needs to
be improved and such non-improvement of internal audit system is a continued failure to correct a major
weakness.
RHP, page 64:
In light of such continued weaknesses in the internal controls and processes, an investor notices that the
company has faced many frauds and litigations.
One of the biggest instances of the poor internal process is the claim by the company that it is not able to
trace the records for issuance of equity shares for a 12 years period (1995-2007).
RHP, page 25:
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An investor would appreciate that such disappearance of records might be associated with disputes. The
publicly available information about Quick Heal Technologies Ltd indicates that the company is fighting
a dispute with Manohar Malani, managing director of a firm NCS Computech Ltd, related to his
shareholding in the company where the shares were allotted to him in the year 2000. (Source: Livemint:
Quick Heal shares slide amid spat over shareholding)
In addition, there have been cases of frauds by employees of the company, which also seem to be a result
of weak internal control processes.
Quick Heal ex-GM arrested for fraud (Source: Pune Mirror)
A former general manager of leading anti-virus solution provider Quick Heal has been arrested for
allegedly duping the firm to the tune of Rs 1.24 crore over the last 10 years by selling its products
through companies owned by him.
In light of such instances and the prolonged period of weak internal control processes, an investor should
pray that no other issue/litigation related to the past comes up to haunt the company and its shareholders
in future.
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An investor should track the developments related to these disputes in the future.
6) Exceptionally large dividend paid out by Quick Heal Technologies Ltd before the IPO:
While analysing the past financial performance of the company, an investor notices that the company paid
an exceptionally large dividend to its shareholders before the IPO in FY2015.
An investor would notice that many times such large dividend payouts before the IPO is an attempt by
existing shareholders/promoters to take existing cash accumulated by the company over the years. In such
cases, the incoming new shareholders (investors in IPO) do not get to benefit from the cash generated by
the company before the IPO.
Investors witnessed a similar case of large dividend payout by a company before its IPO in the case of
InterGlobe Aviation (IndiGo Airlines). In 2015, InterGlobe paid such a large dividend to its shareholders
before IPO that its net worth became negative indicating that the existing shareholders took away all the
cash accumulated by the company before the IPO.
IPO-bound profitable IndiGo has negative net worth (Source: Business Today)
Remaining profitable for nearly seven years, InterGlobe, however, saw its net worth slip to a negative Rs
139.39 crore at the end of June 2015.
Such instances remind minority shareholders that the controlling shareholders may prefer their interests to
the interests of non-controlling/retail/minority shareholders.
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Going ahead, an investor should keep a close watch and in case, she finds that the promoters are taking
decisions, which are not in favour of minority shareholders, then she may take a decision accordingly.
7) An error in the annual report of Quick Heal Technologies Ltd:
In FY2019 annual report, on page 49, the company has mentioned that it sold 5,622 million licenses in the
retail segment and 1,240 million licenses in the enterprise & govt. segment.
An investor would appreciate that the number of licenses sold mentioned in the annual report is erroneous
as it exceeds the population of India.
In May 2019, investors’ presentation, on page 32, the company has correctly mentioned that the unit of
the number of licenses sold by the company is thousands instead of millions.
Therefore, the correct number of license sold by the company in FY2019 is 5.62 million in the retail
segment and 1.24 million in enterprise & govt. segment. The data in the annual report seems to be an
inadvertent typographical error.
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Margin of Safety in the market price of Quick Heal Technologies Ltd:

Currently (July 17, 2019), Quick Heal Technologies Ltd is available at a price to earnings (PE) ratio of
about 11 based on earnings of FY2019. The PE ratio of 11 provides a small 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.
Investors
Investors should note that current market price (July 17, 2019) of Quick Heal Technologies Ltd is
₹153.25 against the IPO price of ₹321/- in February 2016, which indicates a value erosion of more than
50%. In term of money, the value erosion has exceeded ₹1,000 cr whereas the company has retained more
than ₹200 cr of earnings from the profits since the IPO (FY2016-FY2019).
Conclusion:
Overall, Quick Heal Technologies Ltd seems like a company, which has been able to grow its sales at a
growth rate of 10-15% year on year in the past. The growth path has not been consistent. The sales
growth has nearly stagnated in recent years. In addition, the profitability margins of the company have
declined over the years from higher than 50% in FY2009-11 to current levels of 30-35%.
The key reason for stagnating growth and declining profit margins seems to be the intensely competitive
nature of the antivirus industry. Quick Heal Technologies Ltd charges its customers to use its antivirus
whereas many other better-known competitors provide their antivirus solutions of similar effectiveness at
a much lower price and in some case even free of cost (AVAST, AVG etc.). As a result, Quick Heal
Technologies Ltd has witnessed an average realization of its products decline. The company has to bear
the impact of increased in taxes due to GST, as it could not increase the price (MRP) of its products.
Therefore, the company has found it difficult to increase its sales despite increasing the number of
customers.
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Increased spending on advertising and sales promotions to generate sales is another reason for the
declining profit margins of the company over the last decade. The company sells its products to
distributors who in turn sell it to customers. The distributors hold very high power as they can easily sell
antivirus products of other competitors to the customers. Therefore, these distributors seem to delay the
payments beyond normal credit terms. As a result, Quick Heal Technologies Ltd has high receivables
days of 110 days or more. Therefore, the company has witnessed money being stuck in the working
capital. The delays in receivables collections expose the company to credit risk and in the past, there have
been cases when a distributor defaulted and the company had a loss of about ₹16 cr.
Quick Heal Technologies Ltd raised money from investors in February 2016 by an IPO to grow its
business including investments in research & development. However, an investor notices that the
company has consistently reduced the size of its R&D team and the money being spent on R&D has come
down year on year. At the one end, the company is investing money on buildings and related
infrastructures whereas its total employee count has reduced significantly since the IPO.
Quick Heal Technologies Ltd has invested money in a few overseas subsidiaries and a few start-ups.
However, almost all these companies have lost the money invested and as a result, the company has
recognized losses/reduced fair value on these investments.
The company is contesting a large service tax demand on the sale of antivirus products on CDs, which if
decided against the company, may have a significant impact on the liquidity position of the company.
Quick Heal Technologies Ltd has had a history of weak internal controls, which the auditor pointed out as
a continued failure to correct a major weakness. The company has disclosed that it has lost the records for
allotment of equity shares for a 12-year period (1995-2007). Some shareholder has claimed that the
company allotted him shares in 2000 and is no longer recognizing him as a shareholder. Similarly, weak
internal controls seem to have resulted in frauds by employees. The company is fighting in many criminal
cases.
Going ahead, investors keep a close watch on the receivable levels of the company, profit margins,
utilization of cash, investments in subsidiaries or other companies, developments related to the tax
disputes and litigation including the criminal cases, spending on R&D as well as the trend of the total
number of employees. If an investor notices that the company has taken any step, which is not in the
interests of minority shareholders, then she may take a decision accordingly.
These are our views on Quick Heal Technologies Ltd. However, investors should do their own analysis
before making any investment-related decision about the company.
P.S.

Videos
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Analysis Excel
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4) Navkar Corporation Ltd
Navkar Corporation Ltd, an Indian container freight station (CFS) player with operations at Jawaharlal
Nehru Port Trust (JNPT) and Vapi.
FY2011, Navkar Corporation Ltd used to disclose only standalone financials. However, since FY2012,
the company has been preparing both standalone as well as consolidated financials. Moreover, from
FY2018, Navkar Corporation Ltd merged its subsidiary, Navkar Terminals Ltd with itself and as a result,
in FY2018, it reported only standalone financials.
analysing Navkar Corporation Ltd, we have analysed standalone financials until FY2011 and
consolidated financials from FY2012 onwards until FY2017. For FY2018, we have analysed the
standalone financials as the company merged its subsidiary with itself.
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Financial Analysis of Navkar Corporation Ltd:

While analyzing the financials of Navkar Corporation Ltd, an investor would note that in the past, the
company has been able to grow its sales at a decent rate of 15% year on year. Sales of the company
increased from ₹137 cr. in FY2010 to ₹428 cr in FY2018. The financial data present at Screener shows
sales for FY2009 as ₹0.6 cr. This is because, as per the DRHP filed by the company for its IPO in 2015
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(Source: SEBI), the first CFS terminal at Somathane was built in 2009 and FY2010 is the first year of
operations of the terminal.
DRHP 2015, page 150:
When an investor analyses the profitability margins of the company over the years, then she notices that
the operating profit margin (OPM) of Navkar Corporation Ltd has been continuously increasing over the
years. The OPM of the company increased from 27% in FY2010 to 39% in FY2018. On the similar lines,
the net profit margin (NPM) of the company has increased from 16% in FY2010 to 24% in FY2018.
Such improvement in the profit margins of the company highlights the very good business condition of
the company. It indicates that the company has been able to get very favourable terms from its customers
and is able to pass on the cost increases to the client as and when they happened.
However, when the investor analyses the state of business operations of the company in the current
financial year, then she notices that all of a sudden Navkar Corporation Ltd has witnessed a drastic
decline in its profitability margins. In the Q2-FY2019, the company reported a decline of the OPM to
24% and the decline of the NPM to 3%.
This sharp decline in the profit margin comes as a surprise to the investors during the analysis and it
deserves further exploration. As a result, the investor may turn to analyzing the management
communication to shareholders in the form of the conference call (concall) on October 31, 2018, in which
the management discussed the results of Q2-FY2019 quarter with the stakeholders.
In the Oct. 2018 concall, the management highlighted many difficult aspects of the business that Navkar
Corporation Ltd is facing now a day.
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1) Reduction in the negotiating powers of the company with its customers:
On page 2 of the Oct. 2018 concall transcript, Navkar Corporation Ltd has mentioned that the company
faced significant cost pressure due to increase in fuel prices. However, it could not increase the prices that
it charges to its customers and had to take a hit on its profits.
2) Clients are refusing price hikes despite multiple attempts by the company and in
addition, clients are delaying payments as well:
On page 5 of the October 2018 conference call, Navkar Corporation Ltd has mentioned that in addition to
the refusal to increase the prices, the customers are nowadays taking more days to clear their payments. In
addition, customers are asking for more free storage days for their goods on its premises.
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3) Competition in the CFS industry is showing its impact on the business of Navkar
Corporation Ltd as customers now have many options:
On page 5 of the October 2018 conference call, the management of Navkar Corporation Ltd accepted that
the company wants to have profit margins of 35-40%. However, it cannot achieve these margins currently
because they fear that the price hike will lead to a loss of customers as they now have options to move to
other avenues.
On the similar lines, in FY2016 annual report as well, Navkar Corporation Ltd has highlighted to the
shareholders that there is stiff competition among the CFS operators. As a result, the shipping lines,
custom house agents (CHAs) and freight forwarders who are the key customers of CFS operators have
started to ask for increased incentives for using services of any CFS operator. In such a scenario, the CFS
operators have found it difficult to pass on the increase in costs to their customers.
4) Customers are currently asking for very high discounts:
On page 14 of the October 2018 conference call, the management of Navkar Corporation Ltd mentioned
that now a day customers are asking for such high levels of discounts that it is not possible to do business
at those levels.
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5) Direct port delivery (DPD) initiative of the govt. is having a major impact on the CFS
business:
While analyzing the annual report of Navkar Corporation Ltd for FY2018, an investor notices that the
company has highlighted that it is facing challenges from the direct port delivery (DPD) initiative of the
govt.
Under DPD initiative, an importer can do a quick customs clearance of her shipment and take delivery
directly at the port without the need for the containers going to CFS. As a result, it is anticipated that CFS
would face a reduction in business.
In FY2018 annual report, page 9, the company assures the investors that despite DPD, it has reported
satisfactory performance.
However, within six months, in the Q2-FY2019 quarter, the company acknowledged that DPD is
affecting its business in a significant manner.
October 2018 concall, page 3:
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The management of Navkar Corporation Ltd acknowledges that the impact from DPD is very significant
and that they are hoping that DPD might be stopped altogether.
The company has acknowledged that it is currently facing severe impact on its profits as one the one end
it is losing business and on the other end, the cost prices are going up.
6) Negative phase for the CFS industry:
During the October 2018 conference call, the management of Navkar Corporation Ltd acknowledges that
currently, the CFS industry is facing huge challenges as there are many negative factors affecting the
industry.

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7) Profit margins may stay lower in future:
When the management of the company was asked whether the lower profit margins reported by Navkar
Corporation Ltd in Q2-FY2019 will improve in future or the profit margins will stay at the lower levels,
then the company said that the profit margins may stay in the lower range going ahead.
Therefore, while analyzing the profit margins of Navkar Corporation Ltd, an investor comes to know that
the CFS industry was facing a very favourable business environment until recent times. As a result, it was
able to get significant business at very profitable prices, which has led to significant improvement in its
profit margins over the year.
However, recently the company has started facing a very difficult business environment characterized by
government’s push on direct port delivery (DPD), intense competition among CFS players, rising input
costs etc. As a result, on the one hand, the company is getting lesser business and on the other hand, it is
not able to pass on increases in the inputs costs to its customers. Therefore, the company witnessed
significant impact on its profit margins and its net profit margin (NPM) declined to 3% in Q2-FY2019
from 24% in FY2018. Moreover, the company anticipates that the profit margins may stay at these lower
levels in the future.
Over the years, the tax payout ratio of Navkar Corporation Ltd has been in the range of 10-15%. This is
because the company enjoys income tax exemptions for its CFS and ICD operations. The company has
disclosed these tax exemptions in the placement document for the qualified institutional placement (QIP)
done in 2017 (Source: Company website).
QIP placement document, October 2017, page 48:
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An investor would notice that the income tax exemptions for the Somathane CFS are expected to end in
2019. As a result, investors may witness the tax payout ratio of the company increasing in the future.
Operating Efficiency Analysis of Navkar Corporation Ltd:
a) Net fixed asset turnover (NFAT) of Navkar Corporation Ltd:
When an investor analyses the net fixed asset turnover (NFAT) of Navkar Corporation Ltd, then she
notices that the NFAT of the company has witnessed a continuous decline over the years from 0.78 in
FY2010 to 0.27 in FY2018. The overall declining trend in the NFAT indicates that the company has to
continuously investment additional money in its business; however, the new investments have not yielded
an increase in the business in a similar extent.
An investor would notice that the net fixed assets of Navkar Corporation Ltd have increased from ₹140 cr
in FY2009 to ₹1,921 cr in FY2018, which is a growth rate of about 34% year on year. However, during
this period the sales have increased by a growth rate of about 15% year on year.
Equally important is the fact that the fixed asset turnover ratio is very low, less than one, which indicates
that Navkar Corporation Ltd needs to spend more than ₹1 in plant and machinery to produce ₹1 of
additional sales. This low asset turnover has serious implications as a huge amount of incremental
investment is needed to show future growth.
To illustrate, let us assume that in first year Navkar Corporation Ltd, targets to achieve ₹100 cr. of
additional sales, then it would need to invest ₹370 cr. in fixed assets (100/0.27 = 370, as net fixed asset
turnover is currently 0.27). If we assume the NPM of 24% (FY2018), then this ₹100 cr. of additional sales
would provide additional net profits of ₹24cr. However, if we assume NPM of 3% (Q2-FY2019), then the
₹100 cr of additional sales would provide net profits of ₹3 cr only.
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If Navkar Corporation Ltd retains entire profits and invests in its operations, then this incremental
investment of ₹24 cr. of entire net profits would generate only ₹6.5 cr. of incremental sales in the second
year (assuming fixed asset turnover ratio of 0.27). If Navkar Corporation Ltd wishes to grow sales by
another ₹100 cr. in the second year as well, then it would have to generate ₹93.5 of sales by investing
additional ₹346 cr. (INR 370 cr. the total requirement for increasing sales by ₹100 cr. – ₹24 cr. of net
profits invested). This ₹346 cr. needs to come from either fresh equity infusion or debt.
Investors also need to understand that this calculation of ₹346 cr of additional investment to keep
generating ₹100 cr of additional sales year on year is with the assumption of NPM of 24%, which the
company achieved in FY2018. However, if the NPM stays at the level of 3% (Q2-FY2019, which as
highlighted by the management in the Oct. 2018 concall may be the new normal), then the contribution of
funds from net profits will be even lower at about ₹3 cr. In this case, the incremental funds needed from
either fresh equity or debt would increase to ₹367 cr. (₹370 cr. – ₹3 cr). On the contrary, if the NFAT
improves from current levels of 0.27 to any higher level (say 0.50 in line with historical performance
during FY2012-14, then the additional investment requirement from fresh equity or debt will decline to
₹197 cr. (₹200 cr. – ₹ 3 cr., ₹200 cr. = ₹100 cr./0.50).
The above calculations show that the business of Navkar Corporation Ltd is very capital intensive as
reflected by NFAT of less than one. In such a case, whatever be the combination of NPM & NFAT (24%
NPM, 0.27 NFAT or 3% NPM, 0.50 NFAT), Navkar Corporation Ltd would have to keep investing a
significant amount of funds from additional equity or debt in order to keep growing. This is because the
funds generated by profits in all likelihood will prove insufficient to meet the capital expenditure
requirements of the company to fund future growth.
Thus, we may see that with very low fixed asset turnover of 0.27, Navkar Corporation Ltd would have to
keep on relying on additional sources of funds to maintain its growth. This has happened in the past as
well. Navkar Corporation Ltd has been relying on multiple additional sources of funds to meet its capital
expenditure requirements:
 Debt of Navkar Corporation Ltd from financial institutions has increased from ₹101 cr. in
FY2009 to ₹395 cr. in FY2018.
 In addition, Navkar Corporation Ltd has raised two rounds of additional equity during the recent
past:
 In 2015, the company raised ₹510 cr via initial public offer (IPO).
 Again, in 2017, the company had to raise about ₹145 cr via qualified institutional
placement (QIP).
 Over and above these sources of debt from financial institutions and equity dilution, Navkar
Corporation Ltd has raised loans from promoters and related parties. As per FY2018 annual
report, page 83, the amount of such loans (including preferred shares) was about ₹75 cr.
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Such instances of continuous fundraising by any company on regular intervals indicate that the business
model of the company is very capital intensive. In many such cases, the profits generated by the
companies are not sufficient to meet their growth requirements and the companies either end up under
huge debt burden or dilute the equity capital so much that the returns to existing shareholders keep getting
lower and lower as new equity investors are continuously added to the company.
We believe that investors should be cautious while analysing such companies. This is because such
companies have the potential of increasing the risk of bankruptcy and reduced profitability under tough
business conditions.
b) Inventory turnover ratio of Navkar Corporation Ltd:
An investor would note that over the years, the inventory turnover ratios (ITR) of the Navkar Corporation
Ltd has been ranging from 120-100-65. Such high levels of inventory turnover indicate that the company
needs to keep only very low amounts of inventory with itself. In turn, investors may appreciate that the
amount of inventory is not the most determining factor for sales of the company.
Therefore, the inventory turnover ratio may not be the most relevant parameter for the analysis of Navkar
Corporation Ltd.
c) Analysis of receivables days of Navkar Corporation Ltd:
Over the years, initially, Navkar Corporation Ltd witnessed its receivables days deteriorate from 37 days
in FY2010 to 85 days in FY2015. However, in recent years, the company seems to have improved its cash
collection practices and as a result, the receivables days of the company have declined to 41 days in
FY2018.
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Moreover, when an investor analyses the receivables days along with inventory turnover, then she notices
that the company has been able to keep its working capital requirements under control. It means that
Navkar Corporation Ltd has been able to convert its profits into the cash flow from operations without the
money being stuck in 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 FY2009-18.
An investor would notice that over FY2009-18, Navkar Corporation Ltd Limited has reported a total
cumulative net profit after tax (cPAT) of ₹590 cr. whereas during the same period, it reported cumulative
cash flow from operations (cCFO) of ₹790 cr indicating that it has converted its profits into cash.
Margin of Safety in the Business of Navkar Corporation Ltd:
its target growth.
While analysing the SSGR of Navkar Corporation Ltd, an investor would notice that the company has had
an SSGR of 6-8% over the years. However, the company has been growing at a rate of 15% over the
years. As a result, investors would appreciate that Navkar Corporation Ltd will have to continuously raise
money from additional sources like debt or equity to meet its investment requirements.
Therefore, it does not come as a surprise to the investor when she notices that over the last 10 years
(FY2009-18), Navkar Corporation Ltd had to raise additional funds by multiple sources:
1. Debt from financial institutions (₹294 cr.): Total debt has increased from ₹101 cr. in FY2009 to
₹395 cr. in FY2018 (294 = 395 – 101)
2. Equity (₹655 cr.):
1. Raised ₹510 cr. in 2015 by the initial public offer (IPO)
2. Raised ₹145 cr. in 2017 by QIP.
3. In addition, the company has loans of about ₹75 cr from promoters and related parties in the form
of debt and redeemable preference shares.
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The decision of the management of Navkar Corporation Ltd to go for aggressive expansion plans over
and above the sustainable levels from its business cash generation has led to a continuous increase in debt
and equity dilution for minority investors.
b) Free Cash Flow Analysis of Navkar Corporation Ltd:
While looking at the cash flow performance of Navkar Corporation Ltd, an investor notices that during
period it did a capital expenditure (capex) of ₹1,881 cr. As a result, it had a negative free cash flow of
₹1,091 cr. (1,881 – 790).
As per the discussion above, an investor would appreciate that Navkar Corporation Ltd met this cash flow
gap of ₹1,091 cr. in its capital expenditure needs from the additional debt of ₹294 cr., equity dilution
(additional equity) of ₹655 cr and with loans from promoters & related parties.
Therefore, an investor would note that due to the decision of the company management to grow
aggressively beyond the internal business strength, Navkar Corporation Ltd had to dilute its equity and
raise additional debt.
In light of the above discussion, it does not come as a surprise to the investor that Navkar Corporation Ltd
has not been able to declare any dividend for its shareholders until date.
any company.
Additional aspects of Navkar Corporation Ltd:

On analysing Navkar Corporation Ltd, an investor comes across certain other aspects of the company:
1) Management Succession of Navkar Corporation Ltd:
While analysing the FY2018 annual report of Navkar Corporation Ltd, an investor notices that currently,
two brothers Shantilal J Mehta and Nemichand J Mehta are managing the company. Both of the brothers
are currently approaching old age.
In the previous annual reports, an investor notices the name of Jayesh Nemichand Mehta as whole time
director of the company up to August 31, 2016. Jayesh Nemichand Mehta who seems to be the son of
Nemichand J Mehta and is currently about 32 years old but is no longer a director of the company.
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It is advised that investors may seek clarification from the company about the reasons for this change
in succession planning for the company. Investors may ask the company details about its current
succession plan and its implementation.
2) Raising equity at a high cost:
In the discussion above, an investor would remember that Navkar Corporation Ltd has been attempting to
grow at a rate, which is higher than what its inherent business profits can sustain. As a result, Navkar
Corporation Ltd has to rely on additional debt and equity dilution to meet its funding requirements.
Moreover, while looking at the expenses incurred by the company to raise equity, an investor would
appreciate that it has paid a significant amount of money to the bankers for raising equity.
In 2015, Navkar Corporation Ltd paid about ₹32 cr in expenses to raise ₹510 cr, which amounts to a cost
of about 6.3% (32/510).
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In 2017, Navkar Corporation Ltd paid about ₹5.41 cr in expenses to raise about ₹144 cr in qualified
institutional placement (QIP), which is a cost of about 3.8% (5.41/144).
An investor would appreciate that a cost of 3.8% to 6.3% for raising equity is high and indicates an urgent
need on part of the company to meet its fund’s requirements.
Therefore, it is advised that an investor should keep in mind the high capital requirements of the business
of Navkar Corporation Ltd while analysing the company and projecting its future.
3) Timing of capital expansion turning out to be unfavourable:
An investor would notice that Navkar Corporation Ltd has spent a significant amount of money on its
expansion projects in Panvel and Vapi in the last few years. The company has raised debt and equity via
IPO and QIP to meet this capital expenditure. However, now when the capital expenditure is complete
and the company is in the position to use it to gain additional business, the CFS industry is facing tough
times.
As discussed above, the management acknowledges that the CFS industry is currently in its negative
phase due to direct port delivery (DPD) initiative of the government under improving the ease of doing
business in India. The Govt. has given a lot of stress on DPD in the EXIM policy and it aims to improve
the share to DPD at ports to about 70% of the total cargo (Source: BusinessLine):
“DPD allows importers/consignees to take delivery of the containers directly from the port terminals and
haul them to factories without taking them first to a CFS and from there to factories. An importer is thus
assured clearance of cargo in less than 48 hours under DPD as against an average of seven days if
routed through a CFS.
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In late 2016, the government directed JNPT and Customs to raise the proportion of DPD first from 3 per
cent to 40 per cent and later to 70 per cent.”
In light of the determination of the Govt. to keep on working on initiatives to improve the business
environment in India by smoothening the processes in the export-import sector by steps like DPD, it
seems unlikely that the things will go back to earlier days when CFS was a near mandatory step in the
export-import process. Such a change in the business landscape may indicate that the CFS operators will
have to change their value proposition to the customer instead of simple temporary parking/warehousing
to other value additions. This change in business model may entail additional capex requirements over
and above the significant capex already incurred by CFS operators including Navkar Corporation Ltd.
In light of the same, investors should be cautious about estimating the future capital requirements of the
company.
4) Guarantees given to lenders for loans taken by promoter group entities:
As per the placement document of Navkar Corporation Ltd for QIP in 2017, the company has disclosed
that it is a co-borrower in a few loan facilities taken by promoter group companies. As per the co-
borrower lending structure, in case any of the borrowers are not able to repay the loan amount taken by it,
then the lender can ask the other co-borrower to repay the loans given by it. Such an arrangement may
turn out to be a guarantee for the loan availed by promoter group entities.
2017 QIP placement document, page 54:
When an investor analyses the past disclosures of Navkar Corporation Ltd, then she notices that the
company has entered as a co-borrower as well as given guarantees to the loans taken by promoter group
entities in the past as well. As per the 2015 DRHP, the company had given guarantees as well as its
properties as security to the lenders for promoter group entities. The company has stated that if the
promoters & their entities are not able to repay these loans, then the banks may recover the money from
Navkar Corporation Ltd.
2015 DRHP, page 38-39:
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While reading the secretarial audit report section of the FY2015 annual report as well, the investor comes
across that Navkar Corporation Ltd has given a guarantee to one of the promoter group entity: Sidhhartha
Corporation Private Limited.
It is advised that investors should keep a close watch on such lending arrangements in which the company
has become co-borrower or given a guarantee to the promoters and their entities. This is because, in the
event of default by promoters, the lenders would recover the money from the company.
5) Donations to a trust owned by the promoters:
As per the FY2018 annual report, page 102, Navkar Corporation Ltd has been making donations to
Navkar Charitable Trust year on year. In FY2018, the company donated ₹3.5 cr wherein FY2017; the
company had donated ₹2.1 cr.
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As per the disclosures made by the company in the DRHP in 2015, page 20, the promoters are the trustees
of Navkar Charitable Trust.
Navkar Corporation Ltd had cautioned the investors in the DRHP that the donations might even adversely
affect the company. Investors should monitor the donations, which are made to the trust by the company.
6) Promoter own competing companies with the same business objectives as Navkar
Corporation Ltd:
As per the DRHP for the IPO of Navkar Corporation Ltd in 2015 (Source: SEBI), the company has
acknowledged that the promoters of the company have ownership in companies, which have business
objectives to compete in the same business as Navkar Corporation Ltd. Moreover, as per the company, it
has entered into a non-compete agreement with the promoters but the company also highlights that this
non-compete agreement may not be valid as per Indian law.
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7) Multiple transactions of purchasing land from promoters:
While analysing the past documents of Navkar Corporation Ltd, an investor comes across multiple
disclosures related to dealings related to land transactions of the company with its promoter Nemichand
Mehta.
i) Navkar Corporation Ltd purchased a land parcel from its promoter Nemichand Mehta in 2012,
where the ownership of the property is under dispute and now the company has to fight the legal
battle:
As per 2015 DRHP, page 461, Navkar Corporation Ltd had bought a land parcel from its promoter
Nemichand Mehta in 2012. However, it seems that later on, certain disputes came out related to the
ownership of the land parcel and as a result, Navkar Corporation Ltd had to file a civil suit in 2015 to
protect its interest and possession of this land parcel.
ii) Navkar Corporation Ltd again buys land from Nemichand Mehta and his proprietary firm for
₹8.8 cr:
As per FY2016 annual report, page 122, Navkar Corporation Ltd purchased land from Nemichand Mehta
and his proprietary firm M/s. Arihant Industries for ₹8.8 cr.
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An Investor should assess whether the amount paid by Navkar Corporation Ltd for the land is in line with
the market prices. This is because in case the company had purchased the land at a price higher than the
market price, then it may tantamount to shifting economic benefits from the company to the promoters.
iii) Certain land parcel shown by Navkar Corporation Ltd in its fixed assets are still in the name of
its directors:
While analysing the FY2018 annual report, page 76, an investor gets to know that there are some land
parcels, which Navkar Corporation Ltd is using and showing in its fixed assets; however, these land
parcels are still in the name of the directors of the company.
It seems that in case of these land parcels Navkar Corporation Ltd has purchased the land parcels from the
promoters/directors. However, the directors are yet to transfer the ownership of these land parcels in the
name of Navkar Corporation Ltd.
Investors may contact the company to know the details of these land parcels along with other
clarifications like whether the company has paid entire consideration for these land parcels and whether
there are any ownership related disputes related to these land parcels.
From the above instances, it appears that the promoters of Navkar Corporation Ltd have first purchased
the land in their own name and later on sold the land parcels to the company. An investor would
appreciate that in such cases of multiple legs of land transactions, there is always a possibility of
intermediaries taking out their share of economic value before the ownership is transferred from the third
party original landowner to the final consumer of the land (in this case Navkar Corporation Ltd). As a
result, there may be a possibility that the final cost of the land to the company might have been higher
than the cost at which the company might have acquired the land directly from the original landowner.
Investors may look deeper at such land transactions and then form their opinion about the same.
8) Order of SEBI against the promoters of Navkar Corporation Ltd for part in another of
their companies: Jayavant Industries Limited:
In May 2017, SEBI passed an order and imposed a penalty on the many individuals who are promoters of
a company named Jayavant Industries Limited for not following SEBI SAST Regulations, 2011. (Source:
SEBI)
Investors should note that many of the individual indicted in the order are the promoters of Navkar
Corporation Ltd.
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In the said order, SEBI imposed a monetary penalty on the promoters:
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9) Noncompliance of Navkar Corporation Ltd with ROC and Companies Act regulations:
While reading the placement document for the QIP in 2017, page 53, an investor comes to know that
Navkar Corporation Ltd has not complied with the regulations of Registrar of Companies (ROC) and
Companies Act 2013.
Navkar Corporation Ltd admitted that it did not take the central govt. approval, which is needed before
entering into certain transactions with its promoters. The company also disclosed that it did not do certain
filings to ROC for the creation of charges. The company also admitted that as per the regulations, it
should have appointed a company secretary from April 1, 2014; however, it appointed the company
secretary from September 12, 2014.
2017 QIP placement document, page 53:
Similarly, the company did not have any internal auditor during 2015 from January 22, 2015, to March
30, 2015.
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10) Noncooperation of Navkar Corporation Ltd with existing credit rating agency CRISIL:
While analysing the credit rating reports of Navkar Corporation Ltd, an investor comes to know that the
company has not been cooperating with the credit rating agency CRISIL since January 2017.
As per the update from CRISIL dated April 30, 2018, Navkar Corporation Ltd is still not cooperating with
CRISIL to provide it requisite information.
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In most of the cases where companies, which have taken debt but stop cooperating with their credit rating
agencies, we have found that these companies switch their credit rating agency. As a result, investors find
that some new credit rating agency starts the rating of the company. However, in the case of Navkar
Corporation Ltd, we are not able to find any new report from any other credit rating agency.
Investors may approach the company to know the reason for it not cooperating with CRISIL. An investor
may also ask the company about any new credit rating agency, which is rating the company now. If yes,
then investors may seek the credit rating reports prepared by the new credit rating agency.
In case, the company has not started the credit rating from any new credit rating agency, then investors
may ask the company about the reasons it has stopped getting itself/its debt credit rated. An investor may
also ask the company whether it is currently in noncompliance with RBI regulations mandating credit
rating for companies, which have taken debt from financial institutions more than a certain amount.
11) Suboptimal capital allocation by Navkar Corporation Ltd:
As per the discussion above in the article, an investor would appreciate that Navkar Corporation Ltd has
attempted to grow more than the growth rate, which its internal business strength could sustain. As a
result, the company had to raise funds by diluting its equity capital and by raising additional debt.
In addition, when an investor analyses the returns generated by these assets, then she notices that
currently, Navkar Corporation Ltd is able to generate a profit before tax (PBT) of ₹128 cr. from its net
fixed assets (NFA) of ₹1,921 cr. in FY2018. This amounts to a pre-tax return of 6.6% on the money
invested in net fixed assets, which is very low when compared to a risk-free pre-tax return of 7.50%
provided by Government of India Securities 10-Years (2028) (Source: RBI Website on Jan 12, 2019).
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The next best risk-free alternative of deploying money, a fixed deposit with State Bank of India (SBI)
offers an interest rate of 6.85% on deposits exceeding ₹10 cr. (Source: SBI website on Jan 12, 2019)
An investor would note that a pretax (PBT) return of 6.6% earned by Navkar Corporation Ltd on its assets
is very low when compared to other hassle-free and risk-free avenues like govt. securities or fixed
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deposits with banks. Moreover, the investor would appreciate that the PBT return of 6.6% is assuming the
business performance of Navkar Corporation Ltd during FY2018 when it enjoyed good profit margins.
The investor would remember that in Q2-FY2019, the profit margins of the company declined
significantly and the management anticipates that going ahead profit margins might stay at lower levels.
Therefore, if the investor lower her future profit margin assumptions as per the result of Q2-FY2019, then
the PBT return of Navkar Corporation Ltd falls further below the minimum benchmark of the risk-free
return offered by Govt. of India securities or the fixed deposits of SBI.
Alternatively, an investor may consider that unless an investment in the business is able to generate
returns higher than the risk-free returns provided by Govt. Securities or fixed deposits, there is no point in
taking the business risk of investing money in creating large plants & machinery and taking the added
stress of selling the produce in the market. In such situations, an investor may simply sell all its plant &
machinery and invest the money in govt. securities or fixed deposits and earn a higher return.
Margin of Safety in the market price of Navkar Corporation Ltd:

Currently (January 12, 2019), Navkar Corporation Ltd is available at a price to earnings (PE) ratio of
about 9.5 based on earnings of FY2018. The PE ratio of 9.5 offers some margin of safety in the purchase
price as described by Benjamin Graham in his book The Intelligent Investor.
We recommend that an investor may read the following articles to assess the PE ratio to be paid for any
stock:
Investors
Conclusion:
Overall, Navkar Corporation Ltd seems like a company, which is operating in a very capital-intensive
business where it needs to do large capital expenditure to generate additional sales. The company finds
that its capital expenditure (capex) requirements have always exceeded its profit-generating ability. As a
result, the company has regularly relied on additional sources of funds like equity dilution (IPO and QIP)
and debt from financial institutions as well as promoters.
Until recently, Navkar Corporation Ltd enjoyed high-profit margins. However, now a day, the initiatives
of Govt. of India like direct port delivery (DPD) aimed at reducing time delays in clearance of port cargo,
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are creating a tough business environment for the company. This is because DPD initiative has reduced
the role of CFS operators in cargo handling. In addition, the intense competition among CFS players has
ensured that Navkar Corporation Ltd is losing out its negotiating power over its customers.
Now a day, Navkar Corporation Ltd is not able to pass on the increase in costs to its customers. On the
contrary, the customers are pressing it to increase incentives like increased free days of cargo handling in
its warehouses and delay in clearing the payments.
The company acknowledges that currently, the CFS industry is going through a negative phase. However,
this tough phase for the industry has hit Navkar Corporation Ltd especially hard. This is because Navkar
Corporation Ltd had been doing a large capital expenditure (capex) over the last few years. The expanded
capacity has recently become operational and instead of getting to enjoy the fruits of new capacity in
terms of profitable additional business, Navkar Corporation Ltd is facing a tough time to maintain its
profitability while the capacity utilization of new capacity remains low.
An investor would appreciate that Navkar Corporation Ltd used comparatively lower amounts of debt for
the new capex as it funded part of it by way of equity raised in IPO. However, still, the double impact of
industry headwinds along with debt on the books has led the company to go for another round of equity
dilution (QIP) in FY2018 in quick succession. Moreover, the financial data indicates that Navkar
Corporation Ltd had to pay high costs to raise equity, which might indicate the urgent need of capital by
the company.
Investors would appreciate that the business model of Navkar Corporation Ltd is very capital intensive
and it needs a large amount of capital investments to generate additional sales. Therefore, while analysing
the future growth of the company, investors should do an in-depth assessment of its future capital
requirements and their probable sources.
While an investor analyses the promoter group of Navkar Corporation Ltd, then she notices that there are
certain aspects, which need additional information from the company. An investor should ask the
company about the succession planning of promoters. She should also ask the company about various
land parcels, which have been supposedly purchased by it from the promoters but are to be transferred in
the name of the company. She should also seek clarity about any legal dispute related to these land
parcels.
An investor should be aware of the challenges in circumstances where promoter first buy assets/land in
their own name and then sell them to the company. There have been multiple instances wherein such
transactions; the ultimate cost to the company has been higher in comparison to the condition if the
company would have bought the asset directly from the original owner. Therefore, it is advised that the
investor should do enhanced due diligence of such transactions in the case of Navkar Corporation Ltd as
well.
Investors get to know that Navkar Corporation Ltd has provided guarantees to the promoter group entities
by way of co-borrowing arrangements with lenders. Navkar Corporation Ltd has also provided donations
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to a promoter owned trust year on year. In light of such transactions, investors increase their level of
analysis for the company.
An investor also notices that there have been multiple instances in the past where the company has not
complied with the stipulated regulations like taking central govt. approval before dealings with
promoters/related parties, not filing required documents with ROC, delay in appointing the company
secretary, no internal auditor for a certain period etc. Moreover, SEBI has penalized a few promoters of
the company in the instance of another of their company, where they did not comply with the regulations.
In light of such instances, an investor needs to be extra cautious while doing her analysis.
An investor notices that the Navkar Corporation Ltd has stopped cooperating with its credit rating agency,
CRISIL, in January 2017 and has not provided the information asked by the agency. However, investors
are not able to find a report by any other credit rating agency for the company. An investor may ask the
company about the reason for noncooperation with CRISIL. She should also ask whether any other credit
rating agency has rated it. If not, then whether Navkar Corporation Ltd is in compliance with the RBI
guidelines for credit rating requirements of borrowers.
Going ahead, an investor should closely track the profit margins of the company along with capital
requirements. She should monitor related party transactions of the company with promoters, their group
entities, trust as well as developments related to highlighted land transactions. She should update herself
about any credit rating report of the company and analyse audit reports of the company for any
noncompliance with regulations in future.
These are our views on Navkar Corporation Ltd. However, investors should do their own analysis before
P.S.

Videos
Analysis Excel
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5) Sreeleathers Ltd.
Sreeleathers Ltd is one of the leading footwear companies in India based out of Kolkata. Sreeleathers Ltd
deals in formal and casual footwear of men, women and kids as well as in leather accessories.
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Let us analyse the performance of Sreeleathers Ltd over the last 10 years.
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Financial and Business Analysis of Sreeleathers Ltd:

While analyzing the financials of Sreeleathers Ltd, an investor would note that in the past, the company
has been able to grow its sales at a rate of about 20% year on year. Sales of the company increased from
₹22 cr. in FY2009 to ₹141 cr in FY2018.
While analysing the profitability of the company, an investor would notice that the operating profit
margin (OPM) of Sreeleathers Ltd has consistently improved over the years.
The OPM was 2% in FY2009, which increased sharply to 13% in FY2010. The significant change in the
OPM in FY2010 is essentially due to a major corporate restructuring in the company and the promoter
group.
Earlier the name of the company used to be Cat Financial Services Limited (CFSL). In FY2009, in an
amalgamation scheme, the company merged itself with three other promoter group companies: Deys
Holding Pvt. Ltd., Deys Finance Pvt. Ltd and Shree Leathers Pvt. Ltd.
As part of the amalgamation, CFSL got the business of footwear and leather accessories and the company
has maintained it as the core line of business. Therefore, it seems that financials of the company from
FY2010 onwards show the performance of the footwear business. CFSL changed its name to Sreeleathers
Ltd in FY2011.
If an investor analyses the trend of the operating profit margin of Sreeleathers Ltd from FY2010 onwards,
which represents the footwear business, then she notices that the OPM of the company has consistently
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increased from 13% in FY2010 to 21% in FY2018. Such significant improvement in the profit margin
indicates a few aspects of the competitive strength of Sreeleathers Ltd:
1. The company has the ability to pass on the increase in its raw material/purchase costs to its
customers.
2. The company has the ability to sell more footwear at higher prices as displayed by rising sales
revenue with improving profitability.
The ability to pass on an increase in costs and simultaneously increase sales revenue is a good aspect for
any business.
The net profit margin (NPM) of the company has followed a pattern similar to the OPM. The NPM of
Sreeleathers Ltd has improved from 1% in FY2009 to 15% in FY2018.
The tax payout ratio of Sreeleathers Ltd is consistently in line with the standard corporate tax rate
applicable to companies in India.
Operating Efficiency Analysis of Sreeleathers Ltd:
1) Net fixed asset turnover (NFAT) of Sreeleathers Ltd:
When an investor analyses the net fixed asset turnover (NFAT) of Sreeleathers Ltd over last 10 years
(FY2009-18), then she notices that the NFAT of the company witnessed a continuous improvement year
after year. The NFAT has increased from 0.20 in FY2009 to 0.89 in FY2018.
The improvement in NFAT is a result of a significant increase in sales from ₹22 cr to ₹141 cr over
FY2009-2018 without any major capital expenditure by the company during this period. If an investor
notices the capital expenditure done by Sreeleathers Ltd over FY2009-18, then she notices that the
company has spent only ₹8 cr in this period.
An investor would appreciate that a large increase in sales without any major capital expenditure can be a
result of one of the following situations.
1. One situation can be that Sreeleathers Ltd has not seen an increase in the number of footwear sold
over FY2009-18 and the entire six-fold increase in sales is a result of the increase in the price of
the footwear.
2. Another situation can be that Sreeleathers Ltd had a large amount of unutilized capacity of shoe
manufacturing in FY2009-10, which it has been utilizing over the years increase its sales from
₹20 cr to ₹141 cr.
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3. Still another situation can be that Sreeleathers Ltd does not spend on manufacturing shoes in-
house. Instead, it outsources the shoe manufacturing. As a result, it can easily meet additional
demand for its shoes by letting its vendors make more shoes and supply them to Sreeleathers Ltd
to sell in its stores.
While looking at the pricing of the shoes at the website of Sreeleathers Ltd (click here), an investor would
notice that the price of shoes is lower than what we commonly see for various other branded shoes.
Therefore, the possibility of the first situation seems low that the six-fold increase in sales for the
company over the last 10 years is only the result of a six-time increase in the price of footwear.
This leaves an investor with the second and third situations described above.
While reading the past annual reports of Sreeleathers Ltd, an investor notices that the company has not
disclosed its manufacturing capacity in any of the annual reports from FY2009-2018, which are available
on its website. Therefore, it is difficult for an investor to ascertain that the increase in sales of the
company without any capital expenditure is because of utilization of previously unused capacity available
with the company.
An investor would appreciate that any company, which previously had a lot of spare unused
manufacturing and has now started utilized it, would need more employees to put the spare capacity to
use. In the case of Sreeleathers Ltd, over the last four years, FY2015-2018, the sales of the company have
increased from ₹67 cr in FY2015 to ₹141 cr in FY2018. However, an investor would notice that during
this period, the number of employees has declined from 62 employees at the end of FY2015 to 34
employees at the end of FY2018.
Therefore, an investor would understand that the probability of an increase in sales of footwear by making
more footwear in the unutilized manufacturing capacity of the company is low. Moreover, when an
investor reads the disclosure of the company related to the number of employees, then she notices that the
company has permanent only in showrooms, godown and administrative office.
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Therefore, it may indicate that the company has kept showrooms, godown and administrative office under
its direct control and the company has outsourced/contracted out the manufacturing activity of footwear to
other suppliers.
Moreover, while going through the previous annual reports of Sreeleathers Ltd, an investor notices that in
the annual reports for FY2012 and FY2013, the company has disclosed that it sources shoes from small
scales shoe manufacturers.
Therefore, it might be possible that Sreeleathers Ltd has been sourcing most of its incremental
requirement for footwear to meet increasing demand from other vendors including small scale and cottage
industries. In case, this is the real situation, then it is possible that Sreeleathers Ltd could increase its sales
revenue by six times without incurring any significant capital expenditure to increase manufacturing
capacity.
An investor should note that the above discussion on the likelihood of possible scenarios is based on
assumptions along with the analysis of publicly available information in the annual reports of Sreeleathers
Ltd. For more clarity, an investor may contact the company directly to understand the situation.
2) Inventory turnover ratio of Sreeleathers Ltd:
An investor would note that over the years, the inventory turnover ratios (ITR) of the Sreeleathers Ltd has
been ranging from 11-14 during FY2009-18. Such a trend of ITR indicates that the company has kept its
inventory management under control and as a result, not allowed money to be unnecessarily stuck in
working capital.
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3) Analysis of receivables days of Sreeleathers Ltd:
An investor would notice that over the years, receivables days of Sreeleathers Ltd have declined from 9
days in FY2010 to 2 days in FY2018. This reduction in the receivables days for the company has not been
a smooth line improvement. Sreeleathers Ltd witnessed its receivables days increase to 20 days in
FY2012, which may indicate that the company relied on giving a higher credit period to its customers to
increase its sales.
In the information memorandum filed by Sreeleathers Ltd to Bombay Stock Exchange (BSE) in May
2013, the company provided the names of its largest customers.
Information memorandum, May 2013, page 28:
An investor would appreciate that the major customers of Sreeleathers Ltd are companies, which may be
the distributors, retailers/resellers of the shoes. An investor would appreciate that such corporate buyers
will ask for a credit period from footwear manufacturers like Sreeleathers Ltd and the company may have
to give a higher credit period in order to generate higher sales.
Nevertheless, FY2013 onwards, the receivables days of the company started improving and in FY2018, it
declined to 2 days. Such low receivables days indicate that most of the sales for Sreeleathers Ltd take
place with an upfront payment. It may indicate a shift in the business model of the company from earlier
dealer/distributor/reseller led model to current direct sale to end consumer.
Investors may contact the company to understand more about the shift in its business practices over the
last 10 years if any.
An analysis of receivables days along with inventory turnover indicates that Sreeleathers Ltd has been
able to keep its working capital requirements stable and under control. It means that Sreeleathers Ltd has
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been able to convert its profits into the cash flow from operations without the money being stuck in
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 FY2009-18.
An investor would notice that over FY2009-18, Sreeleathers Ltd has reported a total cumulative net profit
after tax (cPAT) of ₹80 cr. whereas during the same period, it reported cumulative cash flow from
operations (cCFO) of ₹88 cr indicating that it has converted its profits into cash.
Margin of Safety in the Business of Sreeleathers Ltd:
1) Self-Sustainable Growth Rate (SSGR):
its target growth.
An investor would notice that Sreeleathers Ltd has witnessed an SSGR ranging from 4% to 6% over the
years. However, the sales growth achieved by the company over the years is 20%, which is higher than its
SSGR. Therefore, investors would expect that the company would have to raise debt from additional
sources to fund its growth. However, in the case of Sreeleathers Ltd, the company has remained debt-free
for almost all of the previous 10 years (FY2009-18).
While reading the SSGR article shared above, the investor would notice that the fundamental concept in
SSGR is that a company needs to invest in fixed assets to grow its business and sales. However, in the
case of Sreeleathers Ltd, the sales growth of the company over the last 10 years has happened without any
major investment in fixed assets (i.e. capital expenditure).
Therefore, it becomes essential for investors to understand the sources from which Sreeleathers Ltd has
met its requirement of footwear to generate sales growth. As discussed above, if the business/sales of the
company have grown by using the previously unutilized manufacturing capacity, then it becomes
important to know the current capacity utilization. This is because the knowledge of current capacity
utilization will help the investor to assess the sales revenue that Sreeleathers Ltd can ascertain from
currently available manufacturing capacity. In case, the company is nearing the optimal utilization of its
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manufacturing capacity, then it may have to incur significant capital expenditure in the near future to
maintain its growth trend.
However, if the investor gets to know that Sreeleathers Ltd has met the additional requirement of
footwear for sales growth by sourcing it from other manufacturers, then she may assume that the
company may have the potential to meet its future requirements as well by outsourcing. However, in such
a case, it remains to be seen whether Sreeleathers Ltd is able to control the quality of shoe manufactured
by its suppliers.
Therefore, it becomes important for an investor to get the key aspect of the business model of Sreeleathers
Ltd in terms of in-house manufacturing or outsourcing for generating future growth. This is essential for
an investor to estimate the future capital requirements of the company.
2) Free Cash Flow Analysis of Sreeleathers Ltd:
While looking at the cash flow performance of Sreeleathers Ltd, an investor notices that during FY2009-
18, the company had a cumulative cash flow from operations of ₹88 cr. However, during this period it did
a capital expenditure (capex) of only ₹8 cr. As a result, it had a free cash flow of ₹80 cr. (88 – 8).
While analysing the past annual reports of Sreeleathers Ltd, an investor would notice that the company
has used this FCF in various manners:
1. A small amount of dividend payments to the shareholders: The company has used the FCF to
pay a dividend of about ₹4 cr. (excluding dividend distribution tax) to the shareholders.
2. Cash & equivalents and investment in financial assets: At March 31, 2018, Sreeleathers Ltd
has cash & investments of about ₹103 cr.
any company.
Additional aspects of Sreeleathers Ltd:

On analysing Sreeleathers Ltd, an investor comes across certain other aspects of the company:
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1) Management Succession of Sreeleathers Ltd:
While analysing the annual reports of Sreeleathers Ltd, an investor notices Mr. Sumanta Dey, who is the
son of Mr. Satya Brata Dey (MD of the company), is part of the board of directors of the company.
Information Memorandum, BSE, May 2013, page 31:
However, an investor would notice that he is a non-executive director of the company. Therefore, it is not
certain whether Mr. Sumanta Dey would be taking up the active management of Sreeleathers Ltd going
ahead.
Moreover, as per recent corporate announcement by Sreeleathers Ltd to BSE, Ms. Rochita Dey, who is
the daughter of Mr. Satya Brata Dey (MD of the company), has joined the company as an additional
director.
Corporate announcement, BSE, December 26, 2018:
Moreover, as per the interview given by Mr. Satya Brata Dey to newspaper Business Line on December
26, 2018, Ms. Rochita Dey is going to play an active part in the management of the company.
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Therefore, going ahead it seems that instead of Mr. Sumanta Dey, Ms. Rochita Dey will carry the
business ahead.
Nevertheless, the presence of Rochita and Sumanta on the board of the directors indicates that the
company has put in place a management succession plan in which the new generation of the promoter
family will be groomed in business while the senior members of the promoter family are still playing an
active part in the day-to-day activities.
2) Related party transactions of Sreeleathers Ltd:
While reading the past annual reports of the company, an investor would notice that Sreeleathers Ltd has
consistently been dealing with multiple related parties in different transactions of sale & purchase of
goods, giving & receiving loans etc.
For example, as per FY2018 annual report, page 73, Sreeleathers Ltd has been involved in the purchase of
goods as well as the sale of goods with related parties every year.
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An investor would appreciate that when publicly listed companies with promoters’ entities/related parties,
then there is a probability of promoters taking out economic benefits out of the company in the form of
mispricing of purchases and sales of good transactions. If related parties purchase goods from the public
listed company at a cheaper price or the related parties sell goods to the public listed company at a higher
price, then the related parties benefit at the cost of the public listed company. Moreover, the promoter
being the common entity controlling both the public listed company and related parties is the ultimate
beneficiary whereas the public/minority shareholders who do not have direct control end up losing their
economic interest.
There have been multiple cases in the past where promoters of public listed companies have taken out
money from these companies by way of related party transactions.
One of the recent cases where promoters took out money from the public listed company by way of loans
is the case of Religare group companies including Fortis Healthcare:
 SEBI finds diversion of ₹2,315 crore from two Religare firms to Singh brothers (Livemint)
 SEBI directs Fortis firms to recover ₹403 cr from Singh brothers, 7 others (Livemint)
Another recent case where the promoters of a listed company are alleged to benefit themselves via
business transactions with related parties is the case of Sun Pharma and its dealings with a related party
Aditya Medisales:
 Huge Transactions between Aditya Medisales and Private Companies of Sun’s Promoters
(Moneylife)
 The Nexus Between Sun Pharma, Aditya Medisales And Dilip Shanghvi (BloombergQuint)
Therefore, it is advised that investors should be cautious whenever they notice business dealings between
publicly listed companies and other related party companies, which are owned/controlled by promoters &
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their relatives. Investors should monitor related party transactions closely as these may turn out to be
instances of promoters taking the economic value out of the company.
In its information memorandum submitted to BSE in May 2013, Sreeleathers Ltd has highlighted that it
has entered into transactions with entities belonging to the promoter group. Sreeleathers Ltd has cautioned
the public shareholders that these transactions may have an adverse impact on its business.
Moreover, the company has also highlighted that the promoters of the company have many other
companies in the same line of business, which have competing interests. This conflict of interest of
promoters may affect the economic interest of the company and its shareholders including public/minority
shareholders.
3) Sale of a property by the company to the daughter of the managing director of

Sreeleathers Ltd:
As per the corporate announcement by the company to Bombay Stock Exchange (BSE) on August 22,
2018, Sreeleathers Ltd sold a property located at 178 Rashbehari Avenue, Kolkata-700029 to Ms. Rochita
Dey who is the daughter of the MD of the company, for ₹15.5 cr.
BSE announcement, August 22, 2018, page 3:
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It is advised that investors may do their due diligence about the property and the transaction value to
ascertain whether the same is in line with the prevailing market prices in the region. This is because in
case the potential benefit to be drawn from the property is more than ₹15.5 cr, then it may be an economic
loss to the public/minority shareholders.
4) Investments by Sreeleathers Ltd in promoter’s companies:
While analysing past annual reports of the company, an investor would notice that Sreeleathers Ltd has
invested in promoter group companies.
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An investor would notice that the above companies, which have received investments include:
 Sumanta Susanta Overseas (P) Ltd, which is a related party as per the latest disclosures.
 Shoeline Trading Pvt Ltd is a company through which the promoters own shares in Sreeleathers
Ltd.
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 The case of the third company Sreeleathers Overseas Limited is a curious one:
a) Curious case of Sreeleathers Overseas Limited:
As per the annual reports available on the website of the company (FY2009 to FY2018), an investor
notices that Sreeleathers Ltd had an investment in Sreeleathers Overseas Limited since before FY2009.
The same is also visible in the screenshots shared above.
Sreeleathers Ltd continued this investment until FY2015 when it sold/wrote off this investment. During
these years, the company never disclosed the name of Sreeleathers Overseas Ltd as a related party in the
annual report. E.g. FY2013 annual report, page 32:
As per the disclosure above, the auditor relied on the list of the related parties as provided to it by the
company.
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However, when an investor searches about the Sreeleathers Overseas Ltd, then she finds out that the
directors of this company contain Mr Satya Brata Dey, who is MD of Sreeleathers Ltd and Mr Sekhar
Dey, who is the brother of Satya Brata Dey.
(Source: Zaubacorp)
The above analysis indicates that Sreeleathers Ltd had invested in a company, which is controlled by the
promoter group; however, it did not disclose it as a related party in the annual report. It seems that the
company can do better on its level of disclosure on related parties.
Moreover, investments by any public listed company in related parties amounts to giving resources
belonging to the public shareholders to promoters. Therefore, investors should keep a close watch on the
investments done by Sreeleathers Ltd in related parties.
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b) The case of Shoeline Trading Pvt. Limited:
As per the above discussion, an investor would notice that Sreeleathers Ltd has made investments in
Shoeline Trading Pvt. Ltd (STPL). The investor would also remember that STPL is one of the companies
through which promoters own their shareholding in Sreeleathers Ltd.
Such cases of investment by public listed companies in related parties, which are a part of promoters’
shareholding present a unique situation.
Investors would note that on March 31, 2018, the promoters own 64.55% stake in Sreeleathers Ltd.
Therefore, any resource including money/cash owned by Sreeleathers Ltd can be assumed to be 64.55%
owned by the promoters. However, when Sreeleathers Ltd invests this money in any promoter
owned/related party e.g. STPL, then this money becomes 100% controlled by the promoters.
Taking the argument further, suppose that the related party e.g. STPL uses this money to purchase one
share of the public listed company Sreeleathers Ltd, then the promoters’ get to increase their stake in the
public listed company by a full share by effectively paying only 64.55% of the value of this share.
This also become a case where effectively the minority/public shareholders finance the promoters’
increase in stake in the public listed company. This is because, in the above example, minority
shareholders have given their 35.45% share of the money to STPL to increase promoters’ stake in
Sreeleathers Ltd.
To summarize, when promoters make public listed companies invest in related parties and then use this
investment to purchase shares of the public listed company, then it is a case of the promoter using the
share of minority shareholders to their personal benefit.
If an investor wishes to read another such case, where a public listed company made investments in a
related party company, which was used by promoters to own stake in the public listed company, then she
may read the case of Dynemic Products Ltd.
Going ahead, investors should keep a close watch on the investments done by Sreeleathers Ltd in related
party/promoter-owned companies.
5) A loan is taken by Sreeleathers Ltd that was not needed at all:
While reading past annual reports of the company, an investor would notice that Sreeleathers Ltd
borrowed ₹11.5 cr via an unsecured loan in FY2014.
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While reading the annual reports for FY2014 and FY2015, an investor would note that Sreeleathers Ltd
did not use this loan for any capital expenditure. Instead, in FY2014, the company took this loan and
invested it in mutual funds. The analysis of cash flow statement esp. the cash flow from investing
activities provide the following insights.
Looking at the above cash flow from investing activities section, an investor would notice that in
FY2014, Sreeleathers Ltd invested only ₹0.37 cr in fixed assets. However, during FY2014, the company
invested ₹17.5 cr in mutual funds. In the above statement, an investor would also note that in FY2015,
Sreeleathers Ltd invested only ₹0.07 cr in fixed assets.
The above cash flow statement shows that in FY2015, Sreeleathers Ltd sold mutual funds and withdrew
₹2.7 cr. The company apparently used this money to repay the loan taken in the previous year as at the
end of FY2015, the loan amount was reduced to ₹2.83 cr.
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Moreover, if an investor analyses the cash & investment situation of Sreeleathers Ltd from FY2013
onwards, then she realizes that the company always had a significant cash balance and was not in a need
of funds.
Therefore, it seems that Sreeleathers Ltd took a large loan in FY2014 when it already had cash &
investments of ₹17 cr. The company did not use this loan for any capital expenditure/business purpose but
invested it in debt mutual funds. The company repaid most of this loan in FY2015.
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While analysing FY2015 annual report, an investor gets to know that in FY2014, Sreeleathers Ltd
accrued (i.e. liable to pay but has not yet paid) an interest of about ₹0.81 cr on the loan amount of ₹10.75
cr, which comes to be an interest rate of about 7.5%.
An investor would appreciate that there seem to be no requirement for the company for taking this loan
when it already had surplus cash available with itself. Sreeleathers Ltd received the money, paid interest
of 7.5% on it, invested it in debt mutual funds that give almost similar returns and then paid back most of
the money next year. This seems like providing a temporary home to someone else’s money.
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Moreover, while analysing the FY2018 annual report, an investor notes that Sreeleathers Ltd has taken
another advance/loan of ₹14 cr in FY2018.
Investors may observe that this advance of ₹14 cr received by the company is:
 Not an advance from customers as there is a separate entry in the above table for “Advance From
Customer”
 Not an advance from sellers/retailers as there is a separate entry in the above table for “Advance
from Seller”
 Not a security deposit from agents as there is a separate entry for “Security Deposit from agents”
in the FY2018 annual report on page 69 in the Note 16: Other Non-Current Liabilities
Moreover, in FY2018, Sreeleathers Ltd has not used this advance of ₹14 cr in capital expenditure but it
has put most of this money in mutual funds. In FY2018, the company spent ₹0.08 cr on the purchase of
fixed assets.
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Investors may contact the company to seek clarifications about the loan of ₹11.5 cr taken in FY2014 and
the requirements of the company, which led it to take this loan. Moreover, investors may also seek
clarification about the nature of the advance of ₹14 cr taken by the company in FY2018 and the
requirements of the same when it already has about ₹103 cr in cash & investments at the end of FY2018.
6) Classification of loan as a cash inflow under operating activity by Sreeleathers Ltd:
An investor would appreciate that a cash inflow, which is labelled as a loan should be classified as cash
inflow under financing activities (CFF). This should not be classified as an inflow under operating
activities (CFO). This is because such misclassification of loan funds inflates the CFO. This leads to an
erroneous interpretation of CFO as investors may misinterpret it as a very good business performance
during the year whereas the company may not have performed well.
However, while analysing Sreeleathers Ltd, an investor notices that the company has done this
misclassification of cash inflow with respect to the unsecured loan discussed above, which was raised by
it in FY2014.
In FY2014 cash flow statement, an investor would notice that Sreeleathers Ltd reported a CFO of about
₹19.7 cr. The largest contributor to the CFO was an increase of ₹11.5 cr in other current and non-current
liabilities.
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While going through the details of other current and non-current liabilities in the annual report, the
investor notices that the increase in these liabilities in FY2014 is due to the unsecured loan of ₹11.5 cr
discussed above.
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An investor would appreciate that Sreeleathers Ltd should have classified this unsecured loan as a cash
inflow under financing activities instead of a cash inflow under operating activities. Such
misclassification leads to an erroneous interpretation of cash flow from operations.
7) Sreeleathers Ltd not sharing the profits of business with minority shareholders:
An investor would notice that Sreeleathers Ltd paid its last dividend in FY2014. Since FY2015, the
company has not paid any dividend. While reading the annual reports for this period, an investor notes
that every year, the company has mentioned that they want to conserve cash to expand the business.
As discussed above in the section on business growth of Sreeleathers Ltd., an investor would note that the
company primarily relies on outsourcing of manufacturing of footwear; therefore, it does not do a lot of
capital expenditure. As a result, an investor notices that since FY2015, the company has had higher
profits year after year; it has not done any capital expenditure during this period. However, it has denied
dividends to minority shareholders.
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The above table highlights that since FY2015, despite increasing profits, the company has not paid any
dividends. Moreover, the company has not done any capital expenditure as well. As a result, the company
has been accumulating cash with itself. Over the last 4 years (FY2015-18), the cash and investments with
the company have increased from ₹35 cr to ₹103 cr.
It seems like a case where the company is keeping cash/business profit without sharing it with minority
shareholders.
8) Buyback of shares by Sreeleathers Ltd in which no share was bought back:
In FY2018, the company announced a buyback plan for ₹32.9 cr. It seemed like a step to distribute money
to shareholders.
The company announced to stock exchanges on Oct. 10, 2017, that it would conduct a board meeting on
Oct. 14, 2017, to consider a buyback of shares.
BSE Announcement Oct. 10, 2017:
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On Oct. 14, 2017, the company informed the stock exchanges that its board of directors have approved a
buyback of shares of the company at a maximum price of ₹156/- and a total amount of ₹32.9 cr.
BSE Announcement Oct. 14, 2017:
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However, when an investor notices the share price of Sreeleathers Ltd from about one month prior to the
board meeting of the decision on buyback price, then she notices that the share price of the company
continuously closed above ₹160/-, which is higher than the maximum buyback price of ₹156/-.
The closing share price of Sreeleathers Ltd on BSE from Sept 15, 2017, to Oct. 15, 2017:
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Therefore, it seems that both at the time of planning the board meeting for buyback (Oct. 10, 2017) as
well as on the day of the board meeting (Oct. 14, 2017) when maximum buyback price was decided to be
₹156/-, the company knew that its maximum buyback price is below the prevailing price of its shares in
the stock market.
Investors would appreciate that generally, companies announce their buyback at a premium to the
prevailing share price to incentivize the investors to sell/tender their shares to the company.
In the case of Sreeleathers Ltd., the company did not provide any premium on the prevailing market price.
On the contrary, it announced a buyback at a price lower than the prevailing market price.
Eventually, the buyback period was over without a single share being bought back by Sreeleathers Ltd.
As per the “Report on Buyback of equity shares of Sreeleathers Ltd. 01-06-2018” available on the website
of the company (Click here), the company did not buy any share in the buyback offer.
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Investors would note that the date of update in the above screenshot seems to be March 23, 2018.
However, unfortunately, in all the reports after March 23, 2018, on this page on Sreeleathers Ltd website,
i.e. in all the reports from March 24, 2018, to June 1, 2018, the date of update is March 23, 2018. It can be
a human error in which the person relied on the copy & paste method while preparing the reports.
Therefore, he/she did not update the date when updating the daily buyback status report.
Nevertheless, the buyback offer indicated that the company does not have any immediate capital
expansion plan/alternate avenue to invest its cash. Therefore, it tried to use the buyback of shares as an
attempt to return the money to shareholders.
However, when the buyback offer failed to buy any share due to the low price of the buyback, the
company did not come up with an alternate method to return money to shareholders like dividend
payment etc.
An investor would note that both the above events: lack of dividend despite rising cash reserves and
announcement of buyback below the prevailing share price may indicate that the company is reluctant to
share its cash/business profits with minority shareholders.
9) The contrasting trend in the salaries of MD of Sreeleathers Ltd and its employees:
While analysing the remuneration of employees of the company, an investor notices that recently, year
after year, the remuneration of the managing director who is the promoter of the company is increasing in
line with increasing profits. However, the remuneration of many other employees is decreasing year on
year.
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As per FY2018 annual report, the remuneration of MD of the company increased by 60% due to the good
performance of the company whereas remuneration of CFO decreased by 6%. The remuneration of
employees declined by about 20%.
Moreover, when a person analyses the remuneration increases for the previous year (FY2017), then she
notices that in FY2017, the remuneration of the MD/promoter of the company had increased by 150%,
whereas the remuneration of other two key employees: company secretary and CFO had declined by 10%
and 11% respectively.
Looking at the above data, an investor would sympathize with the situation of the CFO of the company,
Mr. Sujay Bhattacharya who is working with the company with declining remuneration for two years in
the row while the company is reporting highest ever sales and profits.
Looking at the normal aspirational nature of human being, an investor may assume that:
 Either the workforce (with the CFO as an example) is subpar, who are not able to find better job
alternatives, which may reward the hard work put in by employees in the company’s success.
This does not seem to be the case as it is difficult for any company to grow its business without
efficient hard work by its employees.
 Alternatively, the “additional incentives” other than the remuneration reported in the annual
report, which are given by the company to its employees are good enough for them to stay with
the company.
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10) The curious case of trade payables to Sumanta Susanta Overseas (P) Ltd:
While analysing the related party transactions in the FY2018 annual report, an investor notices that
Sreeleathers Ltd has shown certain transactions with Sumanta Susanta Overseas (P) Ltd (SSOPL), which
are related to:
 Purchase of goods and
 The trade payables that should be related to these purchases.
Apart from these two sections, the name of Sumanta Susanta Overseas (P) Ltd (SSOPL) does not appear
in any other relation in the entire annual report. Therefore, an investor may assume that the only
transactions that Sreeleathers Ltd had with SSOPL were the purchases of goods. Therefore, the trade
payables to SSOPL should be for these purchases.
When an investor notices the amount of trade payables to SSOPL, then she notices that the trade payables
are higher than the amount of purchases done by Sreeleathers Ltd in FY2018.
An investor would note that in FY2017, there was no trade payable for SSOPL. It indicates that
Sreeleathers Ltd has made all the payments due to SSOPL for all the purchases done by it until FY2017.
Therefore, the trade payables in FY2018 are only related to the purchases done by Sreeleathers Ltd from
SSOPL in FY2018.
As per the above table, in FY2018, Sreeleathers Ltd purchased goods of about ₹0.72 cr from SSOPL.
However, it has shown trade payables of ₹0.79 cr.
Investors may seek clarifications from the company about the excess of trade payables over the amount of
purchases done by Sreeleathers Ltd from SSOPL. One explanation that may come to investors’ mind is
that the excess amount of ₹0.07 cr (0.79 – 0.72) can be the interest being paid by Sreeleathers Ltd to
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SSOPL for the credit period. However, investors would note that this amount to an interest rate of about
10% on trade payables, which is high considering that Sreeleathers Ltd is a cash surplus company that has
its investments in debt mutual funds. The debt mutual funds give returns of about 6-7% per annum.
Therefore, there is no point in delaying payments to any supplier and in turn pay 10% interest on the same
whereas the company’s cash is earning 6-7% in mutual funds.
11) The curious case of negative trade receivables of Sreeleathers Ltd
While analysing the FY2016 annual report, an investor notices that the company has shown that it has
negative trade receivables of ₹ (0.52) cr outstanding for less than 6 months.
An investor would appreciate that trade receivable is the money that a company has to collect from its
customers for the goods sold by the company to these customers. In all probability, trade receivable is a
positive number. That is why it is called “receivables”.
Negative trade receivables may indicate a few possible scenarios:
 The customer has paid more than the amount of goods supplied by the company and therefore the
company has received excess money. However, this is usually called an advance from the
customer in the liabilities and is not shown as negative trade receivables.
 The other possibility can be that the customer has found the good supplied by the company as
defective/unacceptable quality and therefore, the customer has returned the goods and the
customer is now asking for a refund/return of the money paid by it to Sreeleathers Ltd for these
goods. However, these cases are usually shown as liabilities under provisions. Moreover, it also
raises questions about the quality of the goods supplied by the company.
Investors may contact the company and seek clarifications about these negative trade receivables, the
details of the customers with negative trade receivables and the reasons for the same.
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12) Legal disputes against Sreeleathers Ltd and its MD, Satya Brata Dey:
While going through the information memorandum submitted by the company to BSE in May 2013, an
investor finds that there are many legal disputes pending against Sreeleathers Ltd (or under its previous
name Cat Financial Services Ltd) and its promoter Ms. Satya Brata Dey.
Out of the above disputes, an investor may especially focus on the following ones:
 Dispute no. 1 filed by the Govt. against the MD, Mr Satya Brata Dey under Wildlife Protection
Act. Investors may note that many sections of the Wildlife Protection Act involve criminal
charges where a person may be jailed if proven guilty. Therefore, it is essential for investors to
get details of this case along with its current status. Any possibility of the key promoter member
receiving a jail term is harmful to the company and its business. Therefore, investors may seek
clarifications from the company about his case.
 Dispute no. 7 under Trademark Registry. An investor may seek clarification from the company
about the nature of this dispute and the trademark over which the rights are being contested by the
parties. In case, the dispute is about the key brand name and the company loses its right to the
brand name, then it may prove harmful for the business.
 Dispute no. 5, which is a civil dispute that seems to be filed against the company before
amalgamation in FY2009 as the name of the party is mentioned as Cat Financial Services Ltd.
Investors may seek details of this dispute from the company and whether it involves any
monetary compensation demanded by the counterparty. If yes, then what is the amount of
compensation sought by the counterparty? This is because if the amount of compensation is high
and the case is settled against the company, then it may have a significant impact on the financial
health of the company.
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Investors would note that the company has disclosed many of these key disputes only in the information
memorandum to the BSE in May 2013 and has not mentioned them in the annual reports. Therefore, it is
essential to investors to know the current status of these disputes as well as if there are any new disputes
filed against the company and its directors post the date of the above-mentioned information
memorandum.
Investors may contact the company and seek further details.
13) Errors in the annual reports of Sreeleathers Ltd:
While reading the past annual reports of the company, an investor notices that the company has done
some mistakes while referring to the additions & deductions in the gross block in the fixed assets
schedule for FY2016 in subsequent annual reports.
In the FY2016 annual report at page 48, an investor would notice that in FY2016, Sreeleathers Ltd made
an addition of assets worth ₹74,000/- (mobile phones) and as a result, its gross block increased from
₹1,657,419,084.13 to ₹ 1,657,493,084.13.
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However, in the fixed assets schedule of FY2017, when the company referred to the transactions of
FY2016 as the previous year, then the company did certain errors:
 The company showed the closing gross block of FY2016 as an amount under deductions and
 The company showed the opening gross block of FY2016 as the closing gross block.
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The company repeated the same mistake in the FY2018 annual report on page 66:
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Margin of Safety in the market price of Sreeleathers Ltd:

Currently (April 5, 2019), Sreeleathers Ltd is available at a price to earnings (PE) ratio of about 20.7
based on the earnings of the last 12 months ending December 2018. The PE ratio of 20.7 does not offer
any margin of safety in the purchase price as described by Benjamin Graham in his book The Intelligent
Investor.
Investors
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Conclusion:
Overall, Sreeleathers Ltd seems a company, which has grown over the last decade at a good pace while
improving its profit margins. The company is consistently able to pass on the increase in raw
material/purchase costs to its customers, which shows its competitive strengths.
Sreeleathers Ltd has been able to grow its business over the last decade without any significant capital
expenditure. It seems that the company follows an outsourcing model where it uses other manufacturers
to make footwear for it. As a result, the company is able to meet the increasing requirements of footwear
for sales growth without investing a lot of money. Instead, the number of employees of the company is
coming down, whereas its sales are increasing year on year.
Because of low capital expenditure and increasing sales and profits, the company has been accumulating
cash year on year. At March 31, 2018, the company had cash & investments of about ₹103 cr.
However, when an investor studies the company’s past, then she notices that the company does not seem
to be willing to share the fruits of business/profits with minority shareholders. The company stopped
paying dividends since FY2015 while saying that it plans to invest cash in expansion plans. However, the
company has done little capital expenditure since FY2015 and the cash reserves are increasing.
The company came out with a buyback offer for ₹32.9 cr in FY2018. However, the maximum price for
the buyback was announced at a lower price than the prevailing share price. As a result, no share was
bought in the buyback period. Moreover, despite the failure of buyback offer, the company still did not
announce any dividend to shareholders.
Sreeleathers Ltd has been involved in multiple sales, purchase, investment transactions with related
parties/promoter entities. The company recently sold a property to the promoter’s daughter. These
transactions have the potential of shifting the economic benefits of the resources of the company to the
promoters at the cost of minority shareholders. Therefore, investors need to monitor these transactions.
While analysing the annual reports of the company, an investor realizes that Sreeleathers Ltd has not
disclosed many key information pieces in the annual reports. For example, the related party status of
Sreeleather Overseas Ltd is not disclosed, where the promoters are directors and Sreeleathers Ltd made
investments. Similarly, the company has not disclosed many legal disputes against the company and its
promoters in the annual reports.
Investors find that in the past Sreeleathers Ltd has availed loans even when it did not need them. The
company raised a loan of ₹11.5 cr in FY2014 and put it in debt mutual funds. The company did not do
any capital expenditure with the money but repaid most of it the next year. Similarly, in FY2018, the
company has raised an advance of ₹14 cr for which no additional details are provided. The company has
invested most of this advance in mutual funds.
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The company has classified cash inflow on account of the unsecured loan as an inflow under operating
activities instead of an inflow under financing activities. As a result, any investor may overestimate the
cash flow from operating activities of the company in her analysis.
While analysing the company, an investor notices that during recent years, the company has grown its
sales and profits to all-time high. However, only the managing director (promoter) of the company seems
to benefit from the growth in terms of a significant increase in remuneration. The remuneration of the
managing director/promoter increased by 150% increase in FY2017 and by 60% increase in FY2018. On
the other hand, the remuneration of other key employee like the CFO declined both in FY2017 and in
FY2018. This different treatment of a different set of employees in terms of remuneration increase
deserves the attention of investors.
Investors may contact the company and seek clarification about multiple aspects like the remuneration
issue discussed above as well as the current status of the legal disputes. Investors may also seek details
about the negative trade receivables disclosed by the company in one of the years as well as the reasons
for trade receivables being more than total purchases from one of the related parties for the year.
Going ahead, the investor may monitor the related party transactions of the company including sales,
purchases and investments in promoter entities. Investors may closely monitor the usage of cash reserves
of the company. Investors may track whether the company shows any inclination to share it with the
shareholders. This is very important because a situation where a company generates a lot of cash, which it
is not able to invest and it is not willing to share with shareholders, is a highly probable case where the
cash may be squandered/mis-utilized. Therefore, investors need to keep a close watch on the usage of
cash reserves by the company.
These are our views on Sreeleathers Ltd. However, investors should do their own analysis before taking
any investment related decision about the company.
P.S.

Videos
Analysis Excel
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6) Associated Alcohols and Breweries Ltd

Associated Alcohols and Breweries Ltd is an India distillery based in Madhya Pradesh dealing in country
liquor, extra neutral alcohol, rectified spirit and Indian made foreign liquor (IMFL).
FY2012, Associated Alcohols and Breweries Ltd used to disclose only standalone financials. However,
since FY2013, the company started reporting both standalone as well as consolidated financials. This is
because in FY2013, Associated Alcohols and Breweries Ltd formed a subsidiary, Vedant Energy Pvt. Ltd
and as a result, it started reporting consolidated financials, which included the business performance of
AABL as well as Vedant Energy Pvt. Ltd.
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The company continued to report consolidated financials until FY2015. However, from FY2016 onwards,
the company stopped reporting consolidated financials and reported only standalone financials. This is
because, in FY2016, the company disposed of its investment in the subsidiary company, Vedant Energy
Pvt. Ltd.
analysing Associated Alcohols and Breweries Ltd, we have analysed standalone financials from FY2009-
FY2012, consolidated financials from FY2013-FY2015 and standalone financials from FY2016 onwards
until FY2019.
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Financial and business analysis of Associated Alcohols and Breweries Ltd:

While analyzing the financials of Associated Alcohols and Breweries Ltd, an investor would note that in
the past, the company has been able to grow its sales at a rate of 15% year on year. Sales of the company
increased from ₹97 cr. in FY2009 to ₹324 cr in FY2018. Further, the sales of the company have increased
to ₹403 cr in FY2019.
While analysing the performance of the company in the past, an investor would notice that over the last
10 years, Associated Alcohols and Breweries Ltd has reported consistently improving operating profit
margins (OPM). The OPM of the company has increased from 6% in FY2009 to 14% in FY2019. The net
profit margin (NPM) of the company has also followed a similar trend. NPM has increased from 1% in
FY2009 to 8% in FY2019.
The consistently increasing profit margins give an impression that Associated Alcohols and Breweries
Ltd has a lot of pricing power over its customers and in turn, has the ability to pass on the increase in the
cost of raw material to its customers. However, a deeper analysis of the company reflects a different
picture.
While reading past annual reports and the credit rating reports of Associated Alcohols and Breweries Ltd,
an investor notices that the company does not have any pricing power in its largest product segment,
country liquor. State governments allot the licenses for country liquor and in turn, grant monopoly rights
of selling country liquor to different companies in allotted districts at a price determined by the state govt.
Once the state govt. fixes the selling price of country liquor, then the alcohol producers cannot increase
the price even if the cost of their raw material increase.
The credit rating agency, CARE, has explained the position of limited pricing power of Associated
Alcohols and Breweries Ltd in its credit rating report for the company in March 2019:
The report illustrates that the main raw material used by Associated Alcohols and Breweries Ltd for
producing alcohol is food grain. The production of food grain depends on monsoon and in turn, the
production, as well as price of food grain, is highly volatile. However, the state government
predetermines the price of country liquor. Country liquor producers like Associated Alcohols and
Breweries Ltd do not get an increase in selling price when the prices of food grains increase.
Because of low pricing power, any increase in food grain prices affects the profit margins of the company
adversely.
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The same risk in the business model of the company is highlighted by another credit rating agency,
CRISIL in its report for the company in March 2015, page 1:
Associated Alcohols and Breweries Ltd has also acknowledged its limited pricing power due to stiff
competition in the liquor industry in its FY2014 annual report, page 13:
Similarly, in the FY2018 annual report, page 36:
When an investor analyses the impact of goods and services tax (GST) on the company, then she notices
that the Associated Alcohols and Breweries Ltd believes that it will have to bear the 2-3% cost increase
due to GST on its own. The company does not seem to be in a position to pass on this cost increase.
Investors’ presentation, December 2017, page 13:
Therefore, an investor would acknowledge that Associated Alcohols and Breweries Ltd does not have
pricing power in its largest product segment of country liquor. However, she is surprised to see the
significant increase in the profit margins of the company over the last 10 years. As a result, the investor
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would appreciate that the company must have taken certain steps to protect itself from the tough business
situation of variable raw material prices and fixed selling prices.
While analyzing the past annual reports, an investor finds out that Associated Alcohols and Breweries Ltd
undertook a few steps to strengthen its business model to protect itself from the low pricing power
position in the country liquor segment.
1) Investment in the multi-grain processing facility:
In FY2017 annual report, Associated Alcohols and Breweries Ltd intimated its shareholders that the
company has invested in a production facility, which can process different grains as raw material. This
multi-grain processing facility provides the benefit of shifting from one food grain to another to produce
alcohol whenever the prices of one food grain increase.
As a result, Associated Alcohols and Breweries Ltd could protect its profit margins by controlling its raw
material costs by using cheaper food grains to produce alcohol.
2) Focus on Indian made foreign liquor (IMFL):
Over the years, Associated Alcohols and Breweries Ltd has increased its focus on selling Indian made
foreign liquor (IMFL), which has higher profits. The share of IMFL in the overall sales of the company
has increased year on year and as a result, its profit margins have increased.
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The credit rating agency, CARE, has highlighted this aspect of the business of Associated Alcohols and
Breweries Ltd in its credit rating report of January 2018 when it upgraded the credit rating of the
company from BBB+ to A-.
The company has also acknowledged in FY2018 annual report that the sale of premium liquor has led to
the improvement of profit margins.
Therefore, an investor would acknowledge that improving profit margins may give an impression that
Associated Alcohols and Breweries Ltd has a lot of pricing power over its customers. However, in reality,
the company does not have pricing power in its largest product segment of country liquor.
Despite the tough business environment of fluctuating raw material costs, fixed selling price, and intense
competition, the company has been able to increase its profit margins because of a few key business
decisions. The company could control its costs by switching to a multi-grain processing facility due to
which it could use cheaper food grains to produce alcohol. In addition, the company increased focus on
the sale of Indian made foreign liquor (IMFL), which provide higher profit margins. As a result,
Associated Alcohols and Breweries Ltd witnessed its profit margins improve over the years.
Over the years, Associated Alcohols and Breweries Ltd had a tax payout ratio in line with the standard
corporate tax rate prevalent in India.
Operating Efficiency Analysis of Associated Alcohols and Breweries Ltd:
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a) Net fixed asset turnover (NFAT) of Associated Alcohols and Breweries Ltd:
When an investor analyses the net fixed asset turnover (NFAT) of Associated Alcohols and Breweries Ltd
in the past years (FY2010-18), then she notices that the NFAT of the company declined during the initial
period. The NFAT of the company declined from 3.31 in FY2010 to 2.17 in FY2013. The key reason for
the decline in NFAT during this period was the investments done by the company to set up a PET bottle
manufacturing plant in order to do backward integration as well as the expansion of manufacturing
capacity.
An investor would appreciate that whenever any company undertakes an expansion plan, then it might
take some time for the newly added capacity to reach optimal utilization level. As a result, for the initial
period, the company witnesses lower NFAT. The NFAT improves over the years, as the utilization level
of the newly added capacity increases.
In the case of Associated Alcohols and Breweries Ltd, the NFAT started improving after the expansion
plan was complete. NFAT increased from 2.17 in FY2013 to 3.91 in FY2018 as the utilization level of the
manufacturing capacity increased to an optimal level. In December 2017, Associated Alcohols and
Breweries Ltd informed its shareholders that it has been using its manufacturing capacity at full
utilization levels for the last three years.
Investors’ presentation, December 2017, page 16:
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An investor would appreciate that as Associated Alcohols and Breweries Ltd was using its plant at full
utilization level since last few years, therefore, it has started its next stage of capacity expansion. The
company intends to increase its distillation capacity from existing 31 million liters per annum to 90
million liters per annum by FY2021.
As per March 2019 credit rating report of the company prepared by credit rating agency, CARE,
Associated Alcohols and Breweries Ltd completed its first phase of capacity expansion in October 2018.
Credit rating report, CARE, March 2019, page 2:
An investor would appreciate that due to recent capacity addition, Associated Alcohols and Breweries Ltd
may witness its NFAT levels decline a bit in coming years. However, if the company is able to utilize the
newly added capacity to optimal levels, then it will witness its NFAT level increase to higher levels.
b) Inventory turnover ratio of Associated Alcohols and Breweries Ltd:
An investor would note that over the years, the inventory turnover ratios (ITR) of the Associated Alcohols
and Breweries Ltd has increased over the years. The ITR has increased from 5.4 in FY2010 to 9.7 in
FY2018.
An increasing ITR indicates that Associated Alcohols and Breweries Ltd has been able to manage its
inventory efficiently over the years.
From the discussion on the profitability of the company above, an investor would notice that Associated
Alcohols and Breweries Ltd controlled its raw material costs by investing in multi food grain processing
ability, which could use cheaper food grains to produce alcohol. Such initiatives of the company might
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have contributed to efficient inventory utilization by the company and as a result, the inventory turnover
has improved over the years.
c) Analysis of receivables days of Associated Alcohols and Breweries Ltd:
An investor would notice that over the years, Associated Alcohols and Breweries Ltd has kept its
receivables days under control. Receivables days have improved from 54 days in FY2010 to 21 days in
FY2018, which is a good improvement despite increasing business.
An investor would also notice that the receivables days of the company witnessed sharp improvement
during the initial period when it declined from 54 days in FY2010 to 10 days in FY2015. Even though the
receivables days have increased in FY2016-2018, still, the level of receivables days seems under control.
An investor should keep a close watch on the trend of receivables days going ahead.
When an investor looks at the inventory and receivables level of Associated Alcohols and Breweries Ltd,
then she realizes that the company managed its inventory and receivables efficiently. As a result, the
working capital of the company has not consumed a lot of cash.
This aspect of the business of Associated Alcohols and Breweries Ltd get established when an investor
compares the cumulative net profit after tax (cPAT) of the company with the cumulative cash flow from
operations (cCFO) for FY2010-18. She notices that the company has been able to convert its profits into
cash flow from operations.
Over FY2010-18, Associated Alcohols and Breweries Ltd has reported a total cumulative net profit after
tax (cPAT) of ₹85 cr. whereas during the same period, it reported cumulative cash flow from operations
(cCFO) of ₹140 cr.
Margin of Safety in the Business of Associated Alcohols and Breweries Ltd:
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its target growth.
While analysing the SSGR of Associated Alcohols and Breweries Ltd, an investor would notice that the
company has consistently had a low SSGR (-3% to 7%) over the years. However, the company has been
growing at a rate of 15% over the years.
The sales growth achieved by Associated Alcohols and Breweries Ltd over the years is higher than its
SSGR. Therefore, investors would expect that the company would have to raise debt from additional
sources to fund its growth. However, in the case of Associated Alcohols and Breweries Ltd, the company
has kept its debt levels under control. The company has reduced its debt from ₹23 cr in FY2009 to ₹21 cr
in FY2018.
While reading the SSGR article shared above, the investor would notice that we have highlighted a
situation (Case C), where companies that have SSGR less than the current growth rate but still manage to
reduce debt over the years. In such cases, efficient working capital management ensures that the company
has a significant amount of CFO, which is not stuck in the working capital needs of the company. As a
result, the cash is available from the internal sources for the capital expenditure needed for growth and
reduce debt.
b) Free Cash Flow Analysis of Associated Alcohols and Breweries Ltd:
While looking at the cash flow performance of Associated Alcohols and Breweries Ltd, an investor
notices that during FY2009-18, the company had a cumulative cash flow from operations of ₹140 cr.
However, during this period it did a capital expenditure (capex) of ₹135 cr. As a result, it had a free cash
flow of ₹5 cr. (140 – 135).
The presence of free cash flow indicates that the Associated Alcohols and Breweries Ltd has been able to
meet all its capital expenditure requirements from its cash flow from operations. As a result, the company
could expand its production capacity and simultaneously reduce its debt over the last 10 years.
any company.
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Additional aspects of Associated Alcohols and Breweries Ltd:

On analysing Associated Alcohols and Breweries Ltd, an investor comes across certain other aspects of
the company:
1) Project execution skills:
While analyzing the capacity expansion project of Associated Alcohols and Breweries Ltd, an investor
gets to know in the credit rating report by CARE that the company completed the expansion project
within predicted time and estimated cost. This is good because many times delays in project completion
leads to significant cost increases as well as lost revenue opportunities.
Credit rating report by CARE, March 2019, page 2:
2) Alleged unaccounted cash, black money, shell companies, money laundering, an income
tax raid and allegedly missing promoters:
While searching about the company, an investor comes across information about a search operation
conducted by income tax authorities in November 2017 at 40 locations of Kedia group in 12 cities of six
states. (Indore: Kedia group owners go ‘missing’ after I-T raids. Source: Freepressjournal)
The following are the key highlights of the article:
 Authorities seized ₹5 crore cash and documents of 350-acre land
 The team also traced more than 24 shell companies of the group during the action on Wednesday,
which primarily used to launder money
 The company had deposited ₹13.5 crore during the period of demonetization
 The company had declared black money worth ₹1 crore under Pradhan Mantri Garib Kalyan
Yojna.
While reading the FY2017 annual report, which contains the details of deposit of demonetized currency
notes by companies in their bank accounts, an investor gets to know the background to this income tax
raid.
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In the above disclosure, Associated Alcohols and Breweries Ltd accepts that it could not provide a
satisfactory explanation to the authorities for part of the cash money deposited by it during
demonetization. Therefore, the company decided to disclose this amount under undisclosed income (black
money) in the Pradhan Mantri Garib Kalyan Yojana, 2016.
The above disclosure by the company in the FY2017 annual report and the data points used in the article
in Freepressjournal corroborate with each other.
Investors may track the developments related to this income tax raid for the search operation and further
proceedings and decide accordingly.
3) A curious case of role of promoter family members in Associated Alcohols and Breweries
Ltd:
While analyzing the annual reports of the company, an investor gets to know that two members of the
promoters’ family, Mr. Anand Kumar Kedia, and Mr. Prasann Kumar Kedia are acting at positions of
Chairman and Vice-Chairman in the company.
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However, when the investor analyses further then she notices a few peculiarities in the manner in which
the company has dealt with the disclosures of their positions within the company.
a) Names of Chairman and Vice-Chairman (promoter family members) not shown as a part of the
board of directors:
While looking at the annual reports of the company, an investor notices that Associated Alcohols and
Breweries Ltd has not included the names of Mr Anand Kedia and Mr. Prasann Kedia as a part of details
of the board of directors of the company.
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An investor would notice that the names of Mr Anand Kedia and Mr. Prasann Kedia are not included in
the members of the board of directors. Their names are not included even in the disclosures of the
attendance in the meetings of the board of directors.
The above disclosures seem to indicate that the positions of Mr Anand Kedia and Mr Prasann Kedia
namely Chairman and Vice-Chairman are not indicative of their roles in the board of directors. Instead,
their designations of Chairman – Business Promotion & Development and Vice Chairman – Operation &
Business Development may represent the positions within the functional departments of the company
instead of the board of directors of the company.
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In case, it is true that the promoter family members, Mr Anand Kedia, and Mr Prasann Kedia have
decided to stay as a part of the management team of the company and not the members of the board, then
it may seem perfectly fine. However, it poses other challenges.
b) Remuneration of highest paid employees of the company (promoter family members) avoids
approval of shareholders:
While analyzing the remuneration of key management personnel including the directors of Associated
Alcohols and Breweries Ltd, an investor gets to know that the two promoter family members, Mr Anand
Kedia, and Mr Prasann Kedia, take the highest remuneration from the company.
In FY2018, Mr Anand Kedia and Mr Prasann Kedia have taken a remuneration total remuneration of
₹8.88 cr from the company (₹4.44 cr. each).
If an investor considers this remuneration in comparison with the net profits of the company for FY2018
(₹25 cr), then she notices that the members of the promoter family have taken home a salary, which is
more than 35% of the PAT (8.88/25 = 35.5%)
An investor would appreciate most of the times; the promoters of the company are a part of the board of
directors of the company. As a result, their remuneration has to be approved by the shareholders of the
company. In case, shareholders believe that the promoters are taking very high remuneration, then they
may vote against such a proposal.
In the recent past, shareholders protested the very high remuneration of promoters of Apollo Tyres Ltd by
rejecting the proposal of reappointment of managing director, who is a member of the promoter family.
Shareholders reject re-appointment of Apollo Tyres MD (Source: Economic Times)
As per the article, the MD was drawing very high salary despite declining profits of the company.
Kanwar took home an annual compensation of ₹42.8 crore in 2017, a 43% hike over his take-home of
₹30 crore in 2016. Apollo’s annual standalone net profit in 2017 was ₹622.4 crore, a decline of 23% over
last year. Annual consolidated net profit also declined by 34% at ₹724 crore.
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Because of the defeat of the proposal, the promoters of Apollo Tyres Ltd took a 30% reduction in their
salaries.
Apollo Tyres’ Onkar, Neeraj Kanwar agree to 30% salary cut (Source Livemint)
Therefore, an investor would appreciate that when promoters are a part of the board of directors, then
their appointment to the board along with their remuneration has to be approved by the shareholders. If
the shareholders believe that the promoters are taking very high salaries, then they may vote against it.
In the case of remunerations of Mr Anand Kedia and Mr Prasann Kedia, an investor would notice that it
has been in the range of 35-50% of the net profits of Associated Alcohols and Breweries Ltd.
However, in the case of Mr Anand Kedia and Mr Prasann Kedia, Associated Alcohols and Breweries Ltd
has not put their appointment and remuneration to the shareholders for approval at least since FY2010.
(Please note that only the annual reports of the company from 2010 are available in public domain. We
are not sure whether shareholders before FY2010 approved their remunerations as those annual reports
are not available in the public domain.)
Therefore, the investor would notice that in the case of promoters of Associated Alcohols and Breweries
Ltd, the company has paid about ₹28 cr to Mr Anand Kedia and Mr Prasann Kedia in remuneration since
FY2015-2018. However, the shareholders of the company did not have an opportunity to express their
opinion about their remunerations.
(Please note that the annual reports before FY2015 do not disclose the remunerations of Mr Anand Kedia
and Mr Prasann Kedia and the annual report for FY2019 has not yet shared by the company on its
website.)
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c) Remuneration of promoter family members and the limit put by Companies Act 2013:
An investor would appreciate that Companies Act puts a maximum limit of 10% of net profits on the
remuneration of directors of the companies. In case, any company wishes to pay higher remuneration to
its directors, then apart from shareholders’ approval, the company needs to take approval from the central
government as well.
In most of the cases, the promoters of the company are also a part of the board of the directors of the
company. Therefore, their remuneration proposals are put to vote by the shareholders. If the remuneration
proposed by the company is high and the shareholders approve it, then the company needs to take central
govt. approval for the same.
However, in cases like Associated Alcohols and Breweries Ltd, where the promoters do not seem to be a
part of the board of directors, then we are not sure whether the statutory limit on the remunerations and
the central govt. approval is applicable to their salaries. Moreover, it is not clear whether Associated
Alcohols and Breweries Ltd has taken such approval from central govt.
Investors may approach the company to seek clarification about the applicability of shareholders and
central govt.’s approval to the remuneration of Mr Anand Kedia and Mr Prasann Kedia. For any further
guidance, investors may consult any lawyer/chartered accountant/counsel specializing in Companies Act.
2013.
Investors may note that the statutory ceiling of 10% of net profits put on the remuneration of directors of
the companies by the Companies Act, stipulates the calculation of net profits as per section 197 of the act.
The broad adjustments to the PAT, which approximate it close the net profit as per the section 197 are
mainly: income tax and the remuneration of the directors though there are many other adjustments need
for exact calculations.
However, from our assessment purpose, we believe that the investors should compare the managerial
remuneration with the net profit after tax (PAT). We have seen that most of the times the promoter
directors take remuneration of about 2-4% of the profits, which includes the commission of about 2% of
the profits and the rest being salary and other components.
4) Using resources of Associated Alcohols and Breweries Ltd for supporting multiple
promoter group companies:
While analyzing the annual reports of the company, an investor notices that Associated Alcohols and
Breweries Ltd is supporting many companies by making investments in them, giving them loans, giving
corporate guarantees to their bankers for the loans taken by them etc.
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The above table details the names of different companies, which are benefiting using the resources of
Associated Alcohols and Breweries Ltd by way of loans, investments, guarantees etc.
An investor would notice that the largest amount of support has been provided to Mount Everest
Breweries Limited (MEBL). Associated Alcohols and Breweries Ltd has provided monetary support of
more than ₹12 cr including investment and loans and guarantee to its bankers for ₹52 cr. An investor
should note that in case of a corporate guarantee, the bank gives loan to the recipient by taking the
comfort of repayment from the guarantee provider. In case, the recipient of the loan (MEBL in this case)
is not able to pay the principal or interest, then the bank will force Associated Alcohols and Breweries Ltd
to make payments on behalf of MEBL.
This obligation of Associated Alcohols and Breweries Ltd to repay loans of MEBL becomes further clear
when an investor read the credit rating report of MEBL prepared by credit rating agency, CARE in March
2019.
In the credit rating report, CARE clearly highlights that it has taken the entire credit comfort on the
corporate guarantor to the extent that the entire credit rating report provides a description of only the
corporate guarantor (Associated Alcohols and Breweries Ltd). CARE has summed up its analysis process
of MEBL in its report as below:
Analytical approach: Credit enhancement by way of corporate guarantee of AABL for the bank facilities
of MEBL. The guarantor’s standalone financials are considered for analysis.
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Therefore, when an investor reads the credit rating report of MEBL, then she realizes that for all practical
purposes, the entire responsibility for the repayment of this loan seems to be on Associated Alcohols and
Breweries Ltd.
While analyzing the relationship of Associated Alcohols and Breweries Ltd and MEBL, an investor
comes across certain other aspects.
5) Non-disclosure of the promoter group entity (MEBL) in the related parties section of the
annual report:
While reading past annual reports of Associated Alcohols and Breweries Ltd, an investor notices that the
investment by the company in MEBL goes back to FY2010 when it invested ₹2 cr for in MEBL.
In FY2010 annual report, Associated Alcohols and Breweries Ltd reported MEBL as a related party over
which the key management personnel have significant influence.
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However, from FY2011 onwards, Associated Alcohols and Breweries Ltd stopped reporting MEBL as a
related party. For example, let us see the related parties’ disclosures in the following annual reports.

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It might be a case where the ownership or directorship structure of MEBL has undergone such a change
after FY2010 that Associated Alcohols and Breweries Ltd no longer needs to include its name in the table
of related parties. However, when an investor reads the credit rating report of MEBL prepared by CARE
in March 2019, then she notices that CARE has described MEBL as a Kedia group company.
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Therefore, it seems that MEBL is a part of the promoter group. However, Associated Alcohols and
Breweries Ltd has not disclosed it under related parties.
Looking at the above section of CARE rating rationale, an investor may also note that in FY2017 and
FY2018, MEBL reported a net profit of ₹1.30 cr and ₹2.36 cr respectively. Looking at such lower levels
of net profits, an investor would note that the loan of ₹52 cr, which is guaranteed by Associated Alcohols
and Breweries Ltd, seems a very large loan.
An investor may seek clarifications from the company about the classification of MEBL as a related
party. Going ahead, investors should keep a close watch on the additional investments, loans, and
guarantees made by Associated Alcohols and Breweries Ltd in MEBL, as they may be a way to support
the large loan repayment of MEBL.
This is essential because many times, such arrangements result in shifting of economic benefits from the
public shareholders of listed companies to the shareholders of investee/beneficiary/promoter group
companies.
6) Curious case of investments in subsidiary company, Vedant Energy Pvt. Ltd.:
As discussed above, an investor would remember that Associated Alcohols and Breweries Ltd created a
subsidiary company Vedant Energy Pvt. Ltd (VEPL) in FY2013 and disposed of it in FY2016. As a
result, the company reported consolidated financials for the period FY2013 to FY2015.
When an investor analyses VEPL, then she comes across the following aspects.
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a) Associated Alcohols and Breweries Ltd gets only 50.71% stake in Vedant Energy Pvt. Ltd despite
making more than 90% share of investment:
While reading FY2013 annual report, the year in which the subsidiary company VEPL was formed, an
investor gets to know the details of the investments done by Associated Alcohols and Breweries Ltd in
the subsidiary company.
As per the disclosures, Associated Alcohols and Breweries Ltd invested an amount of ₹1.36 cr in the
shares of VEPL.
While looking at the total capital structure of VEPL, the investor notices that the total equity owned by
VEPL is ₹1.49 cr, which is held as ₹0.27 cr as share capital and ₹1.22 cr as reserves. (1.49 = 0.27 + 1.22).
Therefore, when an investor notices that Associated Alcohols and Breweries Ltd had invested ₹1.36 cr in
a company with total equity of ₹1.49 cr., then she realizes that the total investment done by Associated
Alcohols and Breweries Ltd is 91% of the capital of VEPL (1.36/1.49 = 91.3%).
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However, she is surprised to note that Associated Alcohols and Breweries Ltd has got only 50.71% share
in the VEPL despite making 91% share of investment.
Investors may seek clarification from Associated Alcohols and Breweries Ltd about the reasons for
getting only 50.71% stake in VEPL despite making 91% share of investments. Moreover, investors may
do further due diligence to know about the other investors in VEPL who received almost 49% of the
equity stake by making only about 9% share of investments.
This is because such an investment and capital structure lead to a situation where the other
counterparty/shareholder enjoys 49% economic benefit by committing only 9% of the capital. This may
effectively look like a case where the other shareholder is benefiting at the cost of shareholders of
Associated Alcohols and Breweries Ltd.
b) Subsidiary company, VEPL, used primarily to make investments in other companies, which
finally led to losses:
While analyzing the financial performance of the subsidiary company, VEPL, an investor gets to know
that it had used its entire capital to make investments instead of creating operating fixed assets.
Looking at the above table an investor notices that VEPL had used almost its entire capital to make
investments instead of fixed assets. Investments form more than 98% of the total assets of VEPL
(146.15/148.55 = 98.4%).
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Moreover, when Associated Alcohols and Breweries Ltd disposed of its subsidiary company, VEPL, in
FY2016, then it recognized a loss of ₹0.6 cr in its profit & loss statement for sale of investments, which
could be the loss upon disposal of VEPL.
Investors may seek clarifications from the company about the requirements for establishing a separate
company to make investments and the reasons for losses on the investments.
7) Noncompliance with statutory guidelines and regulatory requirements:
When an investor analyses the past annual reports of Associated Alcohols and Breweries Ltd, then she
notices that in multiple instances in the past, the company did not comply with the regulatory
requirements. Many times, the auditors have pointed out these instances of non-compliances. Let us look
at some of these instances.
a) Lack of internal controls and internal audit system for a long time:
The past annual reports indicate that Associated Alcohols and Breweries Ltd did not have proper internal
controls as well as appropriate internal audit system until FY2014.
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An investor would appreciate that in a situation of lack of internal control processes and the audit system,
the record keeping of the company suffers, and the chances of misrepresentation of the financial
information increase.
In case of Associated Alcohols and Breweries Ltd, the auditors have pointed out that until FY2013; the
company was not maintaining a proper record of its fixed assets.
Similarly, auditors have pointed out that the company needs to improve its record keeping of inventory.
An investor would acknowledge that the lack of controls and audit process leads to deteriorating
confidence of reliability on the reported data of fixed assets, inventory, and other financial information.
In light of the history of lack of controls and processes, it does not come as a surprise to the investor that
the company ended up having excess cash with itself that it could not explain to income tax authorities
and it had to report the cash as undisclosed income (black money) in FY2017.
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b) Publishing results without auditors’ opinion. Audit committee meetings without statutory
auditor:
In FY2013 annual report, the auditor of Associated Alcohols and Breweries Ltd pointed out that the
company had published its quarterly results without the mandatory limited review of the auditor. The
auditor also pointed out that the company has conducted its audit committee meetings without the
participation of the auditor.
c) Delays in deposit of undisputed statutory dues/taxes etc.:
Auditors of Associated Alcohols and Breweries Ltd have pointed out multiple instances where the
company delayed depositing its tax liabilities, which were not under any dispute. E.g. In FY2012, the
company delayed in depositing excise duty, income tax, wealth tax and fringe benefit tax for more than
six months.
In FY2015, the company did not transfer the unpaid dividends in the Investor Education and Protection
Fund and delayed the deposit of undisputed entry tax and service tax for more than six months.
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It seems that the company has not been able to regularize its process of complying with statutory
requirements until now. In FY2018 as well, the company delayed the deposit of undisputed liability of
value-added tax for more than six months after it became due.
d) Delays in spending money under corporate social responsibility (CSR):
An investor notices that the company has delayed spending money under CSR for many years altogether.
In one such instance, it did not spend any money on CSR for three continuous years FY2015-2017).
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8) Classification of payment of interest under cash flow from operating activity instead of
cash flow from financing activity:
While analyzing the cash flow statements of Associated Alcohols and Breweries Ltd, an investor notices
that over the years, the company had classified interest payments as a cash outflow under cash flow from
operations (CFO). The investor would note that the usual practice is to classify interest payments as a
cash outflow under cash flow from financing (CFF).
Associated Alcohols and Breweries Ltd continued this practice of classifying interest payments as a cash
outflow under CFO until FY2017.
First time in FY2018, the company stopped this practice and correctly classified the interest payments as
a cash outflow under cash flow from financing instead of CFO.
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The changing methods of classification of interest payments under the cash flow statement add to the
previous observations that Associated Alcohols and Breweries Ltd has been interpreting regulatory
guidelines differently.
9) Fluctuating production capacity of Associated Alcohols and Breweries Ltd:
As per the discussion above, an investor would remember that Associated Alcohols and Breweries Ltd
has commenced a capacity expansion program from FY2018 in which plans to increase its production
capacity from existing 31.4 million liters per annum to 90 million liters per annum by FY2021 in two
phases. As a part of this expansion program, the first phase of expansion of capacity from 31.4 million
liters to 45 million liters per annum was completed in October 2018.
The above discussion indicates that before the start of the current expansion plan, Associated Alcohols
and Breweries Ltd had a production capacity of 31.4 million liters per annum. However, when an investor
reads the past annual reports of the company, then she gets to know that the company had a production
capacity of 42 million liters per annum in FY2010.
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Investors may contact the company to get clarification about the implied reduction in production capacity
from 42.0 million liters per annum in FY2011 to 31.4 million liters per annum in FY2018.
10) Risk of losing allotted districts where Associated Alcohols and Breweries Ltd has a
monopoly for country liquor:
The company has communicated to the shareholders that the country liquor producers enjoy a monopoly
position in the allotted districts.
Such a situation leads to a belief about assured production and sales in the investors. However, investors
should always be aware that the licenses for sale of country liquor are allotted/renewed at regular intervals
and there is no guarantee that existing license holders will always get their licenses renewed.
Over the years, Associated Alcohols and Breweries Ltd has witnessed a change in the number of districts,
which were allotted to it by Govt. of Madhya Pradesh.
As per the May 2008, investors’ presentation, page 9, the company used to have a license to sell country
liquor in 10 districts.
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As per credit rating agency, CARE, in FY2017, the number of allotted districts declined to eight.
Credit rating report, Feb 2017, CARE, page 1:
As per credit rating agency, CARE, in FY2018, the number of allotted districts increased to nine.
Credit rating report, March 2019, CARE, page 1:
Therefore, an investor would acknowledge that the so-called monopoly position of country liquor
producers is subject to license renewals. In the light of intense competition for these licenses, it may
happen that the existing license holders may not get their license renewed. As a result, they may witness
the sales from their largest production segment decline.
Therefore, going ahead, an investor should keep a close watch on the renewal of licenses for Associated
Alcohols and Breweries Ltd and the number of districts that it is able to retain for selling country liquor.
Margin of Safety in the market price of Associated Alcohols and Breweries Ltd:
Currently (June 06, 2019), Associated Alcohols and Breweries Ltd is available at a price to earnings (PE)
ratio of about 13 based on earnings of FY2019. The PE ratio of 13 hardly provides a margin of safety in
the purchase price as described by Benjamin Graham in his book The Intelligent Investor.
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Investors
Conclusion:
Overall, Associated Alcohols and Breweries Ltd seems like a company, which has been able to grow its
sales at a growth rate of 15% year on year in the past. The company has been able to increase its sales
with improving profitability. The analysis of the business model of the company indicates that it has very
limited pricing power in its largest product segment, country liquor. As a result, the company seems to
have improved its profit margins by taking initiatives to limit costs by investing in multi-grain processing
facilities and by focusing on sales of premium Indian made foreign liquor. These business initiatives have
resulted in significant improvement in the profit margins of the company despite the tough business
environment of country liquor sales.
The company has grown its business by utilizing its production capacity at an optimal level with efficient
management of inventory and receivables. As a result, the company has managed to grow using its
business profits and reduce its debt over the years without witnessing a lot of money being stuck in
working capital.
Associated Alcohols and Breweries Ltd has displayed good project management skills by completing the
capacity expansion project within stipulated time and cost estimates.
However, there are certain aspects of the company, which need improvement and therefore, require the
enhanced focus of investors. These aspects relate to the internal control process of the company, which
have expressed themselves in the form of unexplainable cash income etc., which have led to a search
operation by income tax authorities.
The company had a history of lack of internal audit system and proper internal control process, which
have been highlighted by the auditor in multiple annual reports. The company had delayed the deposit of
undisputed statutory dues/taxes multiple times. The auditor had found the inventory and fixed assets
record keeping insufficient in the past. The company has conducted audit committee meetings without the
presence of statutory auditor. The company has published quarterly financial result without the mandatory
limited review by the auditor. All these aspects indicate that investors should increase their alertness
while analyzing the data reported by Associated Alcohols and Breweries Ltd.
The company has been paying a high remuneration to the promoter family members, Mr Anand Kedia
and Mr Prasann Kedia as compared to the net profit after tax (PAT) of the company. However, the
company has not put their remuneration to the approval of shareholders. This apparently because the
promoter family members are not present in the board of directors as members. However, the decision by
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promoter family members to stay out of board position has denied the shareholders an opportunity to
express their opinion on their remuneration by way of explicit voting.
Associated Alcohols and Breweries Ltd has supported many promoter group companies by making
investments, giving them loans, and providing guarantees to their bankers for their loans. Moreover, the
company has stopped disclosing the key beneficiary of these transactions, Mount Everest Breweries Ltd.,
as a related party in the annual report.
In FY2013, Associated Alcohols and Breweries Ltd invested in a subsidiary company, Vedant Energy
Pvt. Ltd. (VEPL). However, investors notice that the company got only 50.71% stake in VEPL despite
making more than 90% share of investments.
Until FY2017, Associated Alcohols and Breweries Ltd the company used to disclose interest payments as
an outflow under cash flow from operations, instead of an outflow under cash flow from financing. The
company rectified this practice in FY2018.
Going ahead, investor should keep a close watch on the renewal of licenses by the Govt. of Madhya
Pradesh, investments & guarantees of the company in promoter group entities, signs of weakness in
internal control process & compliance with statutory & regulatory guidelines, outcome of the income tax
search operation & investigation, and the profit margins of the company.
These are our views on Associated Alcohols and Breweries Ltd. However, investors should do their own
analysis before taking any investment related decision about the company.
P.S.

Videos
Analysis Excel
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7) Sharda Motor Industries Ltd
Sharda Motor Industries Ltd is one of the leading manufacturers of the automobile exhaust system, seat
frames, seat covers and white goods parts in India.
FY2012, Sharda Motor Industries Ltd used to disclose both standalone as well as consolidated financials.
This is because, the company had a wholly owned subsidiary, Sharda Sejong Auto components (India)
Limited, which it, later on, merged with itself. As a result, from FY2013 to FY2015, the company
reported only standalone financials.
Since FY2016 onwards, Sharda Motor Industries Ltd again started reporting both standalone and
consolidated financials to incorporate the impact of performance of its associate companies: Bharat Seats
Limited, Relan Industrial Finance Limited and its joint ventures: Toyota Boshoku Relan India Private
Limited and Toyo Sharda India Private Limited.
analysing Sharda Motor Industries Ltd, we have analysed consolidated financials from FY2009-FY2012,
standalone financials from FY2013-FY2015 and consolidated financials from FY2016 onwards until
FY2018.
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Financial and Business Analysis of Sharda Motor Industries Ltd:

While analyzing the financials of Sharda Motor Industries Ltd, an investor would note that in the past, the
from ₹453 cr. in FY2009 to ₹1,155 cr in FY2018. While analysing the profitability of the company, an
investor would notice that the operating profit margin (OPM) of Sharda Motor Industries Ltd has been
consistent over the years in the range of 8-10%, which has improved recently in FY2018 to 13%.
Sharda Motor Industries Ltd operates in the auto-ancillary industry, which is highly dependent on the
automobile industry. An investor would appreciate that the automobile industry is a cyclical business,
which witnesses its growth associated with the growth phases of the overall economy. Because of the
cyclical nature of the customer industry (automobiles), the auto-ancillary business also witness cyclical
phases in their business. This is because the automobile manufacturers are very large corporations when
compared to their vendors/suppliers (auto-ancillary players).
Automobile manufacturers have higher negotiating power over suppliers and as a result, they are able to
push tough contractual terms on their suppliers. It results in continuous pressure on the prices the
suppliers are able to get from automobile manufacturers. Such cyclical characteristic of the business of
auto-ancillary companies along with weak negotiating position usually reflects in the nature of fluctuating
profit margins.
Investors would be able to recollect fluctuating profit margins in case of Gandhi Special Tubes Ltd,
which is an auto-ancillary player, which supplies steel tubes including fuel injection tubes to the
automobile manufacturers.
Sharda Motor Industries Ltd has also communicated to its shareholders that it faces continuous pressure
from automobile manufacturers to reduce the prices of its products. The pricing pressure from the
customers along with the volatility in the prices of the raw material is considered a threat by the company.
The credit rating agency, CRISIL in its report of Sharda Motor Industries Ltd in August 2014, highlighted
the challenge faced by the company from raw material prices and pricing pressure from its customers:
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From the above discussion, an investor would anticipate that the profit margin of any auto-ancillary
player like Sharda Motor Industries Ltd would be very fluctuating in nature as had been the case
of Gandhi Special Tubes Ltd. However, in the case of Sharda Motor Industries Ltd, the investor would
notice that the operating profit margin (OPM) has been stable and improving over the years. The OPM
has improved from 8% in FY2011 to about 13% in FY2018.
An investor would notice that the net profit margin (NPM) of Sharda Motor Industries Ltd has also
witnessed similar improvement over the years. The NPM has improved from 2% in FY2009 to 8% in
FY2018.
Such a trend in the profitability is in sharp contrast to the expected performance of any auto-ancillary
company. As a result, an investor should analyse the company further to understand the reason for the
stability/improvement of profitability of the company.
While analysing multiple documents related to the company, an investor gets to know that the
improvement of the profit margins of Sharda Motor Industries Ltd over the years is a result of multiple
factors:
1) Price revisions received from its customers (automobile manufacturers):
While analysing the February 2017 credit rating report of the company prepared by CRISIL, an investor
gets to know that Sharda Motor Industries Ltd is able to receive price revisions from its customers. The
report mentions that such price revision comes with a time lag meaning that if the raw material prices
increase now, then Sharda Motor Industries Ltd get higher prices from its customers after a few
months/quarters. Nevertheless, such price increases allow the company to maintain its profitability.
2) Improving operating efficiencies in business operations:
Sharda Motor Industries Ltd has been working towards improving its operating efficiencies process
automation and material management, which in turn leads to lower wastage. These efforts lead to better
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operating profit margins and in turn, reduce its vulnerability from an increase in raw material prices and
the pricing pressure from its customers.
An investor gets to know about these measures taken by the company from the credit rating report of the
company prepared by CRISIL in August 2013:
3) Focus on research and development activities:
While analysing past annual reports of the company, an investor would notice that Sharda Motor
Industries Ltd has been continuously spending about 1.5% of its sales revenue on research &
development. Over the last eight years (FY2011-18), the company has spent in excess of ₹100 cr on
research and development.
The focus on research and development has produced multiple benefits for the company, which included
the process improvements leading to better control over its operating margins discussed earlier.
As per the August 2013 credit rating report of Sharda Motor Industries Ltd prepared by CRISIL:
The company received a rating upgrade from A to A+ by CRISIL in October 2015 where the credit rating
agency has pointed out continuous focus on research and development and its benefits in controlling costs
as one of the factors for the increase in credit rating.
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An investor would appreciate that an upgrade in credit rating leads to a lowering of interest rates for the
company, which in turn leads to improvement in profit margins.
4) Sharda Motor Industries Ltd ready with BS-VI products due to its research and development
activities:
Because of the continuous focus on research and development, Sharda Motor Industries Ltd is ready with
upgraded products, which meet the requirement of new Bharat Stage – VI (BS-VI) emission norms. These
new BS-VI ready products are being sold to automobile manufacturers at higher prices.
Credit rating report by CRISIL, February 2017:
This is in sharp contrast to another auto-ancillary player analysed by us, Gandhi Special Tubes
Ltd, which does not have BS-VI compliant version of its current products and as a result, faces a
significant risk to its business in near future.
From the above discussion, an investor would notice that Sharda Motor Industries Ltd has been able to
get comparatively better terms from automobile manufacturers than other auto-ancillary players. Sharda
Motor Industries Ltd has spent significant money on research and development activities and as a result, it
has benefited from process improvements leading to lower costs and BS-VI ready products leading to
higher pricing from customers. Therefore, an investor would appreciate that Sharda Motor Industries Ltd
has been able to have better control on its profit margins.
While analysing the tax payout of Sharda Motor Industries Ltd over the years, an investor would notice
that in most of the years, the tax payout ratio is in line with standard corporate tax rate prevalent in India.
In certain years, the tax payout ratio is significantly different like FY2012 (9%), FY2013 (40%) and
FY2015 (-5%). While analysing these the annual reports for these years, the investor would notice that the
key reasons for such divergences are “Minimum Alternate Tax (MAT) credits” and “deferred tax
adjustments”.
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Investors may contact the company directly to get further clarifications for the tax payout ratio.
Operating Efficiency Analysis of Sharda Motor Industries Ltd:
a) Net fixed asset turnover (NFAT) of Sharda Motor Industries Ltd:
When an investor analyses the net fixed asset turnover (NFAT) of Sharda Motor Industries Ltd over last
10 years (FY2009-18), then she notices that the NFAT of the company witnessed a continuous decline
over the initial years and later on, it witnessed a continuous increase. NFAT declined from 4.23 in
FY2010 to 2.94 in FY2014. However, thereafter, NFAT increased from 2.94 in FY2014 to 6.03 in
FY2018.
An investor would appreciate that the decline in the NFAT in the initial period during FY2009-14
coincides with the capital expenditure of about ₹300 cr done by the company in FY2010-14.
In FY2010, Sharda Motor Industries Ltd had eight manufacturing plants whereas by FY2014, the
company had increased the number of plants to 13.
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An investor would appreciate that whenever a company invests in manufacturing plants, then it usually
takes some time for the plants to be operationalized and then reach optimal capacity utilization. During
this phase of reaching optimal utilization, the company would have already done all the investment but
the benefits in terms of higher sales would take time to come. Therefore, during such phases, companies
usually witness declining asset turnover ratios (e.g. NFAT).
Post FY2014, Sharda Motor Industries Ltd has not done any major capital expenditure whereas the
company has benefited from higher sales from the plants operationalized during FY2010-14. As a result,
the company has witnessed good improvement in NFAT.
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b) Inventory turnover ratio of Sharda Motor Industries Ltd:
An investor would note that over the years, the inventory turnover ratios (ITR) of the Sharda Motor
Industries Ltd has been ranging from 11-13, which has recently improved to 14.7 in FY2018.
Such a trend of ITR indicates that the company has kept its inventory management under control and as a
result, not allowed money to be unnecessarily stuck in working capital. This is in line with the discussion
above where we noticed that Sharda Motor Industries Ltd has generated many process improvements due
to research and development, which led to improvement in operating profit margins.
c) Analysis of receivables days of Sharda Motor Industries Ltd:
An investor would notice that over the years, receivables days of Sharda Motor Industries Ltd have
declined from 45 days in FY2010 to 36 days in FY2018.
Declining receivables days indicate that Sharda Motor Industries Ltd has been able to negotiate improving
credit terms with its customers. This can be a probable result of its focus on product improvement by
research and development. Research and development activities have led to the ready availability of BS-
VI compliant products that are sold at a premium price to the customer.
An investor would appreciate that the focus of the company on continuous improvement of its products
and the efforts to stay ready with the future requirements of its customers (BS-VI) has led to improving
operational efficiencies for the company.
An analysis of receivables days along with inventory turnover indicates that Sharda Motor Industries Ltd
has been able to keep its working capital requirements stable and under control. It means that Sharda
Motor Industries Ltd has been able to convert its profits into the cash flow from operations without the
money being stuck in 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 FY2009-18.
An investor would notice that over FY2009-18, Sharda Motor Industries Ltd Limited has reported a total
cash flow from operations (cCFO) of ₹756 cr indicating that it has converted its profits into cash. The
cCFO of Sharda Motor Industries Ltd is significantly higher than its cPAT primarily because of high
depreciation (₹367 cr) and interest expenses (₹99 cr), which are deducted while calculating PAT, while
these are added back to PAT when calculating CFO.
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Margin of Safety in the Business of Sharda Motor Industries Ltd:
its target growth.
An investor would notice that Sharda Motor Industries Ltd has witnessed an SSGR ranging from -9% to
2% over the years. While studying the formula for calculation of SSGR, an investor would understand
that the SSGR directly depends on the net profit margin (NPM) of a company.
Where,

As the NPM of Sharda Motor Industries Ltd has been very low consistently in the range of 2-4%,
therefore, the company has a low SSGR. The SSGR has increased recently because of a sharp increase in
the profit margins in FY2016-2018.
The sales growth achieved by the company over the years is 5-10%, which is higher than its SSGR.
Therefore, investors would expect that the company would have to raise debt from additional sources to
fund its growth. However, in the case of Sharda Motor Industries Ltd, the company has repaid all its debt
in FY2018 and has become debt-free.
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While reading the SSGR article shared above, the investor would notice that we have highlighted a
situation (Case C), where companies that have SSGR less than the current growth rate but still manage to
reduce debt over the years. In such cases, efficient working capital management ensures that the company
has a significant amount of CFO, which is not stuck in the working capital needs of the company. As a
result, the cash is available from the internal sources for the capital expenditure needed for growth and
reduce debt.
b) Free Cash Flow Analysis of Sharda Motor Industries Ltd:
While looking at the cash flow performance of Sharda Motor Industries Ltd, an investor notices that
this period it did a capital expenditure (capex) of ₹368 cr. As a result, it had a free cash flow of ₹388 cr.
(756 – 368).
While analysing the past annual reports of Sharda Motor Industries Ltd, an investor would notice that the
company has used this FCF in various manners:
1. Dividend payments to the shareholders: The company has used the FCF to pay a dividend of
2. Reduction of debt: Sharda Motor Industries Ltd used the FCF to reduce its debt by ₹92 cr over
the years. It used to have a total debt of ₹92 cr in FY2009 whereas it is debt-free in FY2018.
3. Investment in financial assets/ joint venture/ associates: At March 31, 2018, Sharda Motor
Industries Ltd has cash & investments of about ₹209 cr, which includes the investments of about
₹30 cr done in joint ventures and associate companies.
any company.
Additional aspects of Sharda Motor Industries Ltd:

On analysing Sharda Motor Industries Ltd, an investor comes across certain other aspects of the company:
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1) Management Succession of Sharda Motor Industries Ltd:
While analysing the annual reports of Sharda Motor Industries Ltd, an investor notices Mr. Aashim Relan
who is the son of Mr. Ajay Relan (MD of the company), joined the company in 2012 and is currently
working as Chief Operating Officer (COO).
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) Remuneration of promoters of Sharda Motor Industries Ltd:
While reading the FY2017 annual report, an investor notices that on June 2, 2016, the promoter of Sharda
Motor Industries Ltd Mr. N. D. Relan expired and thereafter his wife Ms. Sharda Relan at the age of 81
years was appointed an executive director of the company on August 10, 2016.
An investor would notice that in FY2018, Sharda Motor Industries Ltd has paid a remuneration of ₹4.64
cr to Ms. Sharda Relan.
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However, while going through the “Management Team” section of the website of the company, the
investor notices that the name of Ms. Sharda Relan does not appear in the list of key management
personnel. The “Management Team” section of the website highlights the following eight personnel:
1. Ajay Relan (Managing Director)

2. Aashim Relan (Chief Operating Officer)
3. Vivek Bhatia (CFO)
4. Sanjiv Kumar Yogi (Chief Purchasing Officer)
5. Sitangshu Goswami (President – Sales & Strategy)
6. Pradeep Rastogi (Legal & Strategic Affairs)
7. Nitin Vishnoi (Company Secretary & Compliance Officer)
8. Abinash Upadhayay (Chief People Officer)
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The above assessment indicates that Sharda Motor Industries Ltd is not highlighting one of the highest
paid employees on its website as the key management personnel. This might seem in contrast to the
principle of remuneration in proportion to the value added to the company. An investor may also interpret
the above situation as a case where the company has merely shifted the remuneration, which was being
paid to Mr. ND Relan to the account of Ms. Sharda Relan.
The total amount of remuneration taken by senior promoters (ND Relan, Sharda Relan and Ajay Relan)
has increased consistently over the years.
While analysing the past annual reports of Sharda Motor Industries Ltd, an investor would notice that the
promoters have been taking home the maximum possible remuneration allowed by the statutory limits.
In FY2010, the overall limit for remuneration to the directors was ₹36,382,914/- while the remuneration
taken was ₹36,248,734/-. FY2011 annual report, page 47:
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The above table also shows the method/calculation for arriving at the maximum permissible remuneration
of promoters/directors for any company.
In FY2011, the overall limit for remuneration to the directors was ₹31,128,889/- while the remuneration
taken was ₹31,433,330/-. FY2011 annual report, page 47:
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In March 2014, Sharda Motor Industries Ltd proposed for paying minimum remuneration to promoters
irrespective of low profits in the year by taking central govt. approval.
Thereafter, Sharda Motor Industries Ltd started paying remuneration higher than the stipulated limits by
taking approval from central govt.
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Based on the above discussion, an investor may observe that the promoters of Sharda Motor Industries
Ltd have ensured that they receive remuneration, which is higher than the statutory limits by taking
approval from central govt. approval irrespective of the business performance of the company. Moreover,
investors would observe that Sharda Motor Industries Ltd seems to have shifted the high remuneration
being paid to Mr. ND Relan to the account of Ms. Sharda Relan after his demise. The company is not
highlighting Ms. Sharda Relan as key management personnel on its website despite paying ₹4.64 cr as
remuneration to her in FY2018.
Investors may keep these aspects in mind while analysing Sharda Motor Industries Ltd.
3) Costlier loans taken from related parties by Sharda Motor Industries Ltd than the loans
from financial institutions:
While analysing the past annual reports, an investor would notice that Sharda Motor Industries Ltd has
year after year taken loans from related parties/promoters.
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Therefore, an investor would note that the promoters/related parties have continuously lent money to
Sharda Motor Industries Ltd and earned interest on the same from the company.
While assessing the interest rate, which is paid by Sharda Motor Industries Ltd on these loans to related
parties viz-a-viz loans from other financial institutions, the investor notices that the interest rate on these
loans from related parties has been continuously higher than the interest rate on the loans provided by
financial institutions.
FY2014 annual report, page 44, 45 & 47:
FY2016 annual report, page 72 & 75:
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Therefore, an investor may interpret that Sharda Motor Industries Ltd has access to cheaper sources of
funding from other financial institutions. However, it continued to rely on the loans from
promoters/related parties to meet its cash flow requirements.
Investors may keep in mind that availing costlier loans from related parties when other cheaper sources of
funds are available to any company may seem an attempt to shift disproportionate economic value from
the company to the related parties/promoters.
4) Year on year depreciation expense of Sharda Motor Industries Ltd seems high:
As per FY2018 annual report, page 57, under the new Indian Accounting Standards (IndAS), the
company has estimated the life of plant & machinery to be 20 years. As per the Companies Act 2013, the
useful life of plant & machinery has been stipulated as 15 years.
IndAS is an attempt to align Indian account standards with the International Financial Reporting
Standards (IFRS), the management of a company is permitted to use its discretion on the estimation of the
useful life of assets based on its own assessment.
Therefore, an investor would assume that on an average about 5% (=1/20) to 6.66% (=1/15) of the value
of plant & machinery will be depreciated every year in the profit & loss statement.
However, when an investor notices the depreciation charged by Sharda Motor Industries Ltd on plant &
machinery, then she notices that the depreciation expense is very high than 5%-6.66%.
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The fixed assets schedule in the FY2018 annual report, page 57 shows that on plant & machinery Sharda
Motor Industries Ltd expensed following depreciation amount:
 In FY2017, depreciation of ₹31.2 cr on plant & machinery of about ₹117-120 cr, which is a
depreciation exceeding 25%
 In FY2018, depreciation of ₹26.4 cr on plant & machinery of about ₹125-130 cr, which is a
depreciation exceeding 20%
By looking at the above data, it seems that the company is depreciating its plant & machinery at a rate of
20-25% every year. Such a rate of depreciation may indicate that the useful life of plant & machinery is
only 4-5 years.
An investor would appreciate that a high depreciation will bring down profit before tax and in turn will
reduce the amount of tax liability of the company.
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Investors may contact Sharda Motor Industries Ltd and seek clarification for the reasons of such
seemingly high depreciation expense indicating very low useful life of plant & machinery when compared
with its stated accounting policies.
5) Family dispute in promoters leading to division of the business in Ajay Relan and Rohit
Relan groups:
It seems that Ajay Relan and Rohit Relan, who are the two sons of promoter N.D. Relan, have been
fighting in National Company Law Tribunal (NCLT) for the last couple of years for their disputes
including ownership of businesses. In February 2019, the two brothers have agreed to divide the overall
business into two divisions:
 Rohit Relan group will control the automobile seating business of Sharda Motor Industries Ltd
constituting 26.38% of the total turnover and the stake of the company in Bharat Seats Limited,
Toyota Boshoku Relan India Private Limited and Toyo Sharda India Private Limited
BSE announcement dated March 9, 2019, page 3:
BSE announcement dated February 23, 2019, page 2:
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 Ajay Relan group to retain rest of the business of Sharda Motor Industries Ltd under its control.
The Rohit Relan group plans to control its businesses via a new company NDR Auto Components
Limited (NDRACL), which will be formed initially as a wholly owned subsidiary of Sharda Motor
Industries Ltd. Later on, all the shareholders of Sharda Motor Industries Ltd (SMIL) will be given
proportionate shareholding in NDR Auto Components Limited.
Thereafter, the promoters will switch their shareholding in the companies by way of gift/transfer etc. and
the public shareholders will end up owning the same shareholding in NDRACL as well as SMIL.
BSE announcement dated March 9, 2019, page 5:
Therefore, it seems that at the time of division of the business between the two factions of the promoter
family, the public shareholders will have the same interest in the business but now divided into two
companies: NDR Auto Components Limited (NDRACL) and Sharda Motor Industries Ltd (SMIL). As a
result, it seems that for the public shareholders, the family arrangements do not affect the existing
economic value.
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6) Disputes with joint venture partners of Sharda Motor Industries Ltd:
While reading past annual reports of Sharda Motor Industries Ltd, an investor notices that its joint venture
Toyota Boshoku Relan India (P) Ltd has not paid ₹8.62 lac since 2015.
Investors may appreciate that the amount involved in this issue is a small amount. However, the fact that a
small amount is outstanding from the joint venture since last 4 years and is being disclosed as pending in
the annual reports year after year indicates that there might be some dispute/larger issue in the JV partners
in their understanding/co-operation.
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We believe that investors should assess such situations to ascertain whether there are underlying
disputes/deteriorating relations between the joint venture partners.
An investor may note that Sharda Motor Industries Ltd is already fighting a case against its other joint
venture Toyo Sharda India Pvt. Ltd in National Company Law Tribunal (NCLT):
BSE announcement, October 25, 2018, page 2:
Investors may seek further clarifications from the company in relation to these disputes.
7) Seemingly speculative derivative transactions by Sharda Motor Industries Ltd:
While reading the FY2018 annual report of the company, an investor notes that the company has
recognized losses on derivatives contracts, which are not considered as hedged.
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The derivative transactions, which are not designated as hedged may include speculative bets taken by the
company in derivatives segment of the markets.
Investors may contact the company to seek clarifications about these transactions. Investors may ask the
company whether it enters into speculative derivatives transactions.
It is important because, in FY2008-10, many Indian companies suffered due to derivatives transactions,
which went the wrong way and the companies were forced to undergo restructuring/declare bankruptcy.
Investors may read the case of Indo Count Industries Limitedto read more about a company, which
suffered a loss of about ₹150 cr on derivatives transactions during this period and had to enter
restructuring.
8) Sale/ Disposal of assets year after year by Sharda Motor Industries Ltd:
While reading the past annual reports of the company, an investor would notice that the company has
been deducting significant amounts from its fixed assets under sales/disposal year after year.
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Overall, in the last 10 years (FY2009-18), the company has disposed of assets amounting to ₹100 cr.
However, the annual reports of the company do not provide details in terms of identification of the assets
disposed of or the reasons for such disposal.
Investors may contact the management to seek further clarifications in this regard.
9) Nonpayment of undisputed custom duty liability by Sharda Motor Industries Ltd:
While reading the past annual reports of the company, in the annexure to the auditor’s report, an investor
gets to know that Sharda Motor Industries Ltd has not paid a customs duty of ₹6.59 lac. An investor may
also note that as per the independent auditor, there is no dispute in relation to this customs duty.
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While reading the annual reports of the previous years, the investor notes that this undisputed custom duty
is pending since FY2015.
10) Error in the annual report of Sharda Motor Industries Ltd:
While reading FY2018 annual report, on page 29, company states that its promoter Mr. Ajay Relan holds
41.27% shares in the company:
However, when the investor reads the details of shareholding of each of the promoters’ at page 22 of
FY2018 annual report, then she notes that the shareholding of Mr. Ajay Relan in the company is 32.19:
Investors would note that there is a difference of about 9% in the data of shareholding of Ajay Relan in
two different places in the annual report. If an investor adds the shareholding of Ajay Relan (HUF) in the
company of about 0.32%, even then, the difference cannot be reconciled.
Moreover, in the above image, an investor would note that the promoter Ajay Relan has sold 19,663
shares of the company in FY2018.
Investors may contact the management to know the reasons for the difference in the shareholding details
of Ajay Relan at different places in the annual report. It might be a simple typographical error or the
company may wish to rectify the same.
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Moreover, investors may seek clarifications regarding the reasons for the sale of the shares by the
promoter of the company.
11) Sharda Motor Industries Ltd was listed on stock exchanges soon after it was formed
and even before its first plant was functional:
While going through the website of the company, an investor would notice that Sharda Motor Industries
Ltd was formed in 1986 and it came out with an IPO on Delhi Stock Exchange in 1987. The IPO was
even before its first large scale plant became functional in 1994.
The company’s shares were almost non-liquid for many years. As per FY2010 annual report, there was no
trade in the shares of the company at Delhi Stock Exchange since 1998.
Later on, the company listed its shares on the Bombay Stock Exchange (May 2013) and National Stock
Exchange (September 2015).
Margin of Safety in the market price of Sharda Motor Industries Ltd:

Currently (April 1, 2019), Sharda Motor Industries Ltd is available at a price to earnings (PE) ratio of
about 10.4 based on the consolidated earnings of FY2018. The PE ratio of 10.4 offers a small margin of
safety in the purchase price as described by Benjamin Graham in his book The Intelligent Investor.
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Investors
Conclusion:
Overall, Sharda Motor Industries Ltd seems a company operating in a cyclical industry, which has been
able to protect and improve its profit margins over the years. The key reason for such performance seems
to be the focus of the company on research and development activities, which have led to the company
being ready with technologically advanced products (BS-VI) for the future requirements of its customers.
Over the years, Sharda Motor Industries Ltd has created value for its shareholders. However, when an
investor notices certain aspects like high remuneration of promoters and loans from related parties taken
by the company at interest rates, which are higher than the interest rates charged by financial institutions,
then she realizes that there is a possibility that the promoters may have favoured themselves over minority
shareholders.
The settlement of the ownership dispute between the promoters factions seems to be neutral for the
current economic interest of public shareholders. However, Sharda Motor Industries Ltd is also fighting
the case against one of its joint ventures in NCLT and another of its joint venture is not paying the dues to
the company. It is advised that investors may seek clarifications from the company in this regard.
An investor may also get clarifications from the company about its seemingly high depreciation levels,
speculative derivative transactions as well as sale/disposal of fixed assets of about ₹100 cr over the last 10
years (FY2009-18).
Investors may also seek clarifications from the company about an undisputed custom duty liability, which
Sharda Motor Industries Ltd has not paid since FY2015.
Going ahead, the investor may keep a track of profit margins of the company to monitor whether the
company is able to retain its competitive edge. Investors may also monitor the remuneration level of
promoters and the amount of loans from related parties and the interest rate applicable to such loans.
Investors may keep a close track on the developments related to the family settlement of promoter group
and the dispute of Sharda Motor Industries Ltd with its joint venture.
These are our views on Sharda Motor Industries Ltd. However, investors should do their own analysis
before taking any investment related decision about the company.
P.S.
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Videos
Analysis Excel
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8) Shri Jagdamba Polymers Ltd
Shri Jagdamba Polymers Ltd is an Indian company producing technical textiles, polypropylene and
polyethylene woven sacks & fabric and geo-textile products etc.
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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 Shri Jagdamba Polymers Ltd:

While analyzing the financials of Shri Jagdamba Polymers Ltd, an investor would note that in the past,
the company has been able to grow its sales at a rate of 20-25% year on year. Sales of the company
increased from ₹20 cr. in FY2009 to ₹179 cr in FY2018. Further, the sales of the company have increased
to ₹190 cr in FY2019.
While analysing the performance of the company in the past, an investor would notice that over the last
10 years, the operating profit margin (OPM) of the company has shown two distinct patterns.
During the initial period, FY2009-15, the OPM of the company declined from 16% in FY2009 to 8% in
FY2015. Whereas since FY2016 onwards, the OPM of the company has witnessed improvement. The
OPM has increased from 8% in FY2015 to 18% in FY2019.
While analysing the reasons for such fluctuations in the profit margins of the company, an investor gets to
know that almost 99% of the raw material of the company is dependent on prices of crude oil.
While reading the annual reports of the company, an investor notices that most of the raw material used
by the company like PP (polypropylene), HDPE (high-density polyethylene), LDPE (low-density
polyethylene) etc. are produced from crude oil. Therefore, an investor would appreciate that the prices of
these raw materials are highly dependent on crude oil prices.
The company has highlighted this aspect of its business in its annual reports. FY2018 annual report, page
19:
Moreover, while reading other public documents like the credit rating reports of the company, an investor
gets to know that the key suppliers of these raw materials are large petrochemical companies like
Reliance Limited.
Credit rating report for Shri Jagdamba Polymers Ltd prepared by ICRA in September 2010:
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An investor would appreciate that small players like Shri Jagdamba Polymers Ltd do not have any
negotiating power in front of large petrochemical companies like Reliance Limited. It is difficult for small
players to negotiate lower prices from Reliance Limited. On the contrary, small players find it hard to get
even any credit period from Reliance Limited. Most of the time, small players like Shri Jagdamba
Polymers Ltd have to make advance payments to purchase raw material from large petrochemical
companies.
Credit rating report for Shri Jagdamba Polymers Ltd prepared by ICRA in September 2010:
Shri Jagdamba Polymers Ltd used to have lower negotiating power with its supplier in the past as
highlighted by ICRA in 2011 credit rating report.
The negotiating position of Shri Jagdamba Polymers Ltd has not changed even after eight years as the
2019 credit rating rationale of CARE Ltd has highlighted similar concerns.
Therefore, an investor would acknowledge that on the front of sourcing of raw material, Shri Jagdamba
Polymers Ltd (SJPL) could do little to negotiate lower prices as the suppliers of petrochemical products
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are very large companies when compared to SJPL. Therefore, whenever the crude oil prices go up, the
raw material costs of Shri Jagdamba Polymers Ltd go up.
Further, to understand the profitability of the company, an investor needs to understand the nature of
competitive intensity in the customer market/industry of Shri Jagdamba Polymers Ltd.
While reading more about the customer market of the company, an investor realizes that Shri Jagdamba
Polymers Ltd operates in a commodity market where there are very low barriers to entry. The capital
required to start production is low and the technology to produce the final product is easily available.
February 2019 credit rating report of CARE for Shri Jagdamba Polymers Ltd:
The low barriers to entry in the industry along with the commoditized nature of the product of Shri
Jagdamba Polymers Ltd lead to severe competition, which is primarily depends on price.
September 2010 credit rating report of Shri Jagdamba Polymers Ltd by ICRA:
By combining the learning from the business situation faced by Shri Jagdamba Polymers Ltd from both
the fronts i.e. while sourcing raw material and while selling its products in the market, an investor would
notice that the company faces immense challenges. Whenever the crude oil prices go up, then its raw
material prices go up as well. However, the company faces difficulty to pass on the increased cost of raw
material prices to its customers because the industry has intense competition from multiple players.
In addition, Shri Jagdamba Polymers Ltd does not have any long-term contracts with its customers.
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In the absence of long-term contracts, the customers can easily switch to other suppliers.
As a result, an investor would appreciate that Shri Jagdamba Polymers Ltd finds it very difficult to pass
on the increasing cost of raw material to its customers to maintain its profitability.
In light of the above learning, when an investor analyses the trend of crude oil prices over the last 10
years, then she notices that the crude oil prices have witnessed two major trends.
1. Phase 1 (FY2009-FY2015) Increasing Crude Oil Prices: Crude oil prices increased steadily
from about $55 per barrel in 2009 to about $110 per barrel during FY2015
2. Phase 2 (FY2015-FY2019) Declining Crude Oil Prices: Crude oil prices declined from $110
per barrel during FY2015 and are currently back in the range of about $55 per barrel.
When an investor analyses the movement of operating profit margin (OPM) of Shri Jagdamba Polymers
Ltd over last 10 years in association with the crude oil prices, then she notices that during phase 1 of
increasing crude oil prices (FY2009-FY2015), the company witnessed a decline in its OPM from 16% in
FY2009 to 8% in FY2015. Whereas in phase 2 of declining crude oil prices, the company witnessed its
OPM to increase from 8% in FY2015 to 18% in FY2019.
During FY2010, the company highlighted that the key reason for the decline in margins (the increase in
raw material prices) was an increase in crude oil prices. FY2010 annual report, page 20:
In FY2017, the credit rating agency CARE highlighted that the improvement in profit margins was due to
a decline in raw material costs/fall in crude oil prices.
December 2017 credit rating report of CARE for Shri Jagdamba Polymers Ltd:
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In light of the dependence of the profit margins of Shri Jagdamba Polymers Ltd on crude oil prices, it is
advised that investors should be cautious while extrapolating the current trend of improving profit
margins in the future. The current improvement in the profit margins may be an effect of low crude oil
prices and the crackdown by China on the polluting industries in its geography. Both these factors may
change in the future. The crude oil prices may increase and the competition from China may come up
again.
As a result, an investor should be cautious while assessing the improvement in the profit margins of Shri
Jagdamba Polymers Ltd in recent years.
The net profit margin (NPM) of Shri Jagdamba Polymers Ltd has followed the trend of OPM over the
years.
Over the years, Shri Jagdamba Polymers Ltd had a tax payout ratio in line with the standard corporate tax
rate prevalent in India.
Operating Efficiency Analysis of Shri Jagdamba Polymers Ltd:
a) Net fixed asset turnover (NFAT) of Shri Jagdamba Polymers Ltd:
When an investor analyses the net fixed asset turnover (NFAT) of Shri Jagdamba Polymers Ltd in the
past years (FY2010-18), then she notices that the NFAT of the company has consistently increased from
2.4 in FY2010 to 5.55 in FY2018.
While reading the annual reports, an investor gets to know that the manufacturing capacity of the
company is stagnant since FY2010. In FY2010, Shri Jagdamba Polymers Ltd increased its production
capacity to 12,000 MTPA from 4,600 MTPA in FY2009.
As per the credit rating rationale prepared by CARE Ltd in February 2019, the manufacturing capacity of
Shri Jagdamba Polymers Ltd is still 12,000 MTPA.
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Therefore, an investor realizes that the growth in sales volume in the revenue growth of the company
from ₹32 cr in FY2010 to ₹179 cr in FY2018 has been contributed by the higher capacity utilization of
the existing plant of Shri Jagdamba Polymers Ltd. As a result, the better utilization of the manufacturing
plant has led to a consistent improvement in the NFAT of the company.
b) Inventory turnover ratio of Shri Jagdamba Polymers Ltd:
An investor would note that over the years, the inventory turnover ratios (ITR) of the Shri Jagdamba
Polymers Ltd has witnessed improvement. The ITR has increased from 8.3 in FY2011 to 19.9 in FY2018.
An increasing ITR indicates that Shri Jagdamba Polymers Ltd has been able to manage its inventory
efficiently over the years. As a result, the company has been able to grow its sales without significant
investments in inventory.
c) Analysis of receivables days of Shri Jagdamba Polymers Ltd:
An investor would notice that over the years, Shri Jagdamba Polymers Ltd has kept its receivables
days under control. Receivables days have improved from 57 days in FY2010 to 36 days in FY2018,
which is a good improvement despite increasing business.
When an investor looks at the inventory and receivables level of Shri Jagdamba Polymers Ltd, then she
realizes that the company managed its inventory and receivables efficiently. As a result, the working
capital of the company has not consumed a lot of cash.
This aspect of the business of Shri Jagdamba Polymers Ltd gets established when an investor compares
the cumulative net profit after tax (cPAT) of the company with the cumulative cash flow from operations
(cCFO) for FY2009-18. She notices that the company has been able to convert its profits into cash flow
from operations.
Over FY2009-18, Shri Jagdamba Polymers Ltd has reported a total cumulative net profit after tax (cPAT)
of ₹42 cr. whereas during the same period, it reported cumulative cash flow from operations (cCFO) of
₹73 cr.
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Margin of Safety in the Business of Shri Jagdamba Polymers Ltd:
its target growth.
While analysing the SSGR of Shri Jagdamba Polymers Ltd, an investor would notice that the company
has consistently had a low SSGR (0% to 4%) over the years. Only in the latest year (FY2018), the SSGR
has improved to 14%, which is primarily due to a recent increase in profitability of the company due to
decline in crude oil prices in recent years.
depends on the net profit margin (NPM) of a company.
Where,
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An investor would notice that the NPM of Shri Jagdamba Polymers Ltd has been consistently very low in
the range of 3% to 4%. Therefore, the company consistently has a low SSGR over the years. In FY2018,
the NPM has increased to 9% and as a result, the SSGR has increased to 14%.
An investor would appreciate that the company has been growing at a rate of 20-25% over the years.
However, the low SSGR indicates that the company does not seem to have the inherent ability to grow at
the rate of 25% from its business profits. As a result, investors would appreciate that Shri Jagdamba
Polymers Ltd would have to raise money from additional sources like debt or equity to meet its
investment requirements.
However, while analysing the growth history of the company, an investor notices that despite growing at
20-25%, the company has kept its debt levels under control. Over the last 10 years, the debt levels of the
company have increased minimally from ₹11 cr in FY2009 to ₹14 cr in FY2018.
There are two reasons leading to the controlled debt levels of the company over the years. Firstly, as per
the above discussion, the company has kept its manufacturing capacity at the same level since FY2010.
The lack of significant capital expenditure to increase manufacturing capacity and the use of operating
leverage (using previously unutilized capacity) has kept the funds requirement of the company under
check.
Secondly, while reading the SSGR article shared above, the investor would notice that we have
highlighted a situation (Case C), where companies that have SSGR less than the current growth rate but
still manage to reduce debt over the years. In such cases, efficient working capital management ensures
that the company has a significant amount of CFO, which is not stuck in the working capital needs of the
company. As a result, the cash is available from the internal sources for the capital expenditure needed for
growth and reduce debt.
b) Free Cash Flow Analysis of Shri Jagdamba Polymers Ltd:
While looking at the cash flow performance of Shri Jagdamba Polymers Ltd, an investor notices that
this period it did a capital expenditure (capex) of ₹38 cr. As a result, it had a free cash flow of ₹35 cr. (73
– 38).
The presence of free cash flow indicates that the Shri Jagdamba Polymers Ltd has been able to meet all its
capital expenditure requirements from its cash flow from operations. As a result, the company could
expand its production capacity and kept its debt level under over the last 10 years.
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any company.
Additional aspects of Shri Jagdamba Polymers Ltd:

On analysing Shri Jagdamba Polymers Ltd, an investor comes across certain other aspects of the
company:
1) Curious case of a large competing company, Shakti Polyweave Private Ltd, owned by
promoters of Shri Jagdamba Polymers Ltd:
While reading about the company, an investor gets to know that the promoters of Shri Jagdamba
Polymers Ltd (SJPL) have another company, Shakti Polyweave Private Ltd (SPPL), which is in the same
business line. The promoters of SJPL run the entire business operations of SPPL.
While reading about Shakti Polyweave (Website), an investor gets to know that it produces the same
products as Shri Jagdamba Polymers Ltd and is a much larger player in terms of manufacturing capacity.
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An investor would notice that Shakti Polyweave has a current production capacity of 30,000 MTPA in
comparison to the production capacity of 12,000 MTPA of Shri Jagdamba Polymers Ltd. Moreover, as
per the above screenshot, the promoters are increasing the production capacity of Shakti Polyweave by
another 20,000 MTPA.
As per the credit rating rationale of Shakti Polyweave prepared by CARE Ltd in February 2019, the
additional capacity is primarily debt funded.
February 2019 credit rating report of CARE for Shakti Polyweave Private Ltd:
In light of the above information, an investor should be aware of the conflict of interest that may arise
when the same promoters/management take decisions about Shakti Polyweave Pvt. Ltd and Shri
Jagdamba Polymers Ltd.
a) Promoters may prefer Shakti Polyweave Pvt. Ltd to Shri Jagdamba Polymers Ltd:
While analysing the past business history of Shri Jagdamba Polymers Ltd, an investor gets to know that
previously, the key role of the company was to act as a contract manufacturer for Shakti Polyweave Pvt.
Ltd.
September 2010 credit rating rationale of Shri Jagdamba Polymers Ltd by ICRA Ltd:
Thus, an investor would note that the key role of Shri Jagdamba Polymers Ltd in the promoter group was
to do contract manufacturing for Shakti Polyweave Pvt. Ltd. Shakti Polyweave would, in turn, sell the
goods produced by the company to export markets. Such an arrangement raises the possibility that for any
export order, the promoters may split the profit between Shri Jagdamba Polymers Ltd and Shakti
Polyweave Pvt. Ltd as per their preferences.
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If the promoters decide, then they may easily keep a larger share of profit in Shakti Polyweave and pass
on a lower share of profit to Shri Jagdamba Polymers Ltd in the form of contract manufacturing/job work
charges.
Possibility of such a situation is removed if the promoters only have one company for the business
activity. In such a case, all the profits are availed by one company and the possibility of promoters
preferring their private company to the public limited company is mitigated.
b) Expansion of production capacity in Shakti Polyweave Pvt. Ltd instead of Shri Jagdamba
Polymers Ltd:
In the discussion above, an investor would remember that the production capacity of Shri Jagdamba
Polymers Ltd is unchanged at 12,000 MTPA since FY2010. On the other hand, Shakti Polyweave Pvt.
Ltd, which is already a larger player with a current production capacity of 30,000 MTPA, is undergoing a
further capacity expansion of 20,000 MTPA. An investor would also remember that both Shri Jagdamba
Polymers Ltd and Shakti Polyweave operate in the same business segment and produce similar products.
An investor may think that the promoters have decided to expand the production capacity of Shakti
Polyweave instead of Shri Jagdamba Polymers because Shakti Polyweave may have reached a higher
capacity utilization and in turn, it might need additional capacity.
However, while reading the credit rating reports of both the companies, an investor gets to know that in
FY2018, Shri Jagdamba Polymers had achieved 88% capacity utilization versus 87% capacity utilization
achieved by Shakti Polyweave.
(*please note: we believe that the mention of SJPL in the credit rating report of Shakti Polyweave Private
Ltd while describing the capacity utilization is a typographical error by CARE Ltd.)
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Looking at the above data, an investor would appreciate that in FY2018, both the companies have
achieved a similar level of capacity utilization (88% vs 87%). However, still, the decision of promoters to
increase production capacity of already larger company Shakti Polyweave instead of Shri Jagdamba
Polymers Ltd may indicate that the promoters have decided to grow the already larger company to an
even larger level.
Investors would note that since FY2010, the manufacturing capacity of Shri Jagdamba Polymers Ltd is
constant at 12,000 MTPA. The major capital expenditure is done by the company during the last 10 years
towards the creation of wind-power generation capacity in FY2014 and FY2016. Moreover, as per the
credit rating rationale of the company by CARE in December 2017, the promoters plan to create a solar
power plant in Shri Jagdamba Polymers Ltd:
Moreover, investors would notice that the larger of the two companies, Shakti Polyweave Private Ltd was
established by the promoters in 1997 whereas Shri Jagdamba Polymers Ltd was established in 1985.
Therefore, investors would note that the Shakti Polyweave, which was established by promoters much
later than Shri Jagdamba Polymers Ltd has grown to a much larger level and is still being expanded to an
even larger level with currently ongoing large capital expenditure.
It might be that Shri Jagdamba Polymers Ltd no longer fits into the future expansion plans of the
promoter group. Alternatively, it might be that the promoters prefer to generate more business growth in
their privately held company instead of the public listed company.
Investors may note that such a situation of differential treatment would not arise if the promoters hold
only one company for doing business in a segment.
c) Investors of Shri Jagdamba Polymers Ltd at the mercy of promoters to give any business to the
company:
After looking at the promoter group structure, an investor would appreciate that the promoters have two
companies in the group to manufacture technical textiles: Shri Jagdamba Polymers Ltd and Shakti
Polyweave Pvt. Ltd. Both of these companies are run by the same promoter group/management. As a
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result, whenever, the promoter group/management gets any new order/business opportunity, then it has
the discretion whether to give this order to Shri Jagdamba Polymers Ltd and Shakti Polyweave Pvt. Ltd.
As a result, the shareholders of Shri Jagdamba Polymers Ltd are always at the mercy of the promoters to
give it any business by not giving the business to Shakti Polyweave. All the distribution of business
between Shri Jagdamba Polymers Ltd and Shakti Polyweave Pvt. Ltd is purely based on the goodwill of
promoters. The promoters may decide to give all the business to Shakti Polyweave and only give that
amount of manufacturing job to Shri Jagdamba Polymers Ltd, which cannot be manufactured by Shakti
Polyweave, as used to happen in the past. This raises possibilities of conflict of interest.
Moreover, from the above discussion, an investor would note that Shakti Polyweave is currently
undergoing a debt-funded large capital expenditure. An investor would appreciate that the natural
intention of the promoter group may be to utilize the newly created capacity of Shakti Polyweave as early
as possible and in turn, pay off the debt raised by them in Shakti Polyweave so that the upcoming interest
burden can be reduced.
In light of the same, an investor should be cautious while analysing the future possible situations where
the conflict of interest of the promoters of the company by way of their privately held company may
interfere with the future prospects of Shri Jagdamba Polymers Ltd.
Investors may note that such a situation of conflict of interest can be avoided if the promoters of public
listed companies have only one company for running a business segment.
2) Management succession planning:
An investor would note that Shri Jagdamba Polymers Ltd was established by Mr. Ramakant
Bhojnagarwala in 1985. Currently, he is assisted by his son Mr. Hanskumar R. Agarwal in running the
technical textile business of the group.
Therefore, it seems that the promoter group has already taken steps for the continuity of the leadership for
the group. The next generation has already started playing an active role in the business while the
founding promoters are still around to guide them.
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3) No increase in manufacturing capacity of Shri Jagdamba Polymers Ltd despite capital

expenditure in FY2012:
While analysing the financial data of Shri Jagdamba Polymers Ltd, an investor notices that over the last
10 years, the company has done significant capital expenditure during three years:
1. FY2012: a capital expenditure of about ₹7 cr
2. FY2014: a capital expenditure of about ₹12 cr and
3. FY2016: a capital expenditure of about ₹13 cr.
In FY2014 and FY2016, the capital expenditure done by the company was utilized towards the creation of
wind-power generation capacity.
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When an investor reads the annual report for FY2012, then she notices that the company had spent ₹7 cr
on building, plant and equipment. FY2012 annual report, page 27:
However, while analysing the annual reports of the company, an investor is not able to find any
information about any increase in production capacity or any other key asset (like new wind power plant
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etc.). An investor would note from the discussion above in the article that the production capacity of Shri
Jagdamba Polymers Ltd is constant at 12,000 MTPA since FY2010.
Therefore, investors may seek clarifications from the company about the assets that were created by it by
the capital expenditure of ₹7 cr in FY2012.
4) Strange case of forfeiture of ₹10 cr by an investor:
While reading about the promoter group, an investor get to know that in FY2019, one of the partners of
the group had to forfeit about ₹10 cr of money in the group company Shakti Polyweave Pvt. Ltd.
The explanation provided in the credit rating rationale is that the partner withdrew from the project after
providing an advance ₹10 cr. Investors would remember that the size of the current capital expenditure of
Shakti Polyweave is ₹72 cr out of which ₹50 cr is to be funded by debt.
Therefore, the equity contribution for the project is ₹22 cr out of which almost 50% was already provided
by the said partner. If the balance equity contribution could have been contributed by the Shri Jagdamba
group promoters, then the project could be completed without any funding constraints.
In light of this information, it seems strange that the said partner had to withdraw from the project despite
giving away almost 50% of the equity contribution. Moreover, when the partner knew that he/she might
have to lose the entire ₹10 cr of money invested.
Therefore, investors may analyse this event further to understand more about it. Investors may take a hard
look at whether the said capital expansion project and in turn, the future of the technical textile business
of Shri Jagdamba group is financially attractive. Investors may need to convince themselves about the
forfeited investment, as the amount of funds is significant when compared to the size of the company and
the project.
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5) Transactions of loans from promoters not disclosed under related party transactions for
Shri Jagdamba Polymers Ltd:
While assessing the credit rating reports for the company, an investor gets to know that the promoters of
the company have frequently provided loans to the company. CARE in its credit rating report for
February 2019 has taken comfort because of such loans.
In the December 2017 credit rating report, CARE has identified the amount of loans provided by
promoters to the company in FY2016 and FY2017.
From the above disclosure in the credit rating report, an investor can ascertain that at the end of FY2016,
the promoters had provided loans of ₹11.90 cr to Shri Jagdamba Polymers Ltd. In FY2017, out of these
loans, the promoters withdrew ₹6.25 cr. Therefore, in FY2017, loans of ₹5.65 cr (11.90 – 6.25 = 5.65)
remained outstanding.
This data matches with the data present under the section “Loans from Directors and Body Corporates” in
the FY2017 annual report, page 66:
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In light of the presence of loans from promoters, an investor would expect that the detailed data related to
these loans would be present in the related party transactions section of the annual report like:
 What is the applicable interest rate on these loans, how much interest is paid by the company to
the promoters for these loans during the year and how much is payable at the end of the year?
 How much money was taken and repaid during the year etc?
However, when an investor analyses the related party transactions section of the annual report, then she
notices that there are no such details of these loans and interest payments in this section.
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An investor would notice that in the detailed table, under different heads, there are no rows for details of
loan taken/repaid and interest paid. In the last two rows, under outstanding balances at the end of the year,
it seems that the company tried to provide some information like amount due from key management
personnel of ₹83.42 lac, which matches with the amount disclosed under “Loan from Directors &
Shareholders”. However, an investor is not able to gain meaningful information about the rest of the loans
and their counterparties.
It seems that the disclosures by Shri Jagdamba Polymers Ltd under related party transactions have a room
for improvement.
Margin of Safety in the market price of Shri Jagdamba Polymers Ltd:

Currently (June 25, 2019), Shri Jagdamba Polymers Ltd is available at a price to earnings (PE) ratio of
about 8 based on earnings of FY2019. The PE ratio of 8 provides a margin of safety in the purchase price
as described by Benjamin Graham in his book The Intelligent Investor.
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Investors
Conclusion:
Overall, Shri Jagdamba Polymers Ltd seems like a company, which has been able to grow its sales at a
growth rate of 20-25% year on year in the past. The company witnessed its operating profit margin
(OPM) decline from 16% to 8% during FY2009 to FY2015 and then witnessed its OPM improve to 18%
in FY2019. While an investor analysed the business dynamics of the company, then she notices that the
profit margins of the company are linked to crude oil prices.
When crude prices increased during FY2009-FY2015, the OPM of the company declined as it could not
pass on the increase in raw material costs to its customers. This is because the technical textiles industry
has a lot of competition. It is a fragmented industry with low initial capital requirement and easy access to
manufacturing technology. The products of the company are commoditized and as a result, the industry
has a price-based competition where usually the buyer has a choice of many organized and unorganized
suppliers. As a result, the companies find it difficult to increase prices when their costs increase leading to
a decline in profit margins when crude oil prices increase. The absence of long-term agreements with the
customers allows the customers the freedom to change suppliers at short notice.
In recent years, crude oil prices have declined and are currently staying at lower levels. Therefore, the raw
material costs for Shri Jagdamba Polymers Ltd has declined and it is able to show improved profit
margins. It is advised that investor may keep the impact of changing crude oil prices in the profit margins
of the company while they make any future prediction about the sustainability of its profit margins.
Investors notice that the manufacturing capacity of Shri Jagdamba Polymers Ltd has stayed the same at
12,000 MTPA since FY2010, as the promoters seem to have decided against increasing its manufacturing
capacity. Instead, the company has invested money in wind power projects in FY2014 and FY2016 and
has plans to invest money in solar power plants.
On the other hand, the promoters have increased manufacturing capacity in one of their privately held
company, Shakti Polyweave Pvt. Ltd, which was established in 1997 much later than Shri Jagdamba
Polymers Ltd (1985). Shakti Polyweave operates in the same business segment as Shri Jagdamba
Polymers Ltd and currently has a manufacturing capacity of about 30,000 MTPA. Moreover, the
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promoters are expanding the manufacturing capacity of Shakti Polyweave further by 20,000 MTPA in a
primarily debt-funded expansion.
It seems that the promoters have preferred to make Shakti Polyweave a larger player in the technical
textiles segment in their group as they have decided to expand further capacity in Shakti Polyweave while
Shri Jagdamba Polymers Ltd also had 88% capacity utilization level.
In such a case, an investor should be aware of the conflict of interests of promoters and minority
shareholders where promoters may prefer to give a higher amount of business to Shakti Polyweave to
utilize the new capacity addition and repay the debt taken for the same. Investors may note that the
probability of such conflict of interest is mitigated if the promoters of the group keep only one company
for one business segment instead of having a public listed company and a privately held company
competing for the same business. Under such group structures, there is a possibility of minority
shareholders of the public listed company being ignored if the promoters decide to prioritize their
privately held company over the public listed company.
While analysing the related party transactions of the company with promoters, an investor gets to know
that the promoters have given loans to the company. However, an investor is not able to gain further
insights into these transactions to find out the cost of these loans (rate of interest etc.). Investors may seek
clarification from the company about these loans.
Investors may also seek clarifications from the company about the capital expenditure done by the
company in FY2012 on building and plant & equipment of ₹7 cr that did not lead to any capacity
expansion. Investors may also analyse the forfeiture of ₹10 cr by one of the partners of the promoter for
the capacity expansion project of Shakti Polyweave.
Going ahead, investors may keep a close watch on the profit margins of the company, lending
transactions between promoters and Shri Jagdamba Polymers Ltd, and any signs where promoters may
prefer their privately held company Shakti Polyweave to the public listed company Shri Jagdamba
Polymers Ltd. If an investor notices that the promoters have preferred their privately held company, then
she may take a decision accordingly.
These are our views on Shri Jagdamba Polymers Ltd. However, investors should do their own analysis
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9) Gandhi Special Tubes Ltd
Gandhi Special Tubes Ltd is an Indian manufacturer of welded and seamless steel tubes, cold formed tube
nuts and fuel injection tube assemblies for automobile and other industries.
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Let us analyse the performance of Gandhi Special Tubes Ltd over the last 10 years.
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Financial and Business Analysis of Gandhi Special Tubes Ltd:

While analyzing the financials of Gandhi Special Tubes Ltd, an investor would note that in the past, the
from ₹56 cr. in FY2009 to ₹114 cr in FY2018. However, an investor would notice that the sale
performance of the company over the last 10 years has been very fluctuating. Gandhi Special Tubes Ltd
witnessed its sales increase from ₹56 cr. in FY2009 to ₹107 cr in FY2012. However, from FY2013
onwards, the company faced a difficult time and as a result, its sales started declining year on year. Sales
of the company declined to ₹91 cr in FY2016. In FY2017, the company witnessed a revival in its
performance and could increase its sales significantly to an all-time high of ₹114 cr in FY2018.
Such a variation in the performance of the company was not limited to only sales/revenue. Gandhi Special
Tubes Ltd witnessed significant changes in profitability as well. The operating profit margin (OPM) of
the company increased from 39% in FY2009 to 44% in FY2011. However, from FY2012 onwards, the
OPM started declining and fell to 25% in FY2015. From FY2016 onwards, the OPM has started
recovering and has increased to 36% in FY2018.
The net profit margin (NPM) of the company has also followed a similar cyclical pattern. NPM touched a
high of 33% in FY2010 and then a low of 17% in FY2015. Later on, the NPM has recovered to 29% in
FY2018.
An investor would notice that the business performance of Gandhi Special Tubes Ltd has witnessed
cyclical nature during the last 10 years (FY2009-18). In the initial years, the company was growing with
increasing profit margins (FY2009-11) but then it faced tough times in subsequent years, which resulted
in declining sales and profit margins (FY2012-15). Thereafter, the performance of the company improved
in recent times in terms of both sales and profitability (FY2016-18).
Such fluctuating performance is a highlight of companies operating in cyclical industries. Cyclical

industries depend a lot upon economic environments for their business performance.
We highly recommended investors to read the analysis of another company in graphite electrodes, which
is affected by industry cycles: Analysis: HEG Ltd.
Gandhi Special Tubes is highly dependent on the automotive industry. An upturn in the automotive
industry often leads to the rise in sales and profit margins of the company. Similarly, a downturn in the
automotive industry leads to declining sales and profit margins of the company.
This aspect of the strong linkage of Gandhi Special Tubes’ performance with the state of automobile
industry comes out clearly from the management’s explanation when the company notices a decline in
sales as well as profit margins in FY2013.
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Companies in cyclical industries have low negotiating power with their customers. As a result, such
companies are not able to pass on the rising costs to their customers. Moreover, in the case of Gandhi
Special Tubes, key customers are large automobile conglomerates who negotiate hard for prices from
their vendors like Gandhi Special Tubes. Therefore, small suppliers like Gandhi Special Tubes are not
able to maintain their profit margins when they are faced with rising costs.
Gandhi Special Tubes has highlighted this aspect of its business in its annual reports since very early
days. An investor may notice that the company has acknowledged that rising raw material costs and
exchange rate changes are a big concern for the company in the FY2007 annual report, which is the oldest
available annual report on its website. The company had highlighted that it may not be able to pass on the
increase in costs to its customers.
When the sales and the profit margins of Gandhi Special Tubes started declining in FY2013, the company
emphasized that it does not have strong negotiating power with its customers. Therefore, it may not pass
on the rising costs to its customers.
Gandhi Special Tubes witnessed the double impact of the slowdown in the automobile sector along with
declining India Rupee against US Dollar in FY2014. As a result, the sales and profit margins of the
company declined.
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The same situation is continued in FY2015 when the company witnessed its lowest net profit margin of
17% in the last decade (FY2009-18).
Therefore, an investor would appreciate that even though Gandhi Special Tubes has good operating and
net profit margins with OPM ranging from 25%-40% and NPM ranging from 17%-30%, it is highly
dependent on the cyclical nature of its industry. The company acknowledged its low negotiating power
with its customers in the old available annual report of FY2007. The situation is hardly changed over the
last decade as the company has acknowledged a similar weak negotiating position in the FY2018 annual
report as well.
Therefore, an investor would notice that Gandhi Special Tubes Ltd is a small player in a large cyclical
industry (automobiles) and is impacted by the different business phases of the automobile industry. The
company is a small supplier to large automobile conglomerates and therefore, it does not have a lot of
negotiating power to increase prices whenever its raw material and other costs increase. As a result,
Gandhi Special Tubes Ltd has witnessed its sales and profit margins fluctuate in the past. Looking at the
acknowledgement by the company of a similar negotiating state in the latest annual report, an investor
may expect that the sales and profit margins of the company may see similar fluctuating trends in the
future as well.
When an investor analyses the tax payout ratio of Gandhi Special Tubes Ltd, then she realizes that the tax
payout ratio of the company was in the range of standard corporate tax rate prevalent in India until
FY2013. However, FY2014 onwards, the tax payout ratio has been varying wildly from 41% in FY2014
to 19% in FY2017.
While analysing the annual reports of the company from FY2014-FY2018, an investor notices that
Gandhi Special Tubes Ltd has been factoring transactions under “Current Tax expense relating to prior
years”, which along with MAT credits, is leading to a wide variation in the tax payout ratio year after
year.

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Investors may seek more details and clarifications from the company about the nature of these prior
period items for which the tax is being adjusted in the later years.
Operating Efficiency Analysis of Gandhi Special Tubes Ltd:
1) Net fixed asset turnover (NFAT) of Gandhi Special Tubes Ltd:
When an investor analyses the net fixed asset turnover (NFAT) of Gandhi Special Tubes Ltd, then she
notices that the NFAT of the company has been on an increasing trend since FY2010 when it was at a
level of 1.75. The NFAT increased to 2.90 in FY2012 when the trend was interrupted and in the next two
years, NFAT declined to 1.44 in FY2014. Since FY2015, the NFAT has been again on the increasing
trend and has reached 2.14 in FY2018.
While analysing the past annual reports for the capital expenditure (Capex) done by Gandhi Special
Tubes Ltd, an investor notices that in the last 10 years (FY2009-18), the company has done one major
capital expenditure of about ₹30 cr in FY2013-FY2014. The capex included the creation of third bright
annealing furnace at the Halol plant.

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After analysis of the business performance and capital expenditure of Gandhi Special Tubes Ltd over last
year, an investor would appreciates that the inherent increasing trend of NFAT for the company is due to
the reduction of net fixed assets (denominator) every year due to the annual depreciation of about ₹5 cr,
which is about 10% of the fixed assets. The decrease in NFAT during FY2013 and FY2014 is due to the
capital expenditure done by the company on the expansion of the Halol plant, which increased the fixed
assets but did not increase the sales of the company immediately. This is because:
1. New manufacturing plants usually take some time to stabilize and reach optimal production
levels.
2. The company’s sales were affected by the slowdown in the automobile industry.
Therefore, an investor would appreciate that Gandhi Special Tubes Ltd has witnessed an increasing trend
of NFAT, which is interrupted by declining NFAT for FY2013-FY2014 due to capital expenditure.
2) Inventory turnover ratio of Gandhi Special Tubes Ltd:
An investor would note that over the years, the inventory turnover ratios (ITR) of the Gandhi Special
Tubes Ltd has been ranging from 3.5 to 5.0. The inventory turnover witnessed a decline in the FY2013-
FY2015 when the performance of the company was affected by the slowdown in the automobile industry.
However, in recent years, the ITR has improved in line with the overall business performance of the
company.
3) Analysis of receivables days of Gandhi Special Tubes Ltd:
An investor would notice that over the years, receivables days of Gandhi Special Tubes Ltd has been
ranging from 55 days to 60 days indicating the company has been able to keep maintain its receivables
days over the years. It seems because most of the customers of the company are large automobile
conglomerates who pay the company as per the terms of the contract.
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When an investor analyses the receivables days along with inventory turnover, then she notices that
Gandhi Special Tubes Ltd has been able to keep its working capital requirements stable and under
control. The working capital position of the company has not deteriorated over the years. It means that
Gandhi Special Tubes Ltd has been able to convert its profits into the cash flow from operations without
the money being stuck in 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
FY2009-18.
An investor would notice that over FY2009-18, Gandhi Special Tubes Ltd Limited has reported a total
cash flow from operations (cCFO) of ₹233 cr indicating that it has converted its profits into cash.
Margin of Safety in the Business of Gandhi Special Tubes Ltd:
1) Self-Sustainable Growth Rate (SSGR):
its target growth.
An investor would notice that Gandhi Special Tubes Ltd has witnessed an SSGR ranging from -7% to
18% over the years. The sales growth achieved by the company over the years is 8%. Therefore, investors
would expect that the company would be able to fund its growth from its internal sources and it would
need to depend on additional capital like debt or equity to fund its growth requirements.
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2) Free Cash Flow Analysis of Gandhi Special Tubes Ltd:
While looking at the cash flow performance of Gandhi Special Tubes Ltd, an investor notices that during
period it did a capital expenditure (capex) of ₹46 cr. As a result, it had a free cash flow of ₹187 cr. (233 –
46).
An investor would notice that over the last 10 years (FY2009-18), Gandhi Special Tubes Ltd had a
nonoperating income of ₹57 cr. Therefore, overall, the company had surplus cash of ₹244 cr (187 + 57).
While analysing the past annual reports of the company, an investor would observe that the company has
used this surplus money in the following manner:
 Dividend payments to the shareholders: The company has used the funds to pay a dividend of
 Buyback of shares: Gandhi Special Tubes Ltd did a buyback of equity shares in March 2018 for
₹44 cr. FY2018 annual report, page 19:
 Cash and investments: At March 31, 2018, most of the remaining money is being kept by the
company as investments in mutual funds and cash (₹103 cr).
any company.
Therefore, an investor would appreciate that over the last 10 years, Gandhi Special Tubes Ltd has been
able to grow from its own resources without depending on additional/outside funds like debt or equity.
During this period, the company generated a significant amount of free cash, which the company utilized
to pay dividends to shareholders, buy back shares from shareholders and has kept the remaining money as
cash & investments for usage in future.
An investor would appreciate that this is a good conservative manner of business management. It seems
that the markets have appreciated the same as well. As a result, in the last 10 years (FY2009-18), Gandhi
Special Tubes Ltd has been able to generate a wealth of ₹440 cr in terms of increase in market
capitalization for ₹141 cr of profits retained and not distributed to shareholders. This amounts to a wealth
of ₹3.12 in market capitalization for every ₹1 of retained earnings.
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Additional aspects of Gandhi Special Tubes Ltd:

On analysing Gandhi Special Tubes Ltd, an investor comes across certain other aspects of the company:
1) Management Succession of Gandhi Special Tubes Ltd:
While analysing the annual reports of Gandhi Special Tubes Ltd, an investor notices that apart from the
brothers Mr. Manhar Gandhi (CMD) and Mr. Bhuptrai Gandhi (Jt. MD), Mr. Jayesh Gandhi who is the
son of Mr. Manhar Gandhi is a member of the board of directors.
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. However, as per the annual reports, Mr. Jayesh
Gandhi is a non-executive director of the company indicating that he is not active in the day-to-day
management of the company.
Investors may contact Gandhi Special Tubes Ltd to understand more about the management succession
planning of the promoters. Investors may seek clarification about the plans of promoters to handover the
active responsibilities of the company to Jayesh Gandhi in future.
2) Strategic Decisions of Gandhi Special Tubes Ltd:
While analysing the past annual reports of the company, an investor notices that multiple occasions, the
management have taken decisions to close down products and plants, which it felt that is not adding value
to the company.
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In 2008, Gandhi Special Tubes Ltd closed down its plant in Pune where it felt that the plant is not adding
a lot of value to its business and the same activities can be done from its Halol plant, which in turn will
save costs.
In FY2012, Gandhi Special Tubes Ltd stopped the production of refrigeration condenser coils, which had
become unviable due to multiple factors.
Such steps by the management of the company to shut down the products and plants, which are no longer
adding value to the company is a good aspect as it saves the capital. An investor would appreciate that
these decisions of the company to avoid wastage of capital are in line with the above discussion about the
conservative nature of its management.
3) The threat of changing technology for the business of Gandhi Special Tubes Ltd:
One of the major products made by Gandhi Special Tubes is fuel injection tube assemblies. It is a critical
component of the automobile. Currently, due to regulatory demands on automobile manufacturers to
upgrade their automobiles to the newer versions of BS-IV and later on to BS-VI, there is pressure on the
players to advance their engines technologically to better fuel consumption and lower pollution levels.
In this process of technological advancement of the engine, one of the components, which needs an
upgrade, is fuel injection parts, which is the key product of Gandhi Special Tubes Ltd.
An investor would appreciate that if the new engine development by automobile manufacturers requires
that a new generation of fuel injection assemblies be used in the vehicles, then Gandhi Special Tubes Ltd
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would find it difficult to retain its business. Gandhi Special Tubes Ltd has highlighted the risk of its
existing products becoming irrelevant due to technological advancements in its annual reports.
An investor would notice that if the new business environment requires that new versions of fuel injection
products should be made, then Gandhi Special Tubes Ltd should use its research and development
abilities to produce new products. However, while reading the annual reports of the company, an investor
would notice that Gandhi Special Tubes Ltd does not have any research and development program to
develop new products or technologically advanced versions of its existing products.
This is a big concern for the company and its investors because in the absence of development of new fuel
injection products from Gandhi Special Tubes Ltd, the existing products will lose the usage and become
irrelevant.
An investor would believe that in the absence of research abilities of the company, the next best solution
is to acquire the technology to make advanced versions of products from other players. Gandhi Special
Tubes Ltd has also acknowledged it to the shareholders in its annual reports.
However, as per the FY2018 annual report, the company has accepted that it has not been able to acquire
this technology (CRDI Tubes) until now.
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Therefore, an investor would acknowledge that Gandhi Special Tubes Ltd is standing at a critical junction
in its business journey where it needs to find new technology to remain relevant in the advancing world of
automobile engineering. In case, the company is not able to get the technology to make newer versions of
products required by the automobile manufacturers or if any other company is able to acquire this
technology and deliver the products to automobile manufacturers, then Gandhi Special Tubes Ltd will
find its products becoming irrelevant.
In light of the same, it becomes essential that investors should contact the company to know the status of
acquisition of the new technology and keep on monitoring developments on this front.
4) Promoters’ remuneration at Gandhi Special Tubes Ltd:
An investor would notice that in FY2018, Gandhi Special Tubes Ltd has paid a remuneration of ₹2.11 cr
each to its CMD Mr. Manhar Gandhi and to its Jt. MD Mr. Bhupatrai Gandhi. An investor would notice
that the remuneration of each promoter director is about 6.20% and both the promoter directors is 12.40%
of the net profit after tax of ₹34 cr. for FY2018.
The statutory requirements state that the company needs to keep the remuneration of any of its director
within 5% and total remuneration to all such directors should be within 10% of the profits as calculated
according to the section 197 of the companies act 2013. The rough estimate of the profit under section
197 can be assumed to be the profit before tax and by adding back the remuneration being paid to
directors.
Therefore, it seems that the company has followed statutory requirements, however, nevertheless, the
remuneration of ₹4.22 cr. being 12.40% of profit after tax seems on a higher level from normal market
standards, where most of the promoters keep their salaries within the range of 2-4% of net profit after tax.
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5) Related party transactions with Jaishri Engineering Co. Pvt. Ltd.:
While analysing the annual reports of Gandhi Special Tubes Ltd, an investor notices that the company has
involved in sale transactions with Jaishri Engineering Co. Pvt. Ltd (JECPL) for a long time. The oldest
publicly available annual report of the company for FY2007 states that Gandhi Special Tubes Ltd had
sales transactions of ₹1.29 cr (₹1.52 cr in FY2006) with other enterprises on which directors have
significant influence, which included JECPL.
In FY2018, Gandhi Special Tubes Ltd had sales transaction of ₹2.11 cr with JECPL.
*In the above table, Investor may note that the company has by mistake mentioned that the figures are in
Indian Rupees (₹), whereas the figures are in Lac Indian Rupees (₹ lac). It seems to be a typographical
error.
Investors may seek clarifications from the company about these sales transactions and their nature.
However, investors may also note that the size of these transactions (₹1-2 cr) is very small when seen in
the context of the overall business operations of Gandhi Special Tubes Ltd (₹80-100 cr).
Margin of Safety in the market price of Gandhi Special Tubes Ltd:
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Currently (March 12, 2019), Gandhi Special Tubes Ltd is available at a price to earnings (PE) ratio of
about 13.08 based on the past four quarters’ standalone earnings. The PE ratio of 13.08 offers a very
small margin of safety in the purchase price as described by Benjamin Graham in his book The
Intelligent Investor.
Investors
Conclusion:
Overall, Gandhi Special Tubes Ltd seems to be a company operating in a cyclical industry. As a result,
Gandhi Special Tubes Ltd has witnessed business phases like increasing sales and profit margins
(FY2009-12), declining sales and profit margins (FY2013-15) and then again increasing sales and profit
margins (FY2016-18). In line with previous cyclical phases, it is expected that the company may continue
to witness such alternating phases of advancing and declining business performance in future as well.
Apart from the cyclical nature of its business, currently, Gandhi Special Tubes Ltd is faced with a critical
stage of technological challenge. The company faces a situation of its key products becoming obsolete
and irrelevant in case it is not able to develop new fuel injection products (CRDI Tubes) in line with the
requirements of automobile manufacturers to make BS-IV and BS-VI vehicles.
Currently, Gandhi Special Tubes Ltd does not have the research & development capability in the
company. As an alternative, the company is attempting to get this technology from other players.
However, until now, the company has not succeeded to get access to this new technology to make CRDI
tubes, which will be very essential to make products needed by its key customers in future.
Until now, Gandhi Special Tubes Ltd has been able to manage its business operations conservatively. The
company has kept its working capital requirements under check. The management has frequently taken
decisions to shut down unviable products and plants. It has funded its growth requirements from its
business profits and has remained debt-free for the entire last decade.
As a result, the company has generated surplus cash from its business. It has used the surplus money to
pay dividends to shareholders, buy back shares, and has kept the remaining money as cash & investments
for use in future.
Investors may contact the company to understand the status of acquisition of technology to make CRDI
tubes.
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Going ahead, investors should monitor the profit margins of Gandhi Special Tubes Ltd to understand the
phase of the business cycle of the company, status of acquisition of technology to make CRDI tubes,
promoter remuneration levels and the amount of transactions with related parties.
These are our views on Gandhi Special Tubes Ltd. However, investors should do their own analysis
P.S.

Videos
Analysis Excel
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10) Kanchi Karpooram Ltd

Kanchi Karpooram Ltd a manufacturer of camphor and its derivatives like gum rosin, value-added resins
and fortified rosin. The company is based in Kanchipuram, Tamil Nadu.
Let us analyse the financial and business performance of Kanchi Karpooram Ltd over FY2010-2018.
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Financial and business analysis of Kanchi Karpooram Ltd:
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While analyzing the financials of Kanchi Karpooram Ltd, an investor would note that in the past, the
company has been able to grow its sales at a rate of 20% year on year. Sales of the company increased
from ₹29 cr. in FY2010 to ₹115 cr in FY2018. For the last four quarters ended in Dec. 2018 i.e. from Jan-
Dec 2018, the company had reported sales of ₹182 cr.
While analysing the performance of the company in the past, an investor would notice that the journey of
Kanchi Karpooram Ltd has been quite eventful. The sales of the company increased significantly during
FY2010-12. Sales increased from ₹29 cr in FY2010 to ₹49 cr in FY2012. However, after FY2012, the
sales almost stagnated for the next five years. By FY2017, the company increased its sales only to ₹59 cr.
Since FY2017, Kanchi Karpooram Ltd has witnessed a sharp increase in sales when the sales for the last
four quarters ending Dec. 2018 have increased to ₹182 cr.
Such intermittent periods of good performance and stagnant performance in the sales growth of Kanchi
Karpooram Ltd have also extended to the profitability of the company as well. An investor would notice
that the operating profit margin (OPM) of Kanchi Karpooram Ltd has been following a cyclical pattern.
In FY2010, the operating profit margin (OPM) of Kanchi Karpooram Ltd used to be 12%, which declined
sharply to 4% by FY2012. Thereafter, OPM increased again to 12% in FY2014 only to decline to 4% in
FY2015. Since FY2015, OPM has been increasing and has reached 22% in FY2018.
Such a fluctuating pattern of profitability indicates that Kanchi Karpooram Ltd lacks the ability to pass on
the changes in its raw material costs to its customers. Because of the weakness in its pricing power,
whenever the raw material prices increase, the company finds it difficult to increase its product prices.
Therefore, the company has to take a hit on its profitability. In the times of declining raw material prices,
the company is able to show improvement in its profit margins.
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However, due to weak negotiating/pricing power, the company has witnessed its profit margins decline
repeatedly in the past. In FY2012 as well as in FY2015, the OPM of Kanchi Karpooram Ltd declined
sharply to 4% whereas a few years back, the company used to have OPM of 12%.
An investor would appreciate that usually, the companies operating in non-differentiable/commodity type
products face such weak pricing power over their customers. In such industries, the customer can easily
replace the product of one company with the product of another company without any significant impact
on the benefits derived from it. Moreover, when the products are simple/low in technology, then usually,
such industries attract a lot of competition both from local manufacturers as well as from imports.
Kanchi Karpooram Ltd seems to face such a situation in its business where its key products camphor and
its derivatives are simple commodity type products and face a lot of competition from manufacturers in
India as well as imports. As a result, the company finds it difficult to pass on the increase in raw material
costs to its customers. The customer can easily replace the products of Kanchi Karpooram Ltd with other
manufacturers. Therefore, during the times of increase in raw material costs, the company has to bear the
costs itself and its profitability suffers.
The credit rating agency, CRISIL, in its Oct. 2015 report for Kanchi Karpooram Ltd highlighted that the
company faces intense competition.
In FY2012, the profitability of the company came under severe pressure and as a result, the company
reported a net loss in the year.
While analysing the company, an investor comes across multiple sources of information, which have
highlighted the difficult business situation of Kanchi Karpooram Ltd including the risk of raw material
price changes as well as intense competition resulting in its poor pricing power.
In FY2012 annual report, while explaining the reasons for the net loss, Kanchi Karpooram Ltd
highlighted that it faced a double blow of increasing raw material prices and decreasing final product
(camphor) prices. As a result, the company could hardly do anything to prevent losses.
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The credit rating agency, CRISIL, highlighted this aspect in its April 2014 report for Kanchi Karpooram
Ltd.
In Sept 2015, another credit rating agency, SMERA, highlighted that the business model of Kanchi
Karpooram Ltd is exposed to the risk of changes in raw material prices.
Similarly, in March 2017, credit rating agency, India Ratings, pointed out the attention of stakeholders
towards fluctuation in EBITDA margins of Kanchi Karpooram Ltd due to inability to pass on raw
material costs.
In FY2011, Kanchi Karpooram Ltd pointed out to the shareholders that supply of its key raw material is
volatile and the situation is further complicated by the wide range of uses for this raw material.
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Considering the above discussion, an investor would appreciate that Kanchi Karpooram Ltd does not
enjoy any strong competitive advantage over its peers. The supply of the company’s key raw material is
volatile, which leads to frequent periods of high prices. Due to the simple and commodity nature of
Kanchi Karpooram Ltd.’s product, it faces intense competition and as a result, it does not have any
pricing power to pass on increases in raw material prices.
Therefore, an investor would notice that in the past the company witnessed periods of good profit
margins, which were soon followed by periods of very low-profit margins and even net loss in FY2012.
As a result, an investor should keep a close watch on the recent improvements in the profit margins of
Kanchi Karpooram Ltd and monitor closely the prices and supply of its key raw materials. This is because
whenever there is an increase in its raw material prices, then Kanchi Karpooram Ltd may face difficulties
to pass on the costs and it may again witness a decline in its profit margins like in the past.
Over the years, Kanchi Karpooram Ltd had a tax payout ratio of 30%-35%, which is in line with the
standard corporate tax rate prevalent in India.
Operating Efficiency Analysis of Kanchi Karpooram Ltd:
a) Net fixed asset turnover (NFAT) of Kanchi Karpooram Ltd:
When an investor analyses the net fixed asset turnover (NFAT) of Kanchi Karpooram Ltd in the past
years (FY2010-18), then she notices that the NFAT of the company has improved significantly from
FY2011 to FY2016. The NFAT increased from 8.92 in FY2011 to 18.58 in FY2016.
While analysing the financials of the company, an investor would notice that during FY2011-2016,
Kanchi Karpooram Ltd has not done any major capital expenditure (Capex). During this period, the
company spent about ₹4-5 cr on capex, which seems to be the maintenance expenditure on existing plant
& machinery. Therefore, an investor would appreciate that the entire sales growth from ₹29 cr. (FY2010)
to ₹56 cr (FY2016) has come from the utilization of spare capacity available in the existing
manufacturing plants.
Investors would appreciate that this utilization of previously unutilized capacity to grow sales is called
operating leverage. This, in turn, leads to the improvement of operating efficiency of the company, as it is
able to produce more goods from using existing infrastructure.
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When an investor analyses the credit rating report prepared by India Rating for Kanchi Karpooram Ltd in
March 2017, then she notices that even in 2017, the company had a lot of unutilized capacity in its
existing manufacturing plants.
Therefore, during FY2011-2016, the NFAT of Kanchi Karpooram Ltd improved because of the utilization
of spare manufacturing capacity (operating leverage).
Moreover, an investor would notice that the NFAT of the company, which has been in the range of 18-19,
is very high considering the NFAT of other manufacturing companies. In the normal course of business,
manufacturing companies usually have an NFAT in the range of 1-4. An NFAT of 18-19 indicates that
the business of camphor production needs very low investment in plant and machinery.
As a result, any person with a small amount of effort can raise the capital and put up a camphor
manufacturing plant. An investor would appreciate that this may be one of the reasons for the intense
competition faced by Kanchi Karpooram Ltd because many firms in the unorganized sector may be able
to compete with it by investing a small amount of money in a camphor manufacturing plant.
An investor would notice that in FY2017-2018, the NFAT has witnessed a sharp decline to levels of 5.5.
This decline is primarily due to a sharp increase in the net fixed assets of the company from ₹3 cr in
FY2016 to ₹18 cr in FY2017.
While reading the corporate announcements done by Kanchi Karpooram Ltd, an investor would notice
that on May 31, 2018, had informed the stock exchanges about its reconciliation of equity as a part of the
adoption of new accounting standards (IndAS). As a part of this disclosure, the company highlighted that
it has revalued its land asset and increased its value by about ₹11 cr.
May 31, 2018, corporate announcement, page 2:
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Therefore, out of the total increase of ₹15 cr in the net fixed assets in FY2017, ₹11 was because of
revaluation of land to a higher value. The remaining ₹4 cr seems to be the investment in the plant &
machinery.
In FY2018, the company has done a capital expenditure (capex) of ₹8.5 cr. This capex seems to be to
increase capacity to meet the high demand as reflected by the sharp increase in the sales in the last 2
years.
b) Inventory turnover ratio of Kanchi Karpooram Ltd:
An investor would note that over the years, the inventory turnover ratios (ITR) of the Kanchi Karpooram
Ltd was declining during FY2011-2015. The ITR declined from 4.7 in FY2011 to 3.4 in FY2015
indicating deteriorating efficiency in inventory management. However, since FY2016, the ITR has been
improving and it has currently improved to 6.2 in FY2018.
Still, an investor would notice that over FY2010-2018, the inventory level of Kanchi Karpooram Ltd
increased from ₹6 cr to ₹23 cr, which indicates that an amount of ₹17 cr has to be invested by the
company to maintain the higher level of inventory.
c) Analysis of receivables days of Kanchi Karpooram Ltd:
Over the years, the receivables days of Kanchi Karpooram Ltd used to be nearly stable in the range of 22-
24 days until FY2016. This indicated that the company used to collect its revenue in time. However, since
FY2017, the receivable days have increased. This might be a result of new customers asking for a higher
credit period.
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An investor would notice that in the last two years, Kanchi Karpooram Ltd has increased its sales at a fast
pace. It may be that the customers have asked for a higher credit period to order additional quantities.
Over the years, the level of trade receivables of Kanchi Karpooram Ltd increased from ₹1 cr in FY2010
to ₹10 cr in FY2018, which indicates that an additional amount of ₹9 cr has been consumed in the credit
provided to customers by the company.
Going ahead, an investor should monitor the level of receivables days of Kanchi Karpooram Ltd.
When an investor looks at the inventory and receivables level of Kanchi Karpooram Ltd, then she realizes
that the business of Kanchi Karpooram Ltd has consumed cash in its working capital. When an investor
compares the cumulative net profit after tax (cPAT) and cumulative cash flow from operations (cCFO) of
the company for FY2010-18, then she notices that the company has been not been able to convert its
profits into cash flow from operations.
Over FY2010-18, Kanchi Karpooram Ltd has reported a total cumulative net profit after tax (cPAT) of
₹25 cr. whereas during the same period, it reported cumulative cash flow from operations (cCFO) of ₹13
cr.
Margin of Safety in the Business of Kanchi Karpooram Ltd:
its target growth.
While analysing the SSGR of Kanchi Karpooram Ltd, an investor would notice that the company has
consistently had a low SSGR (-19% to -4%) over the years. Only in the latest year (FY2018), the SSGR
has improved to 36%, which is primarily due to a sharp increase in profitability of the company in
FY2018.
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depends on the net profit margin (NPM) of a company.
Where,
An investor would notice that the NPM of Kanchi Karpooram Ltd has been consistently very low and
even negative (net losses) in the range of -1% to 3%. Therefore, the company consistently has a negative
SSGR over the years.
An investor would appreciate that the company has been growing at a rate of 20% over the years.
However, the low SSGR indicates that the company does not seem to have the inherent ability to grow at
the rate of 20% from its business profits. As a result, investors would appreciate that Kanchi Karpooram
Ltd will have to raise money from additional sources like debt or equity to meet its investment
requirements.
Therefore, it does not come as a surprise to the investor when she notices that over the past years
(FY2010-18), Kanchi Karpooram Ltd had to raise additional funds by multiple sources:
 Debt (₹19 cr.): Total debt has increased from ₹5 cr. in FY2010 to ₹24 cr. in FY2018 (99 = 138 –
39)
 Equity: The Company has issued warrants and allotted shares to promoters in FY2019.
The corporate announcement, Feb 14, 2019:
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The corporate announcement, March 20, 2019:
Moreover, the low cash generation and continuous additional cash requirement nature of the business of
Kanchi Karpooram Ltd has been highlighted by in its report of the company in Dec. 2016.
Therefore, an investor would appreciate that the tough business dynamics of the company limit the
business growth that it can generate from its inherent profitability (as reflected by negative to low SSGR).
As a result, in order to generate 20% of sales growth in the past years, the company had to put in all its
business profits and in addition, it had to put in additional debt as well as equity to support the business
growth.
An investor would appreciate that the recent increase in SSGR is due to a sharp increase in profitability in
FY2018. However, the past financial performance of the company indicates that it does not have any
sustained competitive advantage over its competitors. As a result, in the past, improved profit margins
have repeatedly declined to low profits/loss. Therefore, an investor should be cautious while extrapolating
her future projections based on recent high-profit margins.
An investor gets another evidence of the low cash generating nature of the business of Kanchi Karpooram
Ltd when she analyses the free cash flow position of the company.
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b) Free Cash Flow Analysis of Kanchi Karpooram Ltd:
While looking at the cash flow performance of Kanchi Karpooram Ltd, an investor notices that during
period it did a capital expenditure (capex) of ₹18 cr. As a result, it had a negative free cash flow of ₹5 cr.
(13 – 18).
As per the discussion above, an investor would appreciate that Kanchi Karpooram Ltd raised an
additional debt of ₹19 cr to met this cash flow gap. Investors would note that over the past years, the
company had debt on its balance sheet, which was consistently increasing. The company needed to pay
interest on this debt. Part of the interest, which was capitalized by the company as a part of the project
cost is already factored in the capital expenditure (capex) of ₹18 cr discussed above. Over and above the
capitalised interest, Kanchi Karpooram Ltd had to pay additional interest of ₹12 cr, which was expensed
in the P&L.
Therefore, an investor would appreciate that the total cash flow gap for the company comes out to be ₹17
cr (5 + 12). The company primarily relied on debt to meet this shortfall. However, as discussed above, the
company has also opted for equity dilution to meet its funds requirement by issuing additional shares to
promoters by alloting them preferential warrants.
Therefore, an investor would note that tough business dynamics of camphor and related products have led
to a situation where the company has not been able to generate sufficient resources from its inherent
business activities to meet its sales growth requirements. As a result, the company has to dilute its equity
and raise additional debt.
any company.
Additional aspects of Kanchi Karpooram Ltd:

On analysing Kanchi Karpooram Ltd, an investor comes across certain other aspects of the company:
1) Management Succession of Kanchi Karpooram Ltd:
While analysing Kanchi Karpooram Ltd, an investor notices that Dipesh Jain, son of founder promoter,
Suresh Shah, is a part of the board of directors of the company. Dipesh Jain is currently working as a
whole time director of the company.
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of leaders are being groomed in business while the senior members are still playing an active part in the
day-to-day activities.
Presence of a well thought out management succession plan is essential in businesses as it provides for a
smooth transition of leadership over the generations and provides continuity in the business operations of
any company.
2) A curious case of credit rating shopping and then non-cooperation with credit rating
agencies by Kanchi Karpooram Ltd:
When an investor analyses the credit rating reports of Kanchi Karpooram Ltd, then she notices that the
company has indulged in credit rating shopping. It indicates that the company kept on switching from one
credit rating agency to another frequently. In this process, the company did not share the required
information with credit rating agencies for the review of credit rating. As a result, the rating agencies
labelled Kanchi Karpooram Ltd as a non-cooperating client.
a) Kanchi Karpooram Ltd rated by CRISIL for the first time in 2014:
In April 2014, the company was rated by CRISIL for the first time, CRISILassigned a rating of BB+ to
the company.
b) Non-cooperation by Kanchi Karpooram Ltd with CRISIL at the very first review of the credit
rating in 2015:
In July 2015, CRISIL put out a note saying that Kanchi Karpooram Ltd has not provided it required
information to review the credit rating.
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c) Kanchi Karpooram Ltd switched its credit rating agency to SMERA in Sept 2015:
In Sept 2015, the company shifted its credit rating agency from CRISIL to SMERA. However, the
company could not retain its earlier credit rating of BB+ and the new credit rating agency, SMERA, rated
Kanchi Karpooram Ltd at BB-
d) Kanchi Karpooram Ltd stopped cooperating with SMERA in 2017:
In Sept 2017, the credit rating agency SMERA highlighted that Kanchi Karpooram Ltd is not cooperating
for the review of credit rating and has not provided it with the required information.
e) Kanchi Karpooram Ltd switched its credit rating again from SMERA to India Ratings:
In 2017, the company has shifted its credit rating from SMERA to India Ratings. In its credit rating report
of March 2017, India Ratings assigned a rating of BB- to the debt of Kanchi Karpooram Ltd.
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f) Kanchi Karpooram Ltd stopped cooperating with India Ratings in 2018:
In April 2018, India Rating highlighted that Kanchi Karpooram Ltd has not provided it required
information and therefore, it has classified the company under the non-cooperating category.
An investor would appreciate that such fluctuating behaviour of Kanchi Karpooram Ltd while dealing
with credit rating agencies, frequent shifting and then non-cooperation even at the time of the first review
raises many concerns about the company. An investor is left wondering whether the company values
consistent disclosure of information to outside stakeholders in order to help them make informed
decisions.
Frequent shifting of rating agencies one after another may be an attempt to get a higher credit rating from
any rating agency that may entertain the company. It might be a case where the company tried to switch
to a rating agency thinking that it may get a higher rating; however, when it did not get the desired rating,
then it stopped cooperating with existing credit rating agency and switched to another agency.
Recently, in May 2018, CRISIL downgraded the rating of Kanchi Karpooram Ltd to B+ based on
publicly available information.
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An investor may appreciate that such incidences of credit rating shopping may be an attempt by
companies to put forward a better picture of the company than the reality. An investor should be cautious
while making decisions about companies in such cases.
3) The high interest rate charged by promoters for loans provided to Kanchi Karpooram
Ltd:
While analysing the past annual reports of Kanchi Karpooram Ltd, an investor notices that for many
years, the promoters have put money in the company in the form of loans. At the face of it, these loans
seem a help by the promoters to the company to meet cash flow requirements.
However, when an investor notices the interest rate paid by the company on these loans from directors,
then she notices that the interest cost on these loans is 13%, which is higher than the interest rate charged
by banks to Kanchi Karpooram Ltd.
The loans taken by Kanchi Karpooram Ltd from lenders like HDFC Bank are in the range of 9.61% to
10.15%.
As a result, an investor would notice that the high cost of the interest rate paid by Kanchi Karpooram Ltd
to directors does not seem to be in the best interest of the company.
Moreover, if an investor notices the interest rate available to individuals when they deposit money with
banks, then she notices that an individual is able to get only an interest rate ranging from 5.75 to 7.00%
from banks like SBI (Source: SBI website, May 10, 2019)
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Therefore, the loans from promoters to Kanchi Karpooram Ltd might be an attempt to get a higher interest
rate on their funds than the interest rate provided by banks on the fixed deposits as the promoters are
getting an interest rate of 13% from the company whereas the banks may provide an interest of 6-7% on
the fixed deposits
4) Transactions by Kanchi Karpooram Ltd with promoters/related parties:
While analysing the annual reports of Kanchi Karpooram Ltd, an investor notices that the company has
entered into different transactions like sales, consulting assignments, loans etc. with different related
parties/promoter group entities.
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An investor would appreciate that the transactions with related parties have a potential of shifting the
economic benefits from the company & minority shareholders to the promoters. Therefore, investors
should be aware that in case, the value provided by the related parties in their dealings is not
proportionate to the consideration paid by the company, then it might be a case of related parties
benefiting at the cost of company & minority shareholders.
Similarly, in case the sale transactions with related parties are not at an appropriate price i.e. the company
selling goods to them at a lower price or buying goods from them at a higher price, then it might be a case
of promoters benefiting at the cost of the company and minority shareholders.
Investors should be cautious while analysing the companies, which enter into transactions with related
parties.
Moreover, in FY2018 annual report, investors would notice that Kanchi Karpooram Ltd has proposed to
increase the limit of sales to a related party, M/s Suresh Industries to ₹25 cr, which was approved in the
AGM.
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5) Transactions shown by Kanchi Karpooram Ltd FY2018 in deviation of accounting

standards:
While analysing the FY2018 annual report, an investor notices that Kanchi Karpooram Ltd has shown
interest cost of working capital loans as well as bank charges as an outflow under cash flow from
operations (CFO). An investor would appreciate that the usual section to factor in interest expenses is
cash flow from financing activities (CFF).
While analysing various previous annual reports of Kanchi Karpooram Ltd, an investor notices that the
above instance is not the only case where the company seems to have deviated from normal accounting
conventions.
In FY2011 annual report, the auditor of Kanchi Karpooram Ltd highlighted that the provisions made by
the company for liabilities under employee benefits were not in line with the applicable accounting
standards.
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In the same year, the management did not carry out the required inspection of its assets.
In addition, in FY2013, the annual report mentioned that the auditor of Kanchi Karpooram Ltd did not
receive a confirmation from its suppliers/vendors and customers about the outstanding balances claimed
by the company. As a result, there could be a possibility that the receivables claimed by Kanchi
Karpooram Ltd might be under dispute by the customers.
In light of the above instances, investors should be cautious while analysing the reported financial
information of the company.
6) Foreign exchange (forex) risk:
While analysing the financial performance of Kanchi Karpooram Ltd, an investor notices that the
company spends a large amount of money on import of raw material, whereas it does not have any
compensating foreign exchange income (exports).
An investor would note that in FY2018, the company had an import expense of about ₹74 cr whereas it
had export earnings of only about ₹2 cr. As a result, the company is always at a risk of increasing import
costs whenever India rupee declines in comparison to the US dollar.
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Kanchi Karpooram Ltd highlighted the adverse foreign exchange movements as one of the reasons for the
loss declared by it in FY2012.
The company, as well as the credit rating agencies, have highlighted the risk faced by Kanchi Karpooram
Ltd because of foreign exchange fluctuations in their communication with stakeholders.
Credit rating report by SMERA in April 2016:
An investor would appreciate that the changes in foreign exchange rates especially the decline of Indian
rupee against US dollar can have a significant impact on the profits of Kanchi Karpooram Ltd. Therefore,
an investor should keep a close watch on the impact of foreign exchange disclosed by the company in its
result. In addition, investors may contact the company to understand their hedging policy and the steps it
takes to mitigate the foreign exchange fluctuation risk.
7) Errors in the stock exchange disclosures done by Kanchi Karpooram Ltd:
While analysing Kanchi Karpooram Ltd, an investor comes across many instances where the information
disclosed by the company to stakeholders contained errors. In some of the cases, the company issued
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revised disclosures to rectify the errors; however, at times, the errors in the documents like annual report
remain.
a) Q3 results declared by Kanchi Karpooram Ltd in Feb 2019:
The company made an error in the Q3-FY2019 results submitted to the stock exchanges in Feb. 2019 and
later on filed a rectification on Feb 15, 2019.
b) Corporate announcement of the outcome of board meeting in Mar. 2019:
The company made an error in the value of warrants mentioned in the initial disclosure made to the stock
exchanges and later on rectified the same with a revised disclosure.
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c) Change in promoters’ shareholding in FY2016 annual report:
As per the annual report of FY2016, during the financial year, the shareholding of the promoters of the
company changed from 42.27% to 41.67%, which is a decline of 0.60%. However, on page 16 of the
annual report, the company mentioned that the decline in the promoters’ shareholding was 1.43%.
Whereas in the same annual report, on page 17, the company had correctly mentioned that the change in
promoters’ shareholding during the year was 0.60%.
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Margin of Safety in the market price of Kanchi Karpooram Ltd:

Currently (May 09, 2019), Kanchi Karpooram Ltd is available at a price to earnings (PE) ratio of about
5.1 based on standalone earnings of the last four quarters from January-December 2018. The PE ratio of
5.1 provides a margin of safety in the purchase price as described by Benjamin Graham in his book The
Intelligent Investor.
In the absence of any strength in the business model of the company, 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.
Investors
Conclusion:
Overall, Kanchi Karpooram Ltd seems like a company, which has been able to grow its sales at a growth
rate of 20% year on year in the past. However, a deeper analysis of the sales growth along with its
profitability presents a different picture. It turns out that Kanchi Karpooram Ltd is operating in a
technologically simple and commodity type product where it faces intense challenges from multiple
manufacturers in India and abroad. As a result, the company does not have any pricing power over its
customers. Therefore, the company takes a hit on its profits whenever the raw material prices increase as
it is not able to pass on the increase in raw material costs to its customers.
The lack of sustainable competitive advantage in the business model of Kanchi Karpooram Ltd is evident
in the cyclical fluctuations in the profit margins of the company. The company has witnessed multiple
periods of good profitability that were soon followed by periods of poor profits and net loss. As a result,
an investor should be cautious while she makes future assumptions about the company based on recent
sharp improvement in the profit margins of the company.
The business model of Kanchi Karpooram Ltd is very tough, which is reflected in a low self-sustainable
growth rate (SSGR) as well as negative free cash flow (FCF) generation. The tough business model of the
company has put a great strain on its cash generation ability. As a result, the company seems to have
given a higher credit period to its customers to generate higher sales. This has resulted in a significant
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amount of money has stuck in working capital. Kanchi Karpooram Ltd could not fund this cash flow
requirement from its business profits and has to rely on additional sources like debt and equity to meet
this gap.
While analysing the history of the company, an investor notices that the company has switched its credit
rating agencies very frequently and has stopped cooperating with all of them. Such behaviour points to
attempted credit rating shopping by the company in which it tried to get the best credit rating for itself by
dealing with multiple credit rating agencies. However, these attempts of Kanchi Karpooram Ltd seem to
have not benefited the company as recently CRISIL despite the refusal of data sharing by the company,
downgraded its credit rating to B+ based on publicly available information. A credit rating of B+
indicates a high risk of default in repayment of money to the lenders of the company.
Over the years, Kanchi Karpooram Ltd has taken loans from its promoters/directors. However, the
interest rate charged by promoters to the company is very high when compared to the loans provided by
banks to the company. In addition, Kanchi Karpooram Ltd has been dealing with related parties of
promoters’ group for consulting contracts, sales contracts etc. An investor should analyse these aspects in
detail before she makes an investment decision about the company.
Kanchi Karpooram Ltd has presented certain transactions in a manner, which do not seem to conform to
prevalent accounting norms. In the past, the auditors have highlighted deviations in the provisions for the
liabilities of employee benefits. In FY2018, Kanchi Karpooram Ltd has deducted finance charges (interest
expense and bank charges) as outflow to arrive as cash flow from operations (CFO) whereas normally,
these charges are classified as an outflow under cash flow from financing activities (CFF). Investors may
contact the company to seek clarifications in this regard.
An analysis of the financial performance of the company indicates that Kanchi Karpooram Ltd is exposed
to very high raw material and foreign exchange fluctuations risk. As a result, in the past, it has seen its
good profit margins turn into net losses very fast. Therefore, going ahead, the investor should keep a close
watch on the supply and pricing situation of the key raw materials of the company. This is because
extrapolation of current good profit margins of the company while ignoring these risks may bring
negative surprises to investors.
Along with the profitability, an investor should closely monitor the debt levels and the related party
transactions of Kanchi Karpooram Ltd. In case, investors notice that the profitability of the company
begins to deteriorate, debt levels start to rise, cash flow generating ability does not improve, then they
make take a decision accordingly.
These are our views on Kanchi Karpooram Ltd. However, investors should do their own analysis before
P.S.
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Videos
Analysis Excel
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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 investors with 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 for the 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 with most of the critical information, which is needed to make
a provisional opinion about any company.
 Email alerts to investors for new stocks meeting their “Saved Screens”
 Email alerts to investors on updates about companies in their watchlist.
All these features are good and have proved very beneficial to investors. However, there is one additional
feature of screener.in, which we have found unique to screener.in. This feature is “Export to Excel”.
“Export to Excel” feature of screener.in lets an investor download an Excel file containing the financial
data of a company on the investor’s computer. The investor can use this excel file with the data to do a
further in-depth analysis of the company.
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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 for the last many years and it has become an essential
part of our stock analysis. It has helped us immensely while doing an analysis of different stocks and while
providing our inputs to the stock analysis shared by the readers of our website. Investors may read the
“Analysis” articles at our website on the following link: Stocks’ Analysis articles
Over time, more and more investors have started using the “Export to Excel” feature of screener.in and as
a result, we have been getting a lot of queries about it at the “Ask Your Queries” section of our website.
These queries have been ranging from:
 Why is there a difference between the data provided by the screener and the company’s annual
report?
 How does screener calculate/group the annual report data in the “Export to Excel” tool?
 What is the source of the data that screener.in provides to its users?
 How to customize the “Export to Excel” file?
 How to upload the customized file in one’s account at screener.in
We have been replying to such queries based on our understanding of screener.in, which we have gained
by using the website for multiple years and based on our learning by listening to the founders of screener.in
(Ayush Mittal and Pratyush Mittal) in June 2016 at the Moneylife event in Mumbai.
In June 2016, Moneylife arranged a session, “How to Effectively Use screener.in” by Ayush and Pratyush
at BSE, Mumbai in which Ayush and Pratyush explained the features of screener.in in great detail. This
session was recorded by Moneylife and has been made available as a premium feature on their private
YouTube channel.
The recorded session can be accessed at the following link, which would require the viewers to pay to view
it:
https://advisor.moneylife.in/icvideos/
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(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 the “Export to Excel”
feature on the “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.
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
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the “Data Sheet” of the “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 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 on 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 the 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 A 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 A 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 into 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 the 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 the 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 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 for 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
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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:
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

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Margin of Safety:
 Self-Sustainable Growth Rate (SSGR): SSGR > Achieved Sales Growth Rate
 Free Cash Flow (FCF): FCF/CFO >> 0
Operating Efficiency Parameters:
 Net Fixed Asset Turnover Ratio (NFAT)

 Receivables Days
 Inventory Turnover Ratio
The ability to see the above multiple parameters in one snapshot for any company for which we download
the “Export to Excel” file, allows us to have a quick opinion about any company that we wish to analyse.
It saves a lot of time for the investors as she can easily determine, which companies have the requisite
strength that is worth spending more time on them.
We believe that to fully benefit from the great resources available to the investors today, it is essential that
investors should use screener.in to the fullest and therefore must customize their own “Export to Excel”
templates as per their preference and upload it to their accounts at the screener.in website.
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 3”
 Once the investor has saved her customized excel file with the desired name, then she should visit
the following link in the web-browser: https://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.
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 Once the investor is at the Excel upload page, then she should click the button: “Choose File”
 Upon clicking on the button “Choose File”, a new pop-up window will open. In the newly opened
window, the investor should browse to the folder where she had saved her customized excel sheet
and select it:
 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 the
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 the following premium services to our readers:
1. Dr Vijay Malik’s Recommended Stocks

2. Peaceful Investing - Workshop Videos
3. Stock Analysis Excel Template (compatible with Screener.in)
4. E-book: “Peaceful Investing – A Simple Guide to Hassle-free Stock Investing”
5. "Peaceful Investing" Workshops
The premium services may be availed by readers at the following dedicated section of our website:
https://premium.drvijaymalik.com/
Brief details of each of the premium services are provided below:
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1) Dr Vijay Malik’s Recommended Stocks

Subscribers of this service get access to a list of stocks with buy/hold/sell recommendations that we believe
provide a good opportunity to grow shareholders’ wealth.
We have selected these stocks after doing an in-depth fundamental analysis covering financial, business,
valuation, management, operating efficiency and the margin-of-safety analysis.
Over time, we have received multiple feedback and queries from our subscribers like:
 Can we let them know our reasons for buying or selling any stock?
 Can we inform them which stocks are in buying range or outside the buying range?
“Recommended Stocks” provide an answer to such queries as these stocks have buy/hold/sell
recommendations as well as a crisp investment rationale, which will be updated whenever we change our
views about any stock.
What a subscriber will get in this service:

 A list of fundamentally good stocks, which we believe have the potential to build wealth for
shareholders. There will be a crisp investment rationale explaining our views about the company
backing our recommendation.
 The stocks will be labelled as:
 Buy: where we believe that the stock presents a good investment opportunity at the current
price.
 Hold: where we believe that the stock price has risen above comfortable valuation levels;
however, the stock does not deserve to be sold.
 Sell: where it is advised to reduce the exposure from the stock; mostly because we believe
that the fundamentals of the company have deteriorated and the stock has lost our confidence.
Rarely, it may be due to overvaluation; however, please note that it would be a rare
occurrence.
 Under Review: at times, a stock may be put under review when a significant event has taken
place and we need some time to form our view about the stock.
 Once a month email from us commenting on the ongoing market scenario especially from the
perspective if something significant has taken place leading to a change in views from a long-term
investing perspective. Please note that it will not be a general mailer/newsletter describing the
economic situation. There might be situations where according to us nothing significant has
happened to change our views and the email may just state that.
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 To get an idea of the monthly email, you may read our letter of July 2022: Our Investing
Philosophy, Interest Rates and Inflation (July 2022)
 As a new subscriber, you will get access to all the previous monthly letters written by us.
 Even though we may mostly communicate with you via monthly emails; however, please note that
we will continuously monitor the Recommended Stocks and communicate via email whenever our
views about the stocks change whether positively or negatively.
What a subscriber will NOT get:

 Any separate detailed voluminous research report will not be provided for stocks. The short
investment rationale and updates present on the “Recommended Stocks” page will be the only
reading material available to the subscribers.
 Any target price for the recommended stocks will not be provided. This is because we believe in a
long-term investment horizon stretching over decades throughout boom and bust phases of markets
and the economy and do not believe in selling stocks over short-term price or business performance
changes. We do not provide any return expectations. Good stocks are expected to provide good
returns over a long period of time. We continuously monitor the stocks and usually sell when the
fundamentals of the company deteriorate. Whenever any stock deserves selling, then we will update
the same on the page and send an email update to the subscribers.
 Regular quarterly or annual reviews of stocks after results will not be provided. This is because
instead of quarterly/annual reviews, we monitor stocks continuously and will update the subscribers
whenever our views about the company change. If our views about the company stay the same,
then we may not provide any updated review about the company even for many quarters. On the
contrary, if our views about the company change, then we will immediately update the subscribers
and not wait for the quarterly or annual results declaration by the company. The aim is to
communicate with subscribers only when there is something necessitating a change in our views
and not inundate the subscribers with regular reviews etc.
 Reviews based on every corporate action, event etc. will not be done. Most of the events/corporate
actions may not change our views about the companies; therefore, we do not provide any
updates/reviews based on very corporate actions/events. However, please rest assured that we
continuously monitor the companies and in case there is any significant event/action, then we will
provide a review/update.
 No on-demand/on-request updates on the recommendations would be provided. We would update
the recommendations on our own when our views change.
 One-to-one discussion about the “Recommended Stocks” with subscribers will not be done.
 Replies to subscribers’ queries about the “Recommended Stocks” will not be provided. If there is
any development about the stock where we believe that an update needs to be provided, then we
will provide it on our own.
 Any advice about allocation to the stocks in the list will not be provided. Subscribers need to take
this decision on their own.
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Instructions to subscribers:
 It is a subscription service. The access to “Recommended Stocks” will expire after the subscription
period gets over unless a renewal is done.
 Please note that once this premium service is availed, then there is no provision of any refund of
fee or cancellation of service during the period of subscription.
Frequently Asked Questions
Q: How many stocks are currently there in the “Recommended Stocks” list?
On June 11, 2022, the list contains 7 stocks. The latest information about the number of stocks and
recommendations is available only to subscribers.
Q: Do you advise any minimum capital for investment in “Recommended Stocks”?
We do not provide any guidance about any minimum capital for investment. An investor needs to make
this decision on her own.
Q: How often do you add new stocks or remove existing stocks from the recommended stocks list?
Adding new stocks: We follow a very stringent stock-selection process. Only when a stock clears our
parameters, then we add it to the recommended list. My experience shows that usually, I add one new stock
in a year. This is the pattern for the last many years. However, it may or may not stay the same in the future.
Nevertheless, as the stock prices are very volatile; therefore, buying opportunities keep on arising within
the existing stocks in the recommended stocks’ list. We will monitor the stocks continuously and update
the recommendation whenever our views about the stocks change.
Selling existing stocks: We follow a very long-term investment horizon, which extends into decades.
Therefore, we keep very strict stock selection criteria. As a result, for most of the stocks we select, we do
not need to sell them and the stocks will continue to be in the recommended stocks until they stay
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fundamentally good. Only when any stock loses our confidence, then we remove it from the list. Our
experience indicates that we may remove a stock every 2-3 years; however, it may or may not stay the same
in the future.
Q: Do you prefer any sector or market capitalization segment etc. while making stock
recommendations?
We prefer to find stocks, which show growth opportunities with good profit margins where the companies
can finance the growth from their profits without raising a lot of debt or equity. In this process, we do not
differentiate stocks based on any market cap. Whenever we find any good stock meeting our stringent
selection process, then we add it to the recommended list irrespective of its market cap. It has been our
experience that most of the time, such stocks belong to the mid or small-cap segment. However, it is not an
intentional focus on mid or small caps and we tend to focus on the fundamental qualities of the stocks
without ignoring any market cap segment.
We follow a bottom-up approach for stock selection. Therefore, we do not prefer any sector when we make
a stock selection.
Regards,
Dr Vijay Malik
P.S. Please note that the information received through this premium service is for the sole use of the
subscriber and is not to be shared with anyone else.
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2) Peaceful Investing - Workshop Videos
This service allows access to 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 Videos 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 for past participants of “Peaceful Investing” workshops to revise the
workshop and refresh the learning.
You can watch a 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 Videos
Subscription to this service provides access to the videos of the full-day workshop having a total duration
of about 9hr:30m.
These videos are divided into the 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)
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 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.
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3) Stock Analysis Excel Template (compatible with Screener.in)

We use a customized excel template to analyse stocks as per our preferred parameters by using the data
downloaded from 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.
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 a 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 a 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) 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.
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Screenshot of the Instructions Sheet: Click Here
See the step by step guide for uploading the excel sheet on Screener.in with screenshots: How to Use
Screener.in Export to Excel tool
3) Version history:
This sheet contains details about the changes/updates made in each of the new versions of the sheet.
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:
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.
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4) e-book: “Peaceful Investing – A Simple Guide to Hassle-free Stock

Investing"
This book contains our key stock investing articles covering all aspects of stock investing including stock
selection, portfolio management, monitoring, selling etc.
Who should read this e-book:
Any person interested in learning a simple step by step approach of analysis of companies, their business,
financials, and management. The reader of the e-book will learn
 to analyse whether a company is financially strong or not and whether it has business strength to
sustain its growth.
 to find out any red flags in the company’s performance.
 to identify whether the management of the company is shareholder-friendly or not. Also whether
the management is taking the money out of the company for personal benefits.
 our method of deciding the ideal price to pay for any company.
 how to monitor stocks in the portfolio and how to decide about selling the stocks.
Reviews about the book:
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Table of Contents
The “Peaceful Investing – A Simple Guide to Hassle-free Stock Investing” book contains the following
articles:
1. Getting the Right Perspective towards Investing

2. Choosing the Stock Picking Approach suitable for you
3. Why I Left Technical Analysis And Never Returned To It!
4. Shortlisting Companies for Detailed Analysis
5. How to conduct Detailed Analysis of a Company
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6. Understanding the Annual Report of a Company

7. How to do Financial Analysis of a Company
8. 7 Signs to tell whether a Company is cooking its Books: “Financial Shenanigans”
9. Self-Sustainable Growth Rate: a measure of Inherent Growth Potential of a Company
10. How to do Valuation Analysis of a Company
11. Hidden Risk of Investing in High P/E Stocks
12. How to earn High Returns at Low Risk – Invest in Low P/E Stocks
13. 3 Principles to Decide the Investable P/E Ratio of a Stock for Value Investors
14. How to do Business & Industry Analysis of a Company
15. Is Industry P/E Ratio Relevant to Investors?
16. Why Management Assessment is the Most Critical Factor in Stock Investing?
17. Steps to Assess Management Quality before Buying Stocks (Part 1)
20. 3 Simple Ways to Assess “Margin of Safety”: The Cornerstone of Stock Investing
21. 7 Important Reasons Why Every Stock Investor should read Credit Rating Reports
22. Final Checklist for Buying Stocks
23. 5 Simple Steps to Analyse Operating Performance of Companies
24. How to Monitor Stocks in Your Portfolio
25. Understanding & Interpreting Quarterly Results Filings of Companies
26. How Many Stocks Should You Own In Your Portfolio?
27. Trading Diary of a Value Investor
28. When to Sell a Stock?
29. 3 Guidelines for Selecting Stocks Ideal for Retail Equity Investors
30. How to Use Screener.in “Export to Excel” Tool
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5) e-Books: Business Analysis Guides

These ebooks contain guidelines to do business analysis of companies belonging to different industries.
After reading these ebooks, an investor will learn which factors influence the business of companies in
these industries. You will learn to identify what makes a company stronger than others in these industries.
This knowledge will help you in selecting fundamentally strong companies for investment.
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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 the 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, March 11, 2018, 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
347 | P a g e

DrVijayMalik Company Analyses Vol 5-1

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Company Analyses (Vol. 5)

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

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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.

Company website: Click Here

Financial data on Screener: Click Here

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Financial Analysis of HEG Ltd:

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FY2009 annual report, page 13:

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FY2010 annual report, page 5:

FY2012 annual report, page 18:

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FY2013 annual report, page 12:

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FY2013 annual report, page 14:

FY2014 annual report, page 14:

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FY2014 annual report, page 15:

FY2018 annual report, page 25:

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FY2014 annual report, page 15:

FY2015 annual report, page 15:

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FY2016 annual report, page 11:

FY2017 annual report, page 15:

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FY2017 annual report, page 4:

BSE announcement by HEG Ltd dated November 26, 2018:

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Operating Efficiency Analysis of HEG Ltd:

a) Net fixed asset turnover (NFAT) of HEG Ltd:

b) Inventory turnover ratio of HEG Ltd:

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c) Analysis of receivables days of HEG Ltd:

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FY2018 annual report, page 198:

Copyright © Dr Vijay Malik. All Rights Reserved.

Margin of Safety in the Business of HEG Ltd:

a) Self-Sustainable Growth Rate (SSGR):

Copyright © Dr Vijay Malik. All Rights Reserved.

b) Free Cash Flow Analysis of HEG Ltd:

1. The first buyback was done in FY2009 for ₹48.5 cr.

Additional aspects of HEG Ltd:

1) Management Succession of HEG Ltd:

Copyright © Dr Vijay Malik. All Rights Reserved.

2) Proposed capital expenditure for the upcoming manufacturing capacity expansion:

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FY2012 annual report, page 9: