DrVijayMalik Company Analyses Vol 4

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

www.drvijaymalik.com
Company Analyses (Vol. 4)
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) KNR Constructions Ltd ......................................................................................................................... 6
2) Globus Spirits Ltd ................................................................................................................................ 37
3) Sutlej Textiles And Industries Ltd ...................................................................................................... 67
4) GM Breweries Ltd ................................................................................................................................ 90
5) Albert David Ltd................................................................................................................................. 103
6) Stovec Industries Ltd.......................................................................................................................... 125
7) Bodal Chemicals Ltd .......................................................................................................................... 147
8) Nesco Ltd ............................................................................................................................................. 178
9) Cupid Ltd ............................................................................................................................................ 203
10) Mahanagar Gas Ltd ......................................................................................................................... 222
How To Use Screener.In "Export To Excel" Tool ............................................................................... 243
Premium Services.................................................................................................................................... 268
Disclaimer & Disclosures ....................................................................................................................... 284
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1) KNR Constructions Ltd
KNR Constructions Ltd is an Indian infrastructure player focused on EPC (engineering, procurement and
construction) activities in the road and irrigation sector.
Company website: Click Here
Financial data on Screener: Click Here
The analysis of an infrastructure/EPC player (Engineering, Procurement and Construction) is different from
other companies due to the following factors and we need to keep these points in mind whenever we put
interpretations to the financial results of any infrastructure/EPC player:
 The EPC contractor’s business is nothing but an accumulation of all its projects under execution.
Unless each of these projects is assessed individually, the complete business position of the EPC
player cannot be understood. From the publically available information, we find it difficult to assess
whether these projects have key factors like land acquisition, govt. approvals etc. in place. We have
always been skeptical about the cost estimates shared in the publically available information
whether these are the real ones or there have been escalations, which companies usually hide from
stakeholders.
 The revenue of the EPC players is derived from the cost incurred by them as these companies use
a percentage of completion method (POCM) for revenue recognition. The revenue declaration has
no linkage to the actual cash that an EPC player might or might not receive. Many times, using the
percentage of completion method (POCM), EPC companies show even that part of the project work
in revenue whose bills are not sent to the customers, which gives rise to “Unbilled Revenue” in the
balance sheet. Many times, there are disputes between the stage of project claimed by the EPC
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player and the Govt Departments/project allottees who have to release the payments etc. It cannot
be assessed from the publically available information how the situations are on this front.
 The EPC players usually have many subsidiaries and the assimilation of subsidiary financials into
main company leads to many areas of accounting manipulations, which always raise an alarm in
business assessment.
We would analyse the financial performance of KNR Constructions Ltd while keeping these aspects in
mind. Moreover, as mentioned above, the EPC players usually create many subsidiaries/joint ventures to
bid for projects and execute them. Therefore, it is advised to focus on consolidated financials of EPC players
so that an investor may assess the financial position of the complete group in her analysis.
In light of these points, let us now assess the performance of KNR Constructions Ltd over last 10 years
(FY2008-17).
Financial Analysis:
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Looking at the financial data of KNR Constructions Ltd for past 10 years (FY2008-17), an investor would
notice that the company has grown its sales at a moderate pace of 10-12% year on year from ₹551 cr in
FY2008 to ₹1,680 cr in FY2017 with a stable operating profitability (OPM) of 14-15% year on year.
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While reading the FY2017 annual report of KNR Constructions Ltd, page 155, an investor notices that the
company follows the percentage of completion method (POCM) for revenue recognition:
As mentioned above, in POCM, EPC players recognize revenue based on their assessment of cost incurred
in the project as a proportion of the total estimated cost of the project. Many times, the EPC players end up
showing that part of the project work as revenue, which is yet to be billed to the customer/accepted by the
customer as completed, which gives rise to “Unbilled Revenue”.
As per the FY2017 annual report, page 172, has about ₹80-85 cr of revenue, which it has shown as its
operating revenue in the profit & loss statement, but which is yet to be billed to the client:
An investor would appreciate that in such instances, many times, later on, the customer may dispute the bill
raised by the EPC player citing that it does not agree that the construction stage as per the agreed contract
has been achieved. On the other hand, the customer may dispute the quality of the work and in turn, show
its dissent on the bill raised by the EPC player.
Such situation leads to disputes and claims between the customers and EPC players, which many times lead
to the customer denying payment of bills raised by the EPC player, which leads to reversal of revenue
earlier recognized. Many times, customers ask for a refund of the money paid earlier in case they are not
satisfied with the work. As a result, we notice that EPC players including KNR Constructions Ltd many
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times show items like “Due to customers” in their balance sheet. The FY2017 annual report, page 179
shows that at March 31, 2017, KNR Constructions Ltd has about ₹158 cr due to customers, an amount that
has increased over the years:
An investor would note that the item “Due to customers” is different from “Advance received from clients”.
The advance received from clients may represent the money provided by the clients to kick-start the work
of any project by mobilizing the construction machinery/acquire land on behalf of the customer etc.
Therefore, it is advised that investors may seek clarifications from the company about the reasons for the
significant amount of dues to the customers.
Therefore, in light of the above observations related to:
 Recognition of revenue at a stage where the customer has still not approved it (unbilled revenue).
 The constant scope of disagreement in the total amount of estimated cost of the project, the amount
of cost actually incurred on the project as well as the percentage of the stage completed. Moreover,
the person auditing/certifying the financials being chartered accountants, who are not experts in the
matters related to civil engineering works, also brings in chances of errors in the cost/percentage
stage assessment.
 Frequent disputes between the customers and EPC players in the stage of the project achieved until
date, which directly affects the revenue to be recognized by the EPC player
 These disputes leading to claims on EPC players, where EPC players may resort to deferring the
reversal of revenue recognition from profit and loss statement but instead carry a liability on the
balance sheet under “Due to customers”
Therefore, an investor would appreciate that the amount of the revenue disclosed by the company in any
year predominantly highlights the company’s assessment of its project execution instead of its ability to bill
and collect money from its customers.
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Therefore, it is advised that investors should always be cautious while assessing the revenues reported by
the infrastructure/EPC players and should seek clarifications from the companies as and when needed.
Moreover, an investor would need to keep a few things in mind while assessing the expenses of the company
as well.
Apart from the regular operational expenses on the construction of the projects shown in the profit & loss
statement (FY2017 annual report, page 144)…
…an infrastructure/EPC player like KNR Constructions Ltd, every year, spends a significant amount of
money on construction of projects, which is not reflected in the profit and loss statement for that year. These
projects and the expenses on these projects, which are over and above the P&L, are shown under “intangible
assets under development” in the balance sheet under “intangible assets under development” in the non-
current assets section. (FY2017 annual report, page 143):
These projects are usually the BOT (Build, Operate and Transfer) or HAM (Hybrid Annuity Mode) projects.
After the completion of the projects, which are capitalized under “intangible assets under development”,
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the projects are shifted to “other intangible assets”. This shift is visible in the non-current assets section
shown above for KNR Constructions Ltd, where the other intangible assets are increasing year on year.
An investor would observe that the other intangible assets and intangible assets under development are
shown differently from the normal capital expenditure under “Property, plant and equipment” and “Capital
work-in-progress”. The normal capital expenditure under “Property, plant and equipment” and “Capital
work-in-progress” may represent the spending done by the company on construction machinery, trucks,
dumpers, crushing plants, mixing plants etc.
Looking at the significant amount of assets accumulated under “Other Intangible Assets” and “Intangible
assets under development” (about ₹1,000 cr at March 31, 2017), an investor would appreciate that to assess
the real economic value generated by the company to its shareholders, an investor needs to take into account
the returns on these assets. An investor would appreciate that a normal look at the P&L statement would
not be sufficient to assess the true outcome of such financial decisions.
Additionally, an investor would appreciate that a company will show only those projects in its balance
sheet, which are either owned by it or are owned by its subsidiaries in which it has more than 50% stake.
For the joint ventures, where the company has less than 50% stake, it would not show those projects in its
balance sheet under “Other Intangible Assets” or “Intangible assets under development”. In such cases, the
company will show the amount invested by it under the non-current investments and the economic benefit
from such projects will be shown as dividends/interest received in the P&L. An investor would appreciate
that without looking at the detailed project dynamics of such investments, only information of
dividend/interest received may not be sufficient to assess the true profitability of these projects.
If an investor analyses the FY2017 annual report, then she notices that KNR Constructions Ltd had decided
to sell its stake in two operational BOT annuity projects, which it had developed in collaboration with Patel
Engineering Ltd. The FY2017 annual report, page 7:
However, when an investor analyses the annual report further, then she notices that at the sale price of these
assets, the company has to incur a loss of about ₹10 cr and the company had made a provision of impairment
in the value of assets in the annual report (FY2017 annual report, page 15):
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An investor would notice that the projects on whose sale price, the company has to take a loss were
operational annuity projects. Therefore, the reported financial numbers in the profit & loss statement of an
infrastructure/EPC player may not communicate its true financial position/money making ability for its
shareholders.
On an update, as communicated in the February 2018 conference call, page 18: it seems that the sale of
these two projects has not completed and the issue is currently under arbitration:
An investor would appreciate that the operating profit margin (OPM) shown by the company in the P&L
may represent only the nature of those projects, which are being factored in the P&L for the year by way
of incremental costs being incurred on those projects during the year. An investor should keep in the mind
that this assumes that the auditor despite being a chartered accountant and not a civil engineering expert,
has correctly estimated the cost/project estimates provided by the company.
The management has communicated to its shareholders in the February 2018 conference call that the
variations in the prices of cement and steel are a major risk to the profitability of the company as the EPC
contracts do not provide for a full pass on of increase in these raw material costs. (February 2018 conference
call, page 18-19):
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In light of the fact that the EPC contracts do not fully cover escalations in the key raw materials of cement
and steel, it comes as a positive surprise to the investors that the company has been able to generate a stable
OPM of 14-15% over entire last decade (FY2008-17). It is advised that investors may seek clarifications
from the company to understand in detail about the parameters that influence their profit margins and the
steps taken by the company in the past, which could lead to sustained profitability over last 10 years when
the cement and steel prices had witnessed significant fluctuations.
The assessment of the true profitability of the company would require estimation of the profits generated
by the company on the projects, which are capitalized on the balance sheet under “Other Intangible Assets”
as well.
For illustration, an investor may look at the BOT project “Walayar –Vadakkancherry Project” which is
completed by KNR Walayar Tollways Private Ltd, which is 100% owned by KNR Constructions Ltd and
is likely to be present in the “Other Intangible Assets” in the balance sheet. Details of this project are
provided on page 22 of Feb 2018 investor’s presentation of the company:
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An investor would notice that the company has spent about ₹900 cr on this project as total cost. In 9M-
FY2018, the project has generated a toll income of about ₹38 cr, which can be extrapolated to about ₹50 cr
per annum (37.87*12/9 = 50.36). An investor would appreciate that a toll income of ₹50 cr on a project
cost of ₹900 cr provides a yield of about 5.55%. This yield is very low on an investment as ₹900 cr invested
in any bank fixed deposit may provide a higher return/yield.
Additionally, the company needs to spend further money to operate the toll road in terms of employee
salaries, regular maintenance of the road, the lighting of the road etc., which needs to be spent from the toll
revenue. Therefore, the net profit from the project will provide even a lesser yield than 5.55% on the total
project cost.
You may read about some of the other companies, which have such low returns on their assets
that the company might be better off selling all its assets and investing the money in bank fixed
deposits:
 Analysis: Globus Spirits Ltd

 Analysis: Meghmani Organics Ltd
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 Analysis: Castex Technologies Ltd / Amtek India Ltd
In light of the lower toll yield on the project cost for Walayar –Vadakkancherry project coupled with other
expenses and debt-servicing requirements, the project does not seem to be able to sustain on its own. As a
result, the parent company KNR Constructions Ltd has to put in additional capital in KWTPL to make
it sustainable.
As per the FY2017 annual report, page 91, during FY2017, a year that was a period of the fullyear of toll
operations, KNR Constructions Ltd had to infuse an amount of ₹130 cr (396.51 – 266.51 = 130.00) in
KWTPL to help it meet its expenses and debt servicing requirements.
The requirement of infusion of funds by the parent company indicates that the project is not profitable and
until now has not been able to add economic value to the shareholders of KNR Constructions Ltd. Instead,
it is draining the resources of the parent company.
If an investor looks at the performance of the subsidiaries of KNR Constructions Ltd at page 201 of the
FY2017 annual report, then she realizes that most of the subsidiaries & joint ventures (JV) of the company
are making losses:
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Moreover, an investor would notice that for FY2017, the profit shown by the parent is 152.39% of the total
consolidated profit. This indicates that all the other subsidiaries and JVs have contributed to a loss of
52.39% to the overall consolidated financials of KNR Constructions Ltd. The company running the Walayar
–Vadakkancherry project, KNR Walayar Tollways Private Ltd (KWTPL) has reported a net loss of ₹23.5
cr for FY2017.
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An investor may also note that in case of KNR Walayar Tollways Private Ltd (KWTPL), the subsidiary
had reported a loss of ₹23.5 cr for the full year of operations in FY2017 whereas as discussed above, the
parent company KNR Constructions Ltd had to infuse ₹130 cr in FY2017 to sustain it.
Therefore, we believe that the assessment of the profitability of any infrastructure/EPC player only based
on the profitability shown in the P&L might not represent the true picture of the company. In the details of
the subsidiaries/JVs shown above, an investor would notice that many of the JVs of the
company are currently not making profits. As a result, the company may need to infuse additional funds in
such subsidiaries/JVs.
KNR Constructions Ltd has been communicating that in case of JVs it is only liable to fund only its
proportionate share of expenses/cash flow shortfalls etc. This position may seem right from a logical
argument perspective. However, we believe that in such cases, it becomes important that investors take note
of the financial health of the JV partner as well.
In case of KNR Constructions Ltd, many JVs have been formed with Patel Engineering group. While doing
a preliminary analysis of Patel Engineering group, an investor notices that currently, the group is not doing
good financially and has been defaulting to meet its debt servicing requirements. (Livemint.com: Banks
invoke S4A to recast Patel Engineering’s Rs 2,963.5 crore debt)
An investor would appreciate that if a JV faces financial difficulties and the JV partner of KNR
Constructions Ltd refuses to bring in its proportionate share of money to meet the cash shortfall of the JV,
then KNR Constructions Ltd would face two options:
1. Let the JV project be stuck and become the JV a defaulter/NPA with lenders. In such an outcome,
the parent company (KNR Constructions Ltd) will also face the consequences of restricted lending
from its lenders, as banks would be extremely cautious while lending to the entire KNR group in
future. In such a situation, the loss of economic value to the parent company is most likely to exceed
its original investment in the JV project.
2. The second option would be to infuse funds in the JV project over and above its proportionate share
to meet the cash flow shortfall so that the JV project may survive and keeps on paying its lenders.
In cases of joint ventures, most of the times, the JV partner who can afford to put in additional money in
the JV ends up infusing a share higher than its proportionate stake to avoid the ramifications, which
otherwise would hit the parent company as well.
Therefore, it looks like that once a JV project has started and has raised debt from the lenders, then a
company cannot simply conclude that its responsibility is only to the extent of its stake in the JV. A
financially weak JV partner is bound to put pressure on the parent company and in turn, reduce the economic
value that it may derive from the JV project.
Therefore, the consolidated financials of the infrastructure/EPC player who has many JV projects and
includes only the liabilities to the extent of its proportionate share might not reflect the true
profitability/economic value that the shareholders of the parent company may derive from the company.
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Therefore, in the light of above argument, we believe that the investors should be cautious while assessing
parameters like OPM shown in the P&L by infrastructure/EPC players as a representative of the true
economic value added by the company to its shareholders in any year.
KNR Constructions Ltd has been availing tax benefits under the section 80IA of the income tax act, which
provides 100% deduction on profits for companies, which carry business of road/highway project etc. for
a period of 10 years. (Ref: caclubindia.com). Therefore, investors would notice that the tax payout of the
company is significantly lower than the standard corporate tax rate applicable to Indian companies.
As communicated by the company, going ahead, the tax payout of the company is expected to stay lower
than the standard corporate tax rate. February 2018 conference call, page 8:
Operating Efficiency Analysis of KNR Constructions Ltd:
The fixed assets of the company include the assets like construction machinery, crushing and mixing plants
that are used to construct the road projects as well as the BOT/HAM projects, which the company plans to
keep on its books and operate during the concession period.
An investor would note that the recent reduction in the net fixed asset turnover (NFAT) during the recent
years from 3.67 in FY2015 to 1.77 in FY2017 is because of completion of the BOT projects Muzaffarpur
Barauni Tollway and Walayar Tollways where the significant investment in the Walayar Tollways is not
resulting in significant returns.
The parameter of inventory turnover does not seem highly relevant for a player like KNR Constructions
Ltd who apart from putting the inventory under the current assets also has such material classified under
“intangible assets under development” under non-current assets. Therefore, it becomes challenging to
ascertain the true efficiency of the inventory utilization of any EPC player.
The receivables days is a relevant parameter for an EPC player as it represents the ease with which it is able
to bill and collect the money from its customers. Moreover, the release of funds by the customers also
indicates that the customer agrees with the amount and quality of work performed by the EPC player.
Therefore, a delay in collection of receivables from the customers indicates that either the customers are
under financial stress and may default in making the payments or that the customers do not agree with the
bills raised by the EPC player. Such disagreement may be related to achievement of payment milestones in
the project progress or the quality of the work done by the EPC player.
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In case of KNR Constructions Ltd, an investor notices that the receivables days have declined from 67 days
in FY2009 to 34 days in FY2017, which is a good improvement.
Keeping the receivables under control while growing the size of the EPC business is a good sign for a
company that has to primarily deal with govt departments for releasing payments. It indicates that the
company has been doing its job in a satisfactory manner, which is also visible from the claims made by the
company that it has completed most of its projects before time.
February 2018 investor’s presentation, page 14:
The company has been able to convert its profits reported in the P&L in the form of cash flow from
operations. Over FY2008-17, KNR Constructions Ltd reported a total cumulative net profit after tax (cPAT)
of ₹652 cr. whereas during the same period, it reported a cumulative cash flow from operations (cCFO) of
₹1,261 cr. An investor may refer the following article to understand more about the situations in which a
company may be able to report a lower cCFO when compared to its cPAT and vice versa:
Margin of Safety in the Business of KNR Constructions Ltd:
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 was attempting 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
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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 over the years, KNR Constructions Ltd has witnessed an SSGR of -3% to
+5% whereas the company has been growing at a rate of 10-12% over the years. As a result, it seems that
the company is attempting to grow at a pace, which is higher than what the internal business cash generation
is able to sustain. As a result, the company has resorted to raising debt to meet its growth requirements as
the debt has increased from ₹191 cr in FY2008 to ₹722 cr in FY2017.
Free Cash Flow Analysis:
While analysing the free cash flow (FCF) position of the company, an investor notices that over FY2008-
17, KNR Constructions Ltd generated a total cash flow from operations (CFO) of ₹1,261 cr and it did a
capex of ₹1,565 cr over the years to grow its revenues from ₹551 cr in FY2008 to ₹1,680 cr in FY2017.
However, as mentioned above, the company had a sustained high level of debt during the last decade and
as a result, it had an interest expense of ₹249 cr over FY2008-17.
Therefore, post the capital expenditure and the interest payment, the company had a cash deficit of ₹553 cr
(1261 – 1565 – 249). Moreover, the company has paid out dividends over these years and has also made
investments in various JV projects.
The company has met the cash shortfall by raising debt from different lenders and promoters and as a result,
the total debt of the company has increased from ₹191 cr in FY2008 to ₹722 cr in FY2017.
An investor would notice that in case of companies having negative free cash flow (FCF) where entire CFO
is used to meet the capital expenditure, the dividends are usually funded by raising debt. We believe that
investors should not take any comfort from the dividend payouts of such companies as the dividend
declarations might represent merely the act of transferring money from lenders to equity shareholders.
Free cash flow (FCF) and SSGR are the main pillars of assessing the margin of safety in the business model
of any company.
Additional aspects of KNR Constructions Ltd:
On analysing KNR Constructions Ltd, an investor comes across certain other aspects of the company, which
are essential for making any final opinion about the company:
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1) Management Succession:
KNR Constructions Ltd was set up in 1995 by Mr. K. N. Reddy. Currently, Mr. K. N. Reddy is about 70
years of age and his son Mr. K. Jalandhar Reddy who is about 48 years of age has
started playing an active role in the management and leadership of the company.
As per the communications from the company, until now, it seems that Mr. K.N. Reddy has put in place
a succession plan whereas he is able to guide the new generation of leadership while still being at the helm
of the company. February 2018 conference call, page 17:
Going ahead, investors may need to keep monitoring the developments on the front of promoter family
members.
2) Project Execution:
As mentioned above, it seems that KNR Constructions Ltd has been able to show good project execution
skills, as it has been able to complete a lot of projects ahead of their scheduled completion period.
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3) Declining promoter shareholding over time with an increase in share price of the
company:
If an investor analyses the trend in promoters’ shareholding over past few years, then she would realize that
the promoters have been continuously selling shares of the company and have significantly reduced their
shareholding from 74% at March 31, 2014, to 55.38% at March 31, 2018.
A simultaneous look at the reduction in the promoters’ shareholding along with the movement of the share
price over past few years might lead to the conclusion that the promoters are cashing out their stake as the
share price of the company is increasing.
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As detailed below, it might be that the promoters prefer to give the money raised by the sale of their shares
as loans to the company and earn interest on it. It might be akin to a situation where a promoter prefers to
have debt exposure on her company rather than equity exposure.
It is advised that investors should keep a close watch on the change in promoters’ shareholding going ahead.
4) A large amount of loans provided by promoters to the company:
At March 31, 2017, promoters have provided loans of about ₹121 cr to the company out of which the
founder promoter Mr. K.N. Reddy has provided loans of ₹117 cr. During FY2017, the promoters’ loans
have increased by about ₹40 cr.
The FY2017 annual report, page 199:
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Usually, the argument that is provided for such loans from promoters to the companies is that the company
is facing difficulties in raising debt from independent sources like banks. Therefore, the promoters are
helping the company by infusing funds by way of loans. KNR Constructions Ltd has put forward the same
reason while describing the loans in its FY2017 annual report on page 15:
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Such reasoning of the promoters helping the company to repay the debt by putting in money from their
personal pockets does not corroborate with the high credit rating of A+ being enjoyed by the company from
credit rating agency CRISIL. Investors should also note that in the past few years CRISIL has upgraded the
credit rating of the company twice to reflect the strong financial position of the company.
As per December 2017 credit rating rationale of CRISIL, it first upgraded the rating of the company from
A- to A in 2016 and then further upgraded the rating from A to A+ in 2017.
Therefore, at one end it seems that the credit strength of the company is improving as reflected by upgrades
in the credit rating and on the other hand, the company has to rely on promoters’ money to pay off the debt
of its subsidiaries. These contrasting signs raise questions and investors should think further about it.
Infusion of money by promoters for debt repayment in a company with high credit rating may represent
any of the following two scenarios:
A) The first interpretation may be that the credit rating assigned by the rating agencies does not reflect the
true financial position of the company. As a result, the company may not be in a fundamentally sound
position, which is represented by a credit rating of A+.
B) The second interpretation may be that the company is fundamentally sound and the promoters are using
the company as an avenue to get the interest rate on their money, which is more than the interest rate
available to them from outside sources like fixed deposits of banks.
An investor may find the amount of interest paid by the company to the promoters on the loans provided
by them in the FY2017 annual report at page 195:
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Using the above-shared data of the interest payment and the loans outstanding from promoters, an investor
may calculate the interest rate being paid by the company to the promoters for their loans. An investor may
calculate that the interest rate is about 10.3% for the loans provided by Mr. K. Narasimha Reddy and 9.7%
on the loans provided by Mr. K. Jalandhar Reddy.
The interest rate available for bulk deposits in the banking system currently ranges from 6.25% to 7.50%
(May 09, 2018) for senior citizens like Mr. K. Narasimha Reddy (Source: SBI Website)
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Therefore, the loans from promoters to the company 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 about 10% from the company whereas the banks may provide an interest of 6-7% on the
fixed deposits.
Therefore, an investor would notice that the infusion of funds by promoters in a company with a high credit
rating might:
1. raise questions on the strength of the credit rating or

2. may reflect an attempt by the promoters to benefit from the company by obtaining a higher interest
rate on their money than the interest rates provided by the banks on fixed deposits.
Moreover, an investor would note from the discussion on the free cash flow position of the company above
that KNR Constructions Ltd has negative free cash flows where its investment requirements are higher than
its cash-generating abilities. As a result, the company has been meeting its cash flow needs by raising loans.
Such a situation indicates that the dividends paid by the company to its equity shareholders are also funded
by debt.
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Extending this argument, an investor would also appreciate that major source of funds for promoters is the
dividend from the company, which in the case of KNR Constructions Ltd seems to be funded by debt.
Therefore, this situation may be akin to a vicious cycle where the company is raising loans to pay dividends
to the promoters and then the promoters are giving the same funds that they received from the company,
back to the company and are earning higher interest rates on it.
Moreover, as discussed above, as the promoters are continuously selling their shares over last few years
while the share price of the company is increasing. Therefore, these loans may be partly funded by the
proceeds of the sale of promoters’ stake in the company, which indicates that the promoters might prefer to
put their money as debt in the company in place of equity shares.
We would suggest that the investors should arrive at their own conclusion regarding it by doing their
analysis.
This is a situation similar to the position of promoter loans in another company Bharat Rasayan Ltd.
Investors may read the following article to read the analysis of Bharat Rasayan Ltd.
Additionally, the investors may also seek clarifications from the company about a property owned by the
promoters, which is rented by the company. It becomes significant to ascertain whether the promoters are
exclusively using the guesthouse for their personal use because it might be akin to using company resources
for personal benefits.
5) Demonetization: dealing in non-permitted receipts and payments in currency notes:
As per the FY2017 annual report, page 171, the company received about ₹12 lac in demonetized currency
notes which were not permitted during the demonetization period. Additionally, it made payments for about
₹77 lac in the demonetized currency notes, which was not permitted:
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The auditor of the company has also highlighted these non-permitted dealings of the company in
demonetized currency notes in its report for the year in the FY2017 annual report, page 140:
Investors may seek clarification from the company about the nature of these non-permitted dealings in the
demonetized currency notes.
6) Investments in closed-ended mutual funds and equity mutual funds:
While analysing the mutual fund investments made by KNR Constructions Ltd, an investor notices that the
company has invested funds in SBI Equity Opportunities Fund – Series I, which is a closed-ended mutual
fund indicating that the company will not be able to get its money back when it needs until the fund period
gets over.
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An investor would appreciate that investing money in mutual funds, which lock the money for a certain
period might not be the best option for a company, which has to rely on loans from promoters to repay
the debt of its subsidiaries. Any surplus money should be invested in such assets, which may be liquidated
as and when the company needs money.
Moreover, the investor would also notice that the company has invested money in equity mutual funds like
SBI Infrastructure Fund, SBI PSU Fund and SBI Equity Opportunities Fund, which invest money in
equities. It is usually advised that companies should focus on taking the risk of their core business operations
and not take unrelated risks like investment in the stock markets.
7) Subsidiary/JV financial results not audited by their auditors:
As per the qualified opinion put in by the auditor in the FY2017 annual report of KNR Constructions Ltd,
the company does not get the financial results of two subsidiaries, six joint operations and one joint
controlled entity audited from their respective auditors. Instead, the management has prepared their
financials and without any check by any auditor, these management prepared financials have been included
in the consolidated financials of KNR Constructions Ltd.
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It is advised that investors may seek clarification from the company about the reasons for non-audit of these
entities. Moreover, the investors should also ask whether any auditor has ever audited the financial results
of these entities.
8) Apparently, surplus funds lying with subsidiaries:
An analysis of the subsidiaries of KNR Constructions Ltd indicates that one of the subsidiaries, KNR
Agrotech & Beverages Pvt Ltd (KABPL), is apparently involved in an unrelated business of mango
plantations. CRISIL in its January 2014 credit rating report of the company has indicated that KABPL is
involved in mango plantations:
Further advised reading: 7 Important Reasons Why Every StockInvestor Should Read Credit Rating
Reports
The company has disclosed that in FY2017 KABPL has profits that are higher than the turnover.
The most probable reason for profits being higher than the turnover might be the non-operating income of
the subsidiary, which can be due to surplus funds lying with the subsidiary. Investors would appreciate that
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any company should call back the surplus funds from its subsidiary companies before taking loans from
outside parties like promoters.
Investors may contact the company to know if the subsidiary KABPL has surplus funds available with it.
Additionally, what are company’s plans for utilization of these surplus funds, if any?
9) High dependence of company’s revenues & business on govt policies and activity:
The business of KNR Constructions Ltd is highly dependent on the tenders/projects being floated by central
and state governments and various other departments. Any decline in the tender activity due to any issue
related to elections, political uncertainties will have a direct impact on the revenues of the company.
In the current financial year, despite the seemingly strong focus of the current central govt. on roads and
infrastructure projects, as per the company, the tender allocation activity was low, which affected the entire
sector.
February 2018 conference call, page 11:
Moreover, the business of the company involves a lot of land acquisition activity, which is a highly
politically sensitive matter. There is a high possibility of projects being delayed due to land acquisition
issues.
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In addition, the majority of the customers of the company are govt. entities, therefore, the company needs
to deal with govt. departments to get its payments released in order to fund its operations. It seems that the
company has faced multiple periods where the receivables of the company were stuck with counterparties,
where the company also resorted to delay the payments to its vendors and other counterparties to increase
the payables.
The cash flow statement of the company for FY2016 and FY2017 indicates a situation where
a significant amount of money was stuck in the trade and other receivables, where the company resorted to
delaying the payables in order to protect its liquidity.
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All these aspects of the company’s business make it highly vulnerable to the vagaries of
the political environment.
Margin of Safety in the market price of KNR Constructions Ltd:
Currently (May 8, 2018), KNR Constructions Ltd is available at a price to earnings (P/E) ratio of about
18.5, which does not offer any margin of safety in the purchase price as described by Benjamin Graham in
his book The Intelligent Investor.
Conclusion:
Overall, KNR Constructions Ltd seems to be a company, which has been growing at a moderate pace of
10-12% over the last decade while reporting stable operating profit margins in the profit and loss statement.
However, upon deeper analysis, it seems that the reported profitability of the company in the P&L may not
represent the complete profitability of the business of the company, which is spread across various different
entities like joint ventures/subsidiaries etc.
There have been instances where the parent company has to infuse funds in the subsidiary having a full
year of operations of a toll road, in order to help it sustain its expenses and debt repayments. Similarly, the
company had to resort two of its operational BOT annuity joint ventures at a loss and make provisions for
impairment in the FY2017 annual report. Therefore, we believe that the nature of structuring of the business
in various entities along with the accounting method of percentage of completion method (POCM) makes
it difficult to assess the true business position of an infrastructure/EPC player.
The company seems to be growing faster than what its internal resources can sustain. It is reflected by a
lower self-sustainable growth rate (SSGR) and negative free cash flow position of the company. As a result,
the company has to resort to taking loans to fund it cash flow shortfalls as well as dividend payments to
equity shareholders.
The promoters have demonstrated very good project execution skills by way of completing a number of
projects ahead of their scheduled deadlines. Moreover, the promoters seem to have a management
succession plan in place where the son of the founder promoter is playing an active role in the management
of the company.
However, it comes to the notice of the investors that the promoters have significantly reduced their
shareholding in the company over past years when the share price of the company has increased
significantly. It might look like that the promoters are cashing out their gains resulting from the increase in
share price of the company.
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The promoters have provided a significant amount of loans to the company, which seem to have been used
to repay the debt raised by the subsidiaries of the company. Such instances of the loans from promoters to
companies, which have a strong credit rating of A+ may put doubts on the credit strength represented by
such credit ratings. Moreover, such loans may also represent opportunities by promoters to gain higher
interest rates from the company than what they can get from fixed deposits from banks. Analyzing these
aspects becomes important for investors as such loans represent a situation where the company takes loans
to pay dividends to equity shareholders including promoters and then the promoters plough back the same
funds in the company as interest-bearing loans to meet the cash flow shortfalls of the company.
Certain actions of the company require further clarifications like a large amount of money due to the
customers, non-auditing of the financials of some of the entities that are included in the consolidated
financials and dealing in non-permitted receipts & payments in the demonetized currency notes. Investors
may contact the company directly to know more about these aspects including the investments in the
seemingly unsuitable mutual funds including equity mutual funds and closed-ended mutual funds etc.
renting out the guesthouse owned by the promoters and the land parcel taken on lease by the company from
the promoters.
We believe that going ahead; investors should monitor the shareholding of the promoters in the company,
loans given by the promoters to the company, debt levels of the company, and signs of receivables being
stuck with the customers as well as the dues to the customers. Investors may request the company to disclose
consolidated financial results each quarter as the consolidated results would help the investors understand
the business position of the company in a better manner than the standalone financials.
These are our views about KNR Constructions Ltd. However, investors should do their own analysis before
taking any investment related decision about the company.
P.S.
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2) Globus Spirits Ltd
Globus Spirits Ltd is a manufacturer of country liquor (IMIL) and bottler for Indian made foreign liquor
(IMFL) having a presence in multiple states with distilleries in Rajasthan, Haryana, West Bengal, and Bihar.
The company owns IMIL brands like Nimboo, Narangi, Heer Ranjha, and Ghoomar.
Let us analyse the performance of Globus Spirits Ltd over the last 10 years.
While analyzing the past financial performance data of the company, an investor would notice that until
FY2014, Globus Spirits Ltd used to disclose only standalone financials. This is because; the company did
not have any subsidiary until then and in FY2015, it two subsidiaries: M/s Uber Blenders & Distillers Ltd
and M/s Globus Trade Bay Ltd. Therefore, since FY2015, the company has been preparing both standalone
as well as consolidated financials.
We believe that while analysing any company, the investor should always look at the company as a whole
and focus on financials, which represent the business picture of the entire group. Therefore, while analysing
Globus Spirits Ltd, we have analysed standalone financials until FY2014 and consolidated financials from
FY2015 onwards.
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Financial Analysis of Globus Spirits Ltd:
While analyzing the financials of Globus Spirits Ltd, an investor would note that in the past (FY2009-18),
the company has been able to grow its sales at a decent rate of 15-20% year on year. Sales of the company
increased from ₹196 cr. in FY2009 to ₹967 cr in FY2018.
However, when an investor analyses the operating profit margin (OPM) of Globus Spirits Ltd, then she
notices a distinct pattern over the last 10 years (FY2009-18). The investor notices that the history of Globus
Spirits Ltd can be divided into two distinct periods. The first period lasted until FY2013 when Globus
Spirits Ltd reported OPM in the range of 15-17%. However, FY2014 onwards (the second period), the
OPM of Globus Spirits Ltd declined sharply to 7-9%. It seems like the business dynamics of Globus Spirits
Ltd underwent a sharp change in FY2014 and the company could not recover from the same until now.
While reading the FY2014 annual report, in the Chairman’s message to shareholders on page 18, the
investor gets to understand the reasons for such a sharp decline in the OPM:
In the above communication, an investor would notice that Globus Spirits Ltd does not have the ability to
pass on increases in the cost of raw material to its customers. This is because in the key markets of Globus
Spirits Ltd, the pricing of its products (Indian made Indian liquor, IMIL) is determined by the state
governments and Globus Spirits Ltd has no direct control over it.
An investor gets to know about the inability to Globus Spirits Ltd to pass on increases in the cost of raw
material when she reads the credit rating report of the company prepared by CARE in Dec. 2017 (page 2):
Such business conditions where a company is not able to pass on the increase in the cost of raw material to
its customers are very difficult. This is because, in case of a sharp increase in the raw material prices,
companies may end up making losses. Under such circumstances, companies may have to choose between
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the options of continuously lobbying the state governments to increase the prices while bearing losses in
the interim or they may shut down their non-profitable operations.
In the case of Globus Spirits Ltd, the company has to keep running its operations at a lower level of
profitability from FY2014 until now. This becomes evident when an investor notices the trend of raw
material costs as a percentage of sales for Globus Spirits Ltd over FY2009-18. The investor notices that the
raw material costs as a percentage of sales for Globus Spirits Ltd used to be in the range of 40% until
FY2013. However, since the FY2014 onwards, it has increased to 60%. This sharp increase in raw material
costs for Globus Spirits Ltd, which it is not able to reverse, is one of the key reasons for the sharp decline
in the profitability of the company over the years. As highlighted above, the OPM of the company has
declined from the previous range of 15-17% (FY2009-13) to current levels of 7-9% (FY2014-18). On
similar lines, the net profit margin (NPM) of Globus Spirits Ltd has declined from a previous range of 8-
10% (FY2009-13) to current levels of 1-2% (FY2014-18).
An investor is in for a surprise when she compares the trend of raw material costs as a percentage of sales
for Globus Spirits Ltd with another publicly listed country liquor manufacturer, GM Breweries Ltd. She
notices that in the past, the raw material costs as a percentage of sales for GM Breweries Ltd has declined
over the years, which is in sharp contrast to Globus Spirits Ltd where it has increased sharply.
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Such wide variance in the business behavior of the companies in the seemingly similar business of Indian
made Indian liquor (IMIL) indicates that investors should deeply understand the specific business aspects
of any company before analysis irrespective of the sector in which it operates.
The tax payout ratio of Globus Spirits Ltd has been in the range of 30-35% for most of the years, which is
in line with the corporate tax rate applicable to companies in India. However, for a few years, the tax payout
ratio is different. Moreover, as communicated by the company during May 2018 conference call (page 8),
it falls under minimum alternate tax (MAT):
We believe that an investor may contact the company for taking further clarifications in the tax calculations.
Operating Efficiency Analysis of Globus Spirits Ltd:

When an investor analyses the net fixed asset turnover (NFAT) of Globus Spirits Ltd, then she notices that
the NFAT of the company has witnessed an overall decline over the years from 3.61 in FY2009 to 1.56 in
FY2018. The overall declining trend in the NFAT indicates that the new investments that are done by the
company over the last decade (FY2009-18) are not proving much efficient.
An investor would note that the inventory turnover ratios (ITR) of the company has been stable within the
range of 12-14 over the years indicating that the company has been able to manage its inventory position
well.
Over the years, Globus Spirits Ltd has been able to improve its receivables days. An investor would notice
that the company used to have receivables days within the range of 35-40 days until FY2014, which has
now improved to 16 days in FY2018. It indicates that the company has been able to collect the money from
its customers in time.
The ability of the company to keep its working capital efficiency within control by keeping ITR and
receivables days under check indicates that the company 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, Globus Spirits Ltd Limited has reported a total cumulative
net profit after tax (cPAT) of ₹198 cr. whereas during the same period, it reported a cumulative cash flow
from operations (cCFO) of ₹522 cr indicating that it has converted its profits into cash.
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While analysing the step-by-step calculation of cash flow from operations (CFO), an investor would notice
that over last 10 years (FY2009-18), Globus Spirits Ltd has had a total depreciation expense of ₹208 cr.
and total interest expense of ₹104 cr. These expenses are non-cash (depreciation) and non-operating
(interest expense) and are therefore added to net profit after tax to arrive at CFO. The significant amount of
depreciation and interest expense has led to a significantly high cCFO than cPAT for Globus Spirits Ltd
over FY2009-18.
Margin of Safety in the Business of Globus Spirits Ltd:
Conversely, if any company attempts to grow its sales at a rate higher than its SSGR, then its internal
target growth.
While analysing the SSGR of Globus Spirits Ltd, an investor would notice that the SSGR of the company
has consistently been very low to negative over the years whereas the company has been growing at a rate
of 15-20% over the years. As a result, investors would appreciate that Globus Spirits 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), Globus Spirits Ltd had to raise additional funds by multiple sources:
1. Debt (₹235 cr.): Total debt has increased from ₹17 cr. in FY2009 to ₹252 cr. in FY2018 (235 =
252 – 17)
2. Equity (₹156 cr.):
1. Raised ₹75 cr. in FY2010 by the initial public offer (IPO)
2. Raised ₹81 cr. in FY2013 by compulsory convertible preference shares (CCPS) to
Templeton Strategic Emerging Markets Fund (₹70.5 cr.) and warrants to promoters (₹10.6
cr.).
FY2013 annual report, page 22:
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The decision of the management of Globus Spirits 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.
Free Cash Flow Analysis of Globus Spirits Ltd:
While looking at the cash flow performance of Globus Spirits Ltd, an investor notices that during FY2009-
18, the company had a cumulative cash flow from operations of ₹522 cr. However, during this period it did
a capital expenditure (capex) of ₹755 cr. As a result, it had a negative free cash flow of ₹233 cr. (755 –
522).
Considering fungibility of money, an investor may assume that Globus Spirits Ltd met this cash flow gap
of ₹233 cr. in its capital expenditure needs from the additional debt of ₹235 cr. An investor would note
from the discussion above that during FY2009-18 total debt of the company increased by ₹235 cr. from
₹17 cr. in FY2009 to ₹252 cr. in FY2018.
An investor would also note that the company would have to pay interest on the debt raised by it over the
years. As per the concept of capitalization, part of the interest during the construction of the plants will be
shown as the cost of the plant and will be considered under the capital expenditure. Whereas the balance
interest will be deducted as interest expense in the profit & loss statement.
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Looking at the financial data of Globus Spirits Ltd for FY2009-18, an investor would note that apart from
the interest capitalized in fixed assets (deducted as capex), the company had to pay additional interest of
₹104 cr., which is cumulative interest expense over FY2009-18.
From the above discussion on raising additional funds and fungibility of money, an investor would
appreciate that Globus Spirits Ltd had to dilute its equity by way of IPO, CCPS, and warrants to raise funds
to meet the interest expense.
Therefore, an investor would note that due to the decision of the company management to grow aggressively
beyond the internal business strength, Globus Spirits Ltd had to dilute its equity and it got under a debt
burden.
This is in sharp contrast to its peer GM Breweries Ltd, which has a positive free cash flow (FCF) and is
currently a debt-free company.
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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 Globus Spirits Ltd:

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On analysing Globus Spirits Ltd, an investor comes across certain other aspects of the company:
1) Management Succession of Globus Spirits Ltd:
While analysing the past annual reports of Globus Spirits Ltd, an investor notices that in FY2013, Mr.
Shekhar Swarup son of the promoter Mr. Arun Kumar Swarup has joined the company in the position of
an Executive Director.
Investors would note that Mr. Arun Kumar Swarup is currently about 60 years of age and Mr. Shekhar
Swarup is currently about 33 years of age. The presence of next generation of the promoter family in the
active business role in the company while the founding promoter is still around, provide the good
opportunity of grooming the next generation as future leaders of the company. It provides a continuity of
the leadership for the company.
2) Suboptimal capital allocation by Globus Spirits Ltd:
As per the discussion above in the article, an investor would appreciate that Globus Spirits 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,
Globus Spirits Ltd is able to generate a profit before tax (PBT) of ₹10 cr. from its net fixed assets (NFA)
of ₹609 cr. in FY2018. This amounts to a pre-tax return of 1.6% on the money invested in plants &
machinery, which is very low when compared to a risk-free pre-tax return of 7.80% provided by
Government of India Securities 10-Years (2028) (Source: RBI Website on Nov 13, 2018).
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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 Nov. 13, 2018)
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An investor would note that a pretax (PBT) return of 1.60% earned by the company on its assets is very
low when compared to other hassle-free and risk-free avenues like govt. securities or fixed deposits with
banks.
An investor may note that in FY2018, the Bihar plant of the company was not operational. As a result, the
profit before tax (PBT) of the company is lower than what it could have been if the Bihar plant were
functional. However, an investor may appreciate that the Bihar plant has a capacity of 26 million bulk liters
of alcohol out of which Globus Spirits Ltd expects to make a production of 25 million bulk liters when the
Bihar plant starts. (Investors’ presentation, Sept 2019, page 9):
Investors would appreciate that Globus Spirits Ltd expects to produce 139 million bulk liters after
production starts at the Bihar plant. In FY2018, the company produced 114 million bulk liters of alcohol,
which generated a profit before tax (PBT) of ₹10 cr.
Globus Spirits Ltd communicated to investors that the production at Bihar plant would maintain the existing
profit margins of the company. The conference call, May 2018, page
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If an investor assumes similar profit margins, then by a simple calculation an investor may extrapolate that
the company may generate a PBT of about ₹12-15 cr. if the Bihar plant commences operations (10*139/114
= 12.2).
This level of pre-tax profit is very low when compared to the risk-free pretax profit that can be generated
by investing ₹609 cr. (amount of NFA of Globus Spirits Ltd in FY2018) in Govt. of India securities (yield
of 7.8%) or a fixed deposit with State Bank of India (interest rate of 6.85%). At 7.8%, an investor may
expect to receive a risk-free pretax return of ₹47.5 cr. and at 6.85%; an investor may expect to receive a
pretax return of ₹41.7 cr. by investing ₹609 cr.
An investor would appreciate that Globus Spirits Ltd will have to improve its business by a huge margin to
generate profits to meet 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.
An investor would note that the other listed player in the country liquor segment, GM Breweries Ltd has
a pretax business return on its net fixed assets of about 100%. In FY2018, GM Breweries Ltd had a profit
before tax of ₹111 cr. whereas it has net fixed assets of ₹111 cr. This is in sharp contrast to Globus Spirits
Ltd., which in FY2018 has a profit before tax of ₹10 cr. on net fixed assets of ₹609 cr.
3) Signs of liquidity stress in Globus Spirits Ltd:
As discussed earlier, an investor would note that Globus Spirits Ltd decided to make investments beyond
the sustainable ability of its business profits and as a result, it had to dilute its equity and raise significant
debt. Moreover, the above discussion highlights that the investments done by the company have led to low
returns in terms of business profits.
Because of these business decisions, Globus Spirits Ltd faced liquidity stress, which has been visible by
various signs:
a) Delay in repayment to lenders:
In the past, there have been multiple instances where Globus Spirits Ltd could not meet its debt repayments
on time. While analysing the annual reports of the company, an investor comes across multiple occasions
where the auditor of the company has pointed it out in its report.
FY2014, default to lenders for 67 days (FY2014 annual report, page 47):
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FY2015, default to lenders for 22 days (FY2015 annual report, page 57):
b) Delay in depositing statutory dues with the authorities:
Globus Spirits Ltd has done delays in depositing statutory dues like tax deducted at source (TDS), income
tax etc. with govt. authorities. Investors should note that many times delays in the deposit of statutory dues
with the authorities are the first sign of liquidity stress in a company.
FY2009 annual report, page 24: delay in depositing income tax and TDS with authorities:
FY2010 annual report, page 29: delay in depositing income tax:
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c) Use of short-term funds for the long-term purpose by Globus Spirits Ltd
In the financial management of businesses, it is always guided that long-term assets like plant & machinery,
should be financed by long-term funds. This is because, in this situation, the company is able to repay the
long-term funds, when the plant becomes operational after a few years.
On the contrary, if a company finances its long-term assets with short-term funds, then it may face problems
in the future. This is because the short-term funds will need to be repaid very soon while the plant may not
have become operational by that time. As a result, the company will have to raise new debt to repay the
previous short-term debt used to finance the long-term assets (plant & machinery). In case, the company is
not able to raise the new debt due to any issues, then it will not be able to repay the previous short-term
debt. As a result, the company may go bankrupt or have to sell its assets in distress to repay the debt. We
have seen such problems arise in non-banking finance companies (NBFCs) recently, which had used short-
term funds raised in commercial paper (CP) market (repayable in 3-6 months), to fund long-term assets
(infrastructure and home loans of 20 years duration).
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Therefore, it is advised that companies should fund their long-term assets using long-term funds.
Whenever an investor notices that a company is using short-term funds for long-term purposes, then she
should become cautious, as it may be one of the indications that the company is not getting long-term funds
from lenders. This may be a sign of liquidity stress in the company, which lenders might have recognized
at an early stage. As a result, lenders may not be willing to give it long-term funds forcing the company to
use its short-term funds for the long-term purpose.
FY2012 annual report, page 26: use of short-term funds for the long-term purpose:
FY2014 annual report, page 47: use of short-term funds for long-term purpose:
The above cases of delays in repayment to lenders, delays in depositing statutory dues with govt. authorities
and the use of short-term funds for the long-term purpose may indicate that the decisions of Globus Spirits
Ltd to grow aggressively by making large capital investments beyond the business profits of the company
may have created liquidity stress for the company. Aggressive capital investments with suboptimal returns
may have caused issues with the company.
Therefore, it does not come as a surprise to the investors that in FY2013, the company had to raise money
by diluting its equity capital by issuing compulsory convertible preference shares (CCPS) to Templeton
Strategic Emerging Markets Fund and warrants to promoters.
In light of the continued sub-optimal returns on its assets, going ahead, investors should continuously
monitor Globus Spirits Ltd for such signs of liquidity stress in the company.
4) Non-compliance to accounting & other guidelines by Globus Spirits Ltd:
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a) Capitalization of advertising expenses instead of deducting them in profit & loss

statement:
In FY2014, the auditor of Globus Spirits Ltd pointed out that until FY2013, the company has capitalized
advertisement and promotional expenses of about ₹36 cr. as intangible assets in the fixed assets. Ideally,
Globus Spirits Ltd should have deducted these expenses from the profit & loss statement as expenses in the
years in which the company spent this money.
This qualified opinion by the auditor indicates that the pretax profits for the years before FY2014 were
higher to the extent of ₹36 cr. After this observation by the auditor, Globus Spirits Ltd deducted these
expenses over the next five years (FY2014-18) as additional depreciation of about ₹7.2 cr. each year.
b) Payment of remuneration to the relatives of directors without proper approvals from

shareholders and central govt.:
While analysing the past annual reports of Globus Spirits Ltd, an investor notices an observation from its
auditor that the company has paid a remuneration of about ₹70 lakh to a relative of one of the directors of
the company without seeking proper approvals from shareholders and central govt. After this observation
from the auditor, the company seems to have initiated the process to recover this remuneration paid by it to
the related party.
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5) Weakness of internal controls of Globus Spirits Ltd:
While analysing the annual reports of the company, an investor would notice that in FY2016, the auditor
of the company has raised concerns about the assessment of fixed assets (plants & machinery) by the
company. The auditor has highlighted that the assessment by Globus Spirits Ltd is weak and it might have
resulted in a misstatement of financial statements.
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Similarly, in the FY2014 annual report, page 46, the auditor has highlighted issues regarding the purchase
of fixed assets. The auditor has mentioned that key controls regarding the purchase of fixed assets by Globus
Spirits Ltd are weak and therefore, need to be strengthened.
The above key observations by the auditor of Globus Spirits Ltd first regarding the purchase of fixed assets
(FY2014) and then about the assessment of fixed assets (FY2016) should make an investor extra cautious
while analysing the financial statements of the company.
6) Purchase of Associated Distilleries Ltd by Globus Spirits Ltd from its

promoters:
Globus Spirits Ltd merged the distillery unit of Associated Distilleries Ltd (ADL) located at Hisar with
itself by issuing 3.24 million shares of Globus Spirits Ltd to the owners of Associated Distilleries Ltd.
An investor may note that Associated Distilleries Ltd is a related party of the company as it is
owned/controlled by the family of promoters of the company.

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The merger involved almost all the assets of ADL except freehold land, building, road, and the temple. In
addition, all the liabilities of ADL were transferred to Globus Spirits Ltd. As per the FY2011 annual report,
the book value (i.e. net assets = assets – liabilities) of the demerged unit of ADL, which the shareholders
of Globus Spirits Ltd received was ₹9.9 cr.
FY2011 annual report, page 37-38:
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The merger was effective from the date of April 1, 2010. It indicates that all the assessment of valuation
including the assets & liabilities of a demerged unit of ADL as well as the market price of shares of Globus
Spirits Ltd was done taking April 1, 2010, as the reference date. Therefore, an investor may estimate the
market value paid by the shareholders of Globus Spirits Ltd to owners of ADL based on the market price
of shares of Globus Spirits Ltd on April 1, 2010.
On April 1, 2010, shares of Globus Spirits Ltd closed at ₹139.70 on Bombay Stock Exchange (BSE). As a
result, by issuing 3.24 million shares, Globus Spirits Ltd effectively paid a consideration of about ₹45 cr.
for the Hisar unit to its promoters. (₹139.70 * 3.24 million shares = ₹452.6 million = ₹45.26 cr.)
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Therefore, an investor may appreciate that in this transaction the shareholders of Globus Spirits Ltd
purchased the Hisar unit having a book value of ₹9.91 cr. from the promoters at a consideration of ₹45 cr.
a) Financial performance of Associated Distilleries Ltd during the merger period:
While analysing the merger, an investor finds the financial performance of ADL for FY2010 and FY2011
in the annual report of Globus Spirits Ltd for FY2011.
The above data indicates that in FY2010 and FY2011, ADL generated profits of ₹6.4 cr. and ₹12.6 cr.
respectively. Therefore, shareholders of Globus Spirits Ltd may believe that for ₹45 cr., they have got an
asset generating profits of about ₹6-12 cr. every year. However, an analysis of Associated Distilleries Ltd
before the merger and after the merger indicates a different picture.
b) Financial performance of Associated Distilleries Ltd before the merger period:
While analysing the red herring prospectus (RHP: Source) filed by Globus Spirits Ltd for its IPO in 2009,
an investor gets to know about the financial performance of Associated Distilleries Ltd for FY2007,
FY2008 and FY2009.
IPO Red herring prospectus, page 201:
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By analysing the above data, an investor notices that before the merger during FY2007, FY2008 and
FY2009, the financial performance of Associated Distilleries Ltd was continuously declining year after
year. During this period, Associated Distilleries Ltd was generating a net profit after tax of about ₹50 lac
(₹5 million).
c) Financial performance of Associated Distilleries Ltd after the merger period:
While analysing the FY2016 annual report of Globus Spirits Ltd, an investor finds that the auditor of the
company has highlighted about a plant of the company, which is lying unutilized for more than three years
i.e. at least since FY2012-FY2013.
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The auditor has highlighted that the plant is lying unused for many years and the management is looking
for some alternative uses for this plant. Moreover, the auditor is not able to confirm the recoverability of
the carrying value of this plant.
The management of the company in its response to the auditors’ qualified opinion, communicates to the
shareholders in the directors’ report that the plant under question, which is lying unused since more than
last three years (i.e. at least since FY2012-FY2013) is Hisar plant.
As per the above explanation, it seems that the Hisar plant, whose purchase transaction was completed by
Globus Spirits Ltd in FY2012 by paying ₹45 cr. in shares to its promoters, stopped working within a year
after the purchase transaction and the company is now looking for alternative uses for this plant.
As per the clarification provided by the management, the alternative uses of the Hisar plant can generate
good value for the shareholders.
Investors may seek updates from the company about the status of the Hisar plant and if the management is
able to find an alternative use for it.
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7) Remuneration of promoters of Globus Spirits Ltd:
While analysing the financial performance of the company, an investor notices that Globus Spirits Ltd has
been facing challenges since FY2014 onwards. However, while analysing the remuneration of the
promoters, an investor notices that the remuneration has been increasing almost consistently over the years.
An investor would notice that the remuneration of promoters used to be about 1-2% of net profits in the
earlier years, which has increased to 33% of net profits in FY2018.
Going ahead, an investor should monitor the remuneration of promoters.
8) Promoters of Globus Spirits Ltd operating competing businesses in their

personal capacities:
While reading the red herring prospectus (RHP: Source) filed by Globus Spirits Ltd for its IPO in 2009, an
investor gets to know that the promoters have a few companies, which operate in alcohol industry and thus
in turn act as competitors to Globus Spirits Ltd.
IPO Red herring prospectus, page 22-23:
The company has highlights three companies in RHP (2009):
 Associated Distilleries Ltd.,

 Rajasthan Distilleries Pvt. Ltd. and
 Northern India Alcohol Sales Pvt. Ltd.
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Investors would appreciate that when promoters of any publicly listed company operate competing
businesses in their personal capacity, then it leads to a precarious situation for the minority shareholders of
the publicly listed company. This is because the promoters may prioritize their personal interests over the
interests of the publicly listed company and its minority shareholders.
9) Related party transactions of Globus Spirits Ltd:
Investors would notice that over the years, Globus Spirits Ltd has been involved in multiple transactions
with related parties/associate companies of promoters. The company has been regularly making payments
on behalf of promoter entities. However, in FY2017, the company wrote off the money that was due from
some of the promoter entities.
The above information in the related party section of FY2017 annual report of Globus Spirits Ltd indicates
that the company has been making payments on behalf of multiple promoter entities including Globus
Spirits (Jharkhand) Limited and Himalayan Spirits Limited. However, in FY2017, Globus Spirits Limited
wrote off about ₹1.25 cr., which was due from Globus Spirits (Jharkhand) Limited and Himalayan Spirits
Limited, indicating that there is almost nil possibility of recovery of this money. This is essentially a loss
to the shareholders of Globus Spirits Ltd.
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Investors may seek clarifications from the company about the nature of these transactions and the reasons
for the writing off the dues from promoter entities.
Moreover, in the above table, investors would also notice that Globus Spirits Ltd has given a security
deposit of about ₹4.65 cr. to Associated Distilleries Limited. Investors would remember from the discussion
above that Associated Distilleries Ltd is the entity of promoters that had sold almost all its assets except
freehold land, building, road and a temple to Globus Spirits Ltd in FY2012.
Investors may contact the company for clarifications about the reasons for the payment of security deposit
to Associated Distilleries Limited and the benefits that shareholders of Globus Spirits Ltd might get from
it.
Going ahead, investors may monitor the related party transactions entered by Globus Spirits Ltd with
various promoter entities.
10) Errors in the annual report of Globus Spirits Ltd:
While reading the FY2018 annual report of the company, an investor notices that the section of details of
promoters’ shareholding shows that some of the shares held by the promoters are pledged/encumbered.
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However, while analysing the shareholding pattern disclosure for March 31, 2018, done by Globus Spirits
Ltd to Bombay Stock Exchange (BSE, Source); the investor notices that the company has denied any
pledging/encumbrance of promoters’ shares.
We believe that in case an investor finds any information in the annual report, which is out of place or
contrary to the information available on other public sources, then she may contact the company directly in
order to ascertain the correctness of disclosures made by the company.
In another instance, in the FY2018 annual report, Globus Spirits Ltd has classified the investment in shares
of Bank of India under “unquoted” indicating that the shares of Bank of India are not listed on any stock
exchange. However, investors would appreciate that the shares of Bank of India are listed for trading on
both the major stocks exchanges of India: BSE and NSE.
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Margin of Safety in the market price of Globus Spirits Ltd:
Currently (November 13, 2018), Globus Spirits Ltd is available at a price to earnings (PE) ratio of about 75
based on consolidated earnings of FY2018. The PE ratio of 75 does not offer any margin of safety in the
purchase price as described by Benjamin Graham in his book The Intelligent Investor.
Conclusion:
Overall, Globus Spirits Ltd seems like a company, which has seen quite contrasting phases in its business
over the last 10 years (FY2009-18). Until FY2013, the company was growing at a moderate pace with good
profitability. However, FY2014 onwards, everything changed suddenly and the company could barely
report net profit margins of 1-2%. The company finds it very difficult to pass on the increases in the cost of
its raw material to the end customers as the pricing of its products is decided by state governments and is
outside its control.
It seems that during the good times, Globus Spirits Ltd decided to undergo fast expansion. Such aggressive
expansion was beyond levels that could be sustained from its business profits. As a result, the company
faced a liquidity crunch, which was visible through multiple signs like delay in repayment to lenders, delay
in payment of income tax, TDS and other statutory dues as well as usage of short-term funds for long-term
purposes.
Moreover, during this period, the company acquired the distillery plants of one of the promoter entity,
which became out of use shortly after purchase. As a result, Globus Spirits Ltd had to raise a significant
amount of additional funds by debt and equity dilution. The company raised equity funding by way of IPO,
CCPS, and warrants.
However, in the current times, the business returns generated by Globus Spirits Ltd on its assets are lower
than the risk-free returns, which can be obtained from Govt. securities and fixed deposits of banks.
The business performance of Globus Spirits Ltd is in sharp contrast to one of its listed peers, GM Breweries
Ltd, which has shown good sales growth with decent profitability and free cash flows. As a result, GM
Breweries Ltd is currently a debt-free company.
During analysis, investors note that the promoters of Globus Spirits Ltd operate multiple companies, which
are operating in the same alcoholic business as the company itself. Moreover, Globus Spirits Ltd has been
making payment on behalf of many of the promoters’ entities. In FY2017, Globus Spirits Ltd has written
off some of the money that was due from promoters’ entities.
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There are many aspects where the compliance/control levels within the company leave scope for
improvement. Initially, the company capitalized the money spent on advertising and promotions of its
products, which it should have ideally deducted as an expense from the profit & loss statement. As a result,
during these years, the profits of the company were higher than what they actually should have been. The
auditor of the company raised objections to the same and the company deducted the same as additional
depreciation over the next five years.
The company paid remuneration to relatives of the directors without proper approvals from shareholders
and central govt. The auditor raised an objection on the same and as a result, the company started recovery
of this payment from the concerned person.
The auditor has also highlighted issues with the process over control of purchase of fixed assets as well as
the assessment of fixed assets of the company. The auditor has raised caution that these issues may lead to
the misstatement of financial statements of the company. As a result, investors should do high due diligence
before making any final investment decision.
Going ahead, investors should closely track the improvement in the business returns generated by the
company on account of the start of the Bihar unit as well as the performance of the new segment of premium
alcoholic beverages (Unibev). This is because the company needs to show a remarkable improvement in its
performance to justify the risk undertaken to run the entire business.
Investors may also monitor the transactions of the company with various promoters’ entities, remuneration
of promoters, debt levels and developments related to the Hisar unit.
These are our views on Globus Spirits 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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3) Sutlej Textiles and Industries Ltd
Sutlej Textiles and Industries Ltd is an Indian company focused on the production of Melange, Modal,
Lyocell and Tencel yarns and home textiles segment.
Let us first try to analyse the past financial performance of Sutlej Textiles and Industries Ltd.
Financial Analysis of Sutlej Textiles:
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Looking at the financial performance of Sutlej Textiles and Industries Ltd for past 10 years (FY2008-17),
an investor would notice that the company has been growing its sales at a moderate pace of 10-12% year
on year. However, this sales growth has been associated with fluctuating profitability margins. The
operating profit margin (OPM) of the company has been varying from 4% in FY2009 to 15% in FY2011
and has declined to 13% in FY2017. Similarly, the net profit margin (NPM) of the company has been
varying from net losses in FY2009 to 7% in multiple years including FY2017.
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The varying profit margins of the company over the years indicate that the company operates into a difficult
and highly competitive business environment where at times, it finds it difficult to pass on the rising costs
(including raw material costs and other inputs costs) to the end customers.
Different credit rating agencies have highlighted this aspect of the susceptibility of the profit margins of the
company in their report over the years.
Credit rating report from CARE in July 2016:
Credit rating report from CARE in September 2017:
India Ratings credit rating report of July 2015 (click here):
“Sutlej’s fluctuating operating margins are due to volatile raw material prices in the context
of high operating leverage. As the key end-industry (fabrics) for the company is consumer
discretionary, it faces high price elasticity of demand”
Apart from the changes in the raw material prices and other inputs costs, the changes in the govt policies
and incentives also affect the profit margins. During FY2018, especially the Q3 (Oct-Dec 2017) quarter,
the company witnessed a steep decline in its profit margin because of reduction in the export incentives
provided by the govt.
Feb 2018 conference call, page 4:
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The company has to use its manufacturing facilities for third-party contracts/job works at prices, which
barely cover the variable costs.
The management has also accepted the tough nature of business in the industry and it has at times,
acknowledged that the industry conditions behave so tough that even reporting a positive profit is
commendable.
While analysing the results for Q3-FY2018, an investor would note that the home textile division of the
company has made losses in the quarter:
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In different shareholders’ communications, the company has communicated that it has one of the highest
margins in the sector it operates. E.g. FY2017 annual report, page 34:
However, when an investor compares the profit margin of Sutlej Textiles and Industries Ltd with its peers,
then she notices that many of the peers of the company have significantly higher profit margins.
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It indicates that overall, Sutlej has a lot to improve in terms of its competitiveness, product mix and branding
in order to match the profit margins of some of the better performers in the industry.
Therefore, in light of the tough and competitive business environment and the changing policy situations
faced by the company, it becomes essential that an investor keep a close watch on the profit margins of the
company going ahead.
An investor would notice that the tax payout of the company has been consistently below the standard
corporate tax rate prevalent in India. This is because the company has tax incentives available from the govt
for its manufacturing units:
The company has communicated to the shareholders that because of the incentives, the tax rate of the
company is expected to be at the level of MAT (minimum alternative tax).
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Feb 2018 conference call, page
Operating Efficiency Analysis of Sutlej Textiles:
While analysing the net fixed asset turnover (NFAT) of the company over the year, an investor would notice
that the company witnessed an improving NFAT until FY2014 when it had the highest NFAT of 3.59.
However, since FY2014, the NFAT of the company is on a decline. In FY2017, the company had the NFAT
of 2.31. The decline in the NFAT in recent years is because of significant capital expenditure of about ₹900
cr done by the company during FY2014-17 to increase its manufacturing capacity in both the spindles as
well as home textiles segment.
Feb 2018 investors’ presentation, page 28:
An investor would notice that to maintain the NFAT alongside continuing capex, a company needs to spread
out the capacity expansion in such a manner that it can keep on utilizing its newly added capacity quickly
before it further expands the capacity. We saw an example of such a company, which could have increasing
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NFAT while it was doing capex as it could quickly utilize the newly added capacities at optimal levels in
Skipper Ltd. Investors may read the analysis of Skipper Ltd and its performance on the front of NFAT in
the following article:
However, in case of Sutlej Textiles and Industries Ltd, the company is yet to utilize some of its capacities
in the optimal manner, which as per the company is to use it for its own market products rather than for job
work. As a result, the company is not able to get the true benefit from the added capacities leading to lower
sales revenue and hence, the lower NFAT.
Feb 2018 conference call, page 11-12:
An investor would notice that the receivables days and the inventory turnover level (ITR) of the
company have been range bound over last decade (FY2008-17).
The receivables days have been in the range of 27-31 days. The receivables days in FY2017 have increased
to 31 days, which is on the account of different accounting treatment needed for trade receivables because
of new accounting standards (IndAS). Under IndAS, the company needs to show the receivables, which
have been discounted from the banks in its balance sheet instead of contingent liabilities. These receivables,
where the company has taken a loan from the banks under bill discounting and as a result, the receivables
are to be received by the bank are now shown under trade receivables in the balance sheet whereas earlier
such receivables were removed from the “trade receivables” and shown under contingent liabilities.
The company has disclosed this change in the treatment of trade receivables in its FY2017 annual report
under section “Notes to first-time adoption”
Over the years, Sutlej Textiles and Industries Ltd has had its inventory turnover ratio (ITR) within the range
of 4.7 to 5.5 indicating that the company has been able to keep its inventory utilization efficiency in check.
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Therefore, an investor would notice that the company has been able to control its inventory and receivables
over the years and as a result has been able to prevent a significant amount of cash from being stuck in the
working capital. Therefore, an investor would notice that the company has been able to convert its
profits into cash flow from operations.
Over FY2008-17, the company reported a cumulative profit after tax (cPAT) of ₹770 cr whereas during the
same period it reported cumulative cash flow from operations (cCFO) of ₹1,454 cr.
An investor may read the following article to understand the factors that influence the conversion of PAT
into CFO. The article will illustrate the parameters that lead to a company reporting lower CFO than PAT
and vice versa.
Margin of Safety in the Business of Sutlej Textiles:
target growth.
An investor would notice that Sutlej Textiles and Industries Ltd has witnessed an SSGR of -7% to +7%
whereas the company has been growing at a rate of 10-12% over the years. As a result, it seems that the
company is attempting to grow at a pace, which is higher than what the internal business cash generation is
able to sustain. As a result, the company has resorted to raisingexternal funds to meet its growth
requirements as the debt has increased from ₹738 cr in FY2008 to ₹1,033 cr in FY2017.
17, Sutlej Textiles and Industries Ltd generated a total cash flow from operations (CFO) of ₹1,454 cr and
it did a capex of ₹1,176 cr over the years to grow its sales from ₹791 cr in FY2008 to ₹2,250 cr in FY2017.
However, as mentioned above, the company had a sustained high level of debt during the last decade and
as a result, it had an interest expense of ₹531 cr over FY2008-17.
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Therefore, post the capital expenditure and the interest payment, the company had a cash deficit of ₹253 cr
(1454 – 1176 – 531). Moreover, the company has paid out dividends over these years and has also made
investments including ₹50 cr invested in the preference shares of The Oudh Sugar Mills Ltd in FY2012.
The company has met the cash shortfall by raising debt from different lenders and as a result, the total debt
of the company has increased from ₹738 cr in FY2008 to ₹1,033 cr in FY2017.
of any company.
Additional aspects & annual report analysis of Sutlej Textiles:
On analysing Sutlej Textiles and Industries Ltd, an investor comes across certain other aspects of the
company, which are essential for making any final opinion about the company:
Sutlej Textiles and Industries Ltd was a part of K.K Birla group, whereupon the division of family business
interests Ms. Nandini Nopany the eldest daughter of Mr. Birla along with her son Mr.C.S. Nopany inherited
the company along with two sugar mills: Upper Ganges Sugar & Industries Ltd and Oudh Sugar Mills Ltd.
Investors may read the following article in Business Line as reference: Nopanys to ring-fence K.K. Birla
legacy; to up stake in Upper Ganges, Oudh Sugar
It seems that recently these companies have witnessed one-step of management succession as a part division
of family business of late Mr. K.K. Birla. Currently, Mr. C.S. Nopany who is about 51 years of age is the
Executive Chairman.
Going ahead investors should focus on the future management succession-planning put in place by the
company.
2) Project Execution:
The company has added to the existing manufacturing capacities in the past in both the business segments
of the spindles and home textiles.
Feb 2018 investors’ presentation, page 28:
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The capacity additions have been a mix of inorganic measures (acquisition of Birla Textile Mill in Baddi)
as well as organic measures (addition of capacity at existing plants).
3) High Promoter Remuneration:
The Executive Chairman of the company, Mr. C.S. Nopany has taken home remuneration of ₹9.96 cr.
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The company has not disclosed the absolute amount of ceiling applicable to the remuneration of directors.
However, the remuneration seems higher than the statutory limit placed by the Companies Act 2013, which
is highlighted by the auditor in its report. The FY2017 annual report, page 111:
The company has been taking shareholders’ approval to pay a remuneration, which is higher than the ceiling
put in the Act.
As per our own benchmark, which compares the promoters’ remuneration with the reported PAT, the
FY2017 remuneration of the Executive Chairman ₹9.96 cr, which is 6.3% of the PAT (₹158 cr) for FY2017,
is on the higher side.
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Investors should keep a close watch on the promoters’ remuneration going ahead.
4) Non-disclosure of promoter group entities under the list of related parties:
As mentioned in the new article published in the Business Line (Nopanys to ring-fence K.K. Birla legacy;
to up stake in Upper Ganges, Oudh Sugar), the promoters of Sutlej Textiles and Industries Ltd have
inherited two sugar mills: Upper Ganges Sugar & Industries Ltd and Oudh Sugar Mills Ltd as part of the
division of business of late Mr. K.K. Birla.
Subsequently, the promoters merged Upper Ganges Sugar & Industries Ltd and Oudh Sugar Mills Ltd into
a company named Avadh Sugar & Energy Ltd where the promoters Ms. Nandini Nopany and Mr. C.S.
Nopany hold key positions (Chairperson and Co-chairperson respectively). (Source: http://www.birla-
sugar.com/Our-Companies/About-Us-Avadh)
Therefore, it seems that the promoters of Sutlej Textiles and Industries Ltd have significant influence over
Upper Ganges Sugar & Industries Ltd, Oudh Sugar Mills Ltd (merged into Avadh Sugar & Energy Ltd).
However, none of these names appears in the FY2017 annual report of Sutlej Textiles and Industries Ltd
under the related party section as the enterprises over which promoters exercise significant
control/influence.
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It might be that due to some legal business structuring/clauses these companies may not fall in the
classification of related parties or it might be an omission on part of the company. Therefore, investors may
seek clarification from the company about the same.
5) Supporting promoter group entities from the resources of Sutlej Textiles and Industries
Ltd:
While analysing the annual reports of the company, an investor would note that Sutlej Textiles and
Industries Ltd has been supporting promoter group companies Oudh Sugar Mills Ltd and Upper Ganges
Sugar & Industries Ltd over the years.
The company invested ₹50 cr in Oudh Sugar Mills Ltd in FY2012 by way of Cumulative Redeemable
Preference Shares (FY2012 annual report, page 63)
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These investments we carried at their initial investment value of ₹50 cr until FY2016. However, in FY2017,
two developments took place:
 Oudh Sugar Mills Ltd was merged into Avadh Sugar & Energy Ltd. As a result, Avadh Sugar &
Energy Ltd and M/s Palash Securities Ltd have issued preference shares to Sutlej Textiles and
Industries Ltd in lieu of its investments in Oudh Sugar Mills Ltd.
 As part of IndAS accounting, Sutlej Textiles and Industries Ltd has to disclose the fair value of the
preference shares in the annual report of FY2017.
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Therefore, while analysing the FY2017 annual report, an investor notices that the value of the initial
investment of ₹50 cr along with the due coupon for the interim period has declined in value significantly.
The fair value of this investment in FY2015 was ₹22.49 cr, which has increased to ₹28.32 cr in FY2017.
The decision of Sutlej Textiles and Industries Ltd to invest in Oudh Sugar Mills Ltd might be akin to
supporting promoter group entities using the resources of the company where the investment has turned
into losses.
6) Supporting promoter group entities from the resources of Sutlej Textiles and Industries
Ltd (Part 2):
While analysing the annual reports of the company, an investor would notice that Sutlej Textiles and
Industries Ltd has given a loan of ₹40 cr to Upper Ganges Sugar & Industries Ltd in FY2016. (FY2016
annual report, page 131):
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The investor would note that Upper Ganges Sugar & Industries Ltd repaid the loan within the financial
year; therefore, there was no loan outstanding at the end of FY2016.
However, in the FY2017, Sutlej Textiles and Industries Ltd again gave a loan of ₹40 cr to Upper Ganges
Sugar & Industries Ltd, which was also repaid by it within the financial year; therefore, again there was no
loan outstanding at the end of FY2017. (FY2017 annual report, page 182):
Moreover, if an investor reads the summary balance sheet presented by Sutlej Textiles and Industries Ltd
along with H1-FY2018 results, then she would notice that a loan of ₹40 cr is again outstanding in the books
of the company at September 30, 2017.
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As the details of the counterparty to this ₹40 cr loan outstanding at September 30, 2017, is not disclosed in
the Ltd information in the quarterly results, therefore, it cannot be said with certainty whether this loan is
to Upper Ganges Sugar & Industries Ltd (or to Avadh Sugar & Energy Ltd in which it has been merged).
Investors may seek clarification from Sutlej Textiles and Industries Ltd about this counterparty.
Therefore, it might be one of the scenarios that Sutlej Textiles and Industries Ltd has decided to
continuously support Upper Ganges Sugar & Industries Ltd to the extent of ₹40 cr. As a result, it might
advance the loan at the start of the financial year and take repayment before the end of the financial year.
Therefore, the loan is not outstanding at the end of the financial year.
This can be one of the scenarios. Investors may seek clarification from the company about this loan as it
may also tantamount to supporting promoter group entities using the resources of the company.
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7) The statutory auditor did not do self-audit of two key manufacturing units:
In the FY2017 annual report, the statutory auditor of the company, M/s Singhi & Co has highlighted that
they did not conduct the audit of two of the key units of the company at Kathua (J&K) and Baddi (Himachal
Pradesh). Instead, a branch auditor has audited these units. (FY2017 annual report, page 110-111):
The statutory auditor, M/s Singhi & Co has acknowledged that it has not visited these branch auditors.
(FY2017 annual report, page 111):
Investors may seek details of the branch auditor from the company to do their own assessment of the branch
auditor who has audited the key manufacturing units.
8) Issues related to compliance with guidelines:
Upon reading past annual reports, an investor notices that Sutlej Textiles and Industries Ltd has faced many
issues related to compliance with regulations:
 SEBI order on non-compliance of insider trading guidelines: The Company paid ₹5.39 lac as a
settlement for the inquiry initiated by SEBI for the delay in disclosure of insider trades by the
company.
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 Delay in appointment of women director: In FY2015 annual report, the company secretary has
highlighted as part of its secretarial audit report, page 83 that the company did not appoint women
director on its board in time as per the statutory requirements.
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 Nonpayment of interest due to lenders on time: An investor would notice that every year at
March 31, the company has an interest amount of about ₹3-4 cr, which is due for payment, but has
not been paid by the company.
Looking at the financial position of the company as well as its credit rating of AA, it does not look like that
the company would be facing any financial crunch to pay these interest payments on time when they became
due. However, it is advised that investors should seek clarifications from the company as well as the credit
rating agencies about these delays in interest payments.
In light of these issues, it does not come as a surprise to the investor when she reads the observation by the
company secretary in its FY2017 secretarial audit report that the company should improve its compliance
to regulations. The FY2017 annual report, page 106:
Investors may seek clarifications from the company on the steps taken by the company in order to ensure
that it complies with all the required regulations.
9) Pledging of promoters shareholding:
Investors would notice that one of the companies classified as promoters of the company, Uttar Pradesh
Trading Co. Ltd has pledged 3,000,000 shares to lenders.
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It might be that the promoter entity has raised funds from lenders by providing its shares in Sutlej Textiles
and Industries Ltd as a security in order to support other promoter group entities/personal usage.
An investor should monitor the changes in the level of pledging of promoters shareholding going ahead.
Margin of Safety in the market price of Sutlej Textiles:
Currently (April 25, 2018), Sutlej Textiles and Industries Ltd is available at a price to earnings (P/E) ratio
of about 11.5 based on trailing 12 months earnings, which offers a small margin of safety in the purchase
price as described by Benjamin Graham in his book The Intelligent Investor.
Conclusion:
Overall, Sutlej Textiles and Industries Ltd seems to be a company, which has been growing at a moderate
pace of 10-12% over the last decade in an industry, which is marked by high competition and pricing
pressures. As a result, the company has been facing fluctuating profit margins, as it is not able to pass on
the increases in the raw material and other inputs costs to its customers in time. The company is also
impacted by govt policies and as a result, the recent reduction in export incentives by the govt has led to
a reduction in its profitability.
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The company has been able to increase its manufacturing capability consistently both by organic plant
capacity creation as well as by inorganic acquisition where it acquired another Birla group textile company.
However, recently, the company is not able to utilize entire capacity for its own market and has to run about
half of the capacity as job work for third parties where it is not able to make any profits. As a result, in the
recent most quarter (Oct-Dec 2017), the home textiles division of the company reported losses.
The company operates in a capital-intensive business, where it is not able to meet its fundsrequirement for
capital expenditure from the cash generation from the business operations. As a result, the company has
relied on debt to meet its growth requirements.
The company has been supporting different promoter group companies by way of loan and investments in
preferred shares. Some of these investments have witnessed a decline in value indicating a loss to the
shareholders of the company.
It seems that the promoters are taking home a remuneration, which is higher than the statutory limits and
as a result, the company has to take approval of shareholders in the AGM to pay the higher remuneration
to the promoters.
There are many aspects where investors may seek clarifications from the company like delays in interest
payments to lenders, non-classification of promoters’ group companies as related parties, loan to one such
promoter group company etc. An investor may seek clarification from the company about the opinion of
secretarial auditor about the scope of improvement in the compliance to norms, pledging of promoters
shareholding, details of branch auditors who have audited two key manufacturing units of the company etc.
Investors should monitor the profit margins of the company along with debt levels, promoters’ remuneration
& pledge levels, compliance issues and investments/loans to promoters’ group companies.
These are our views about Sutlej Textiles and Industries Ltd. However, investors should do their own
analysis before taking any investment related decision about the company.
P.S.

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4) GM Breweries Ltd
GM Breweries Ltd is an Indian country liquor manufacturer, focusing on the Mumbai & Thane markets in
Maharashtra.
Let us analyse the financial performance of GM Breweries Ltd.
Financial Analysis:
While analyzing the financials of G.M Breweries, an investor would note that since FY2018, the company
has started reporting its financials in compliance with new accounting standards (IndAS). As a result, in
FY2018 annual report, the company has reported its sales including various indirect taxes like state excise
duty, value added tax (VAT) etc. for the current year, FY2018, as well as the previous year, FY2017. In the
past, the company has been reporting only net sales excluding these indirect taxes in the profit and loss
statement.
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As a result, if an investor analyses the publically available historical sales data of the company, then she
may interpret that the company has suddenly grown its sales three to four times in FY2017 & FY2018
(about ₹1,300-1,600 cr) over its sales in FY2016 (about ₹360 cr), which would not be right conclusion
A look at the detailed sales breakup in the FY2018 annual report, page 55, will indicate to an investor that
out of every ₹100/- of sales, the company has to pay about ₹72/- to the govt authorities as indirect taxes
(state excise duty: 45% and value-added tax: 27%).
Therefore, it becomes essential that an investor adjust the reported sales data in the publically available
historical data so that she compares the net sales of every year in her analysis. If the investor does not make
this adjustment, then it may lead to erroneous calculation and interpretation of all those ratios, which include
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sales as a parameter like sales growth, net fixed asset turnover (NFAT), receivables days, inventory turnover
etc.
As a result, in the analysis ahead, we have adjusted the sales data to reflect the net sales for FY2017 and
FY2018.
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Looking at the financial data of GM Breweries Ltd for past 10 years (FY2009-18), an investor would notice
that the company has grown its sales at a moderate pace of 8-10% year on year from ₹210 cr in FY2009 to
₹426 cr in FY2018. An investor would also notice that the company has witnessed many fluctuations in its
operating profit margin (OPM) over the years. The OPM of the company has been as low as 7% in FY2010
and as high as 27% in FY2016. OPM has been showing cyclical patterns during the last decade.
Investors would note that the fluctuating OPM for any company is a sign of inability to pass on the changes
in the raw material costs to end customers. It may be due to the low bargaining power of the company over
its customers due to intense competition in the industry. A company may also face fluctuating OPM in
cases where the prices of the products are regulated and the company may not change them as per its will.
In case of GM Breweries Ltd, over the years, the company has not been able to pass on the prices increases
of key raw materials like rectified spirits. As a result, its profitability has suffered.
The company highlighted this constraint to the shareholders in its FY2010 annual report, page 8. The
company mentioned that it had to take a hit on its profits to maintain its sales, which seems a direct result
of the competition among country liquor manufacturers.
After 10 years, the company is still facing this challenge. In FY2018 annual report, page 45, the company
has communicated it to the shareholders:
Therefore, an investor would note that the company might find it difficult to keep its profitability levels at
high levels in future. Changing raw material prices and intense competition in the country liquor industry
might put pressure on the product prices of GM Breweries Ltd. Therefore, we believe that investors should
keep a close watch on the profit margins of the company in future.
The net profit margin (NPM) of the company has followed the trend of the OPM over the years.
Over the years, GM Breweries Ltd has a tax payout ratio of 34-35%, which is in line with the standard
corporate tax rate prevalent in India.
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Operating Efficiency Analysis:
We primarily focus on net fixed asset turnover (NFAT), inventory turnover ratio (ITR) and “receivables
days” parameters to assess the operating performance of a company.
In case of GM Breweries Ltd, the company has frequently changed the classification of its investment in
property between the capital work in progress (CWIP) and non-current assets. This reclassification changes
the value of fixed assets (net fixed assets + CWIP), that we use to arrive at NFAT (Sales/fixed assets). As
a result, the NFAT of the company over the years may not be comparable over the years.
In the FY2014 annual report at page 22, an investor would notice that the CWIP of the company
has witnessed a steep decline from ₹42 cr in FY2013 to ₹6 cr. An investor would note that there
is no corresponding increase in the fixed assets in FY2014. Instead, the non-current investments
have increased from ₹0.02 cr in FY2013 to ₹49 cr in FY2014.
Moreover, while analysing the detailed notes to the financial statement of the FY2014 annual
report, at page 27, the investor notices that the non-current investments have increased during the
by about ₹46 cr on account of investment in property.
The removal of an amount of ₹40 cr from fixed assets to investments impacts the calculation of NFAT (=
sales/fixed assets). It also impacts the calculation of cumulative capital expenditure (capex) over the years
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as the resultant decline in fixed assets, on an overview, presents itself similar to the sale of assets
(liquidation/negative capex).
As mentioned earlier, GM Breweries Ltd has started using the new accounting standards (IndAS)
and has accordingly changed its reporting of financial numbers. In FY2018 annual report, at page
50, an investor would notice that now the company has reversed the practice of showing
investment in property under non-current investments and now it is showing it under capital
work in progress (CWIP).
Because of the change in classification of the expenditures between CWIP and Non-current investments, it
becomes difficult to calculate and interpret the ratios, which use fixed assets e.g. NFAT.
However, an investor would notice that the company has been able to increase its sales over the years and
has simultaneously repaid its entire debt. This indicates that the company has been making good use of its
assets. An investor would also notice that the company is currently using only about 49% of its
manufacturing capacity of country liquor, which leaves sufficient room for future growth without the urgent
need of any large investment.
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The inventory turnover ratio (ITR) of the company has been varying year on year. However, over the years,
the ITR has improved from 23 in FY2010 to 38 in FY2018. Increase in ITR indicates an improvement in
the efficiency of inventory utilization over the years.
An investor would notice that GM Breweries Ltd has almost nil receivables days year on year. It indicates
that the company sells most of its products (country liquor) on advance payment/over the counter payment
basis and does not provide any credit period to its customers.
An investor would appreciate that if a company collects all the money from its customers upfront but
receives a credit period from its suppliers/vendors, then effectively, the suppliers are funding the inventory
of the company. Such a situation eases out the working capital burden on the company and helps it to
maintain its debt-free status.
The efficient collection of receivables and inventory management also becomes evident when an investor
compares the cumulative net profit after tax (cPAT) and cumulative cash flow from operations (cCFO) of
the company over the years. Over FY2009-18, GM Breweries Ltd reported a total cPAT of ₹279 cr. whereas
during the same period, it reported a cCFO of ₹317 cr.
An investor may refer to the following article to understand more about the situations in which a company
may be able to report a lower cCFO when compared to its cPAT and vice versa:
Margin of Safety in the Business of GM Breweries Ltd:
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target growth.
An investor would notice that over the years, GM Breweries Ltd has witnessed an SSGR of 25-50% whereas
the company has been growing at a rate of 8-10% over the years. Therefore, it seems that the company is
growing at a pace, which it can afford from its business profits. As a result, during FY2009-18, the company
has increased its sales and at the same time has paid off all the existing debt.
18, GM Breweries Ltd generated a total cash flow from operations (CFO) of ₹317 cr and it did a capex of
₹144 cr over the years to grow its revenues from ₹210 cr in FY2009 to ₹426 cr in FY2018. As a result, the
company had an FCF of ₹144 cr.
The company seems to have utilized this FCF to repay the existing debt, meet interest expense, pay
dividends etc. The balance amount is available with the company in the form of cash & investments of
about ₹118 cr.
of any company.
The company has demonstrated the ability to grow without putting the burden on the financial resources,
good working capital position, ability to pay dividends from business profits and generate surplus cash.
This ability seems to have been recognized by the market and as a result, over last 10 years, the company
has been able to reward its shareholders with an increase in market capitalization of ₹1,514 cr against
retained earnings of ₹253 cr. This amount to the creation of a wealth of about ₹6 for every ₹1 of earnings
retained by the company.
Additional aspects of GM Breweries Ltd:
On analysing GM Breweries Ltd, an investor comes across certain other aspects of the company:
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When an investor analyses the annual reports of GM Breweries Ltd from FY2010, then she notices certain
changes in the involvement of the family members of the promoters in the company:
 In FY2011, Ms. Celina William Almeida resigned from the position of Chairperson of the company
and her son Jimmy William Almeida was appointed as Chairman & Managing Director of the
company.
 In FY2012, John William Almeida who seems brother of Jimmy William Almeida resigned from
the company, thereby ceding full control of the company to Jimmy.
Currently, Jimmy William Almeida and his wife Smt. Jyoti Jimmy Almeida are the members of the
promoters’ family who are running the business. They are currently in the age bracket of about 50-60 years.
The annual reports do not provide information whether any person from the next generation of the
promoters has joined the company.
Therefore, we believe that investors should assess what are the management succession plans of the
company by taking clarifications from the company.
2) Payment of rent to the director:
As per FY2018 annual report, page 62, the company has been paying ₹2 cr as rent to one of the directors,
which is a related party.
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Investors may seek clarification about the property for which the company is paying rent to the director and
then assess whether the rent amount is in line with the market prices. This is because a rent payment to
a related party, which is higher than the market rate, would amount to taking the economic benefit away
from the company at the cost of public shareholders.
3) No details of non-current investments:
In the FY2018 annual report, at page 51, the company has disclosed that it has non-current investments of
₹107 cr. However, the company has not provided further details about the names of the mutual funds, tax-
free bonds, preference shares and equity shares where it has invested this money.
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While reading annual reports of many other companies, investors would notice that the companies provide
names of each mutual fund scheme, equity shares etc. where they have invested their money. This
information is essential to understand the risk taken by the company in its investments, which are of
significant size. Therefore, we believe that investors should ask for details of these investments from the
company for further analysis.
4) No performance based incentive for employees:
In FY2018 annual report, page 17, the company has disclosed that it does not provide any incentive to its
employees based on the business performance of the company. As a result, the employees are eligible only
for a fixed remuneration irrespective of company’s performance.
It might be that the company believes that the sales of its core product, country liquor, are self-driven. As
a result, it does not feel the need to incentivize its employees to work harder for better performance by
giving them bonuses linked to company performance. However, investors would appreciate that the lack of
performance bonus may make the employees very rigid and inflexible in their approach to business.
We believe that investors should understand more about the actions being taken by the company to keep its
employees motivated for improving the business performance. This is because the employee motivation is
essential for future growth of any company.
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5) Very less time taken by GM Breweries Ltd for preparation and audit of annual accounts:
As per the corporate announcements of the company on Bombay Stock Exchange (BSE), the company
declared its Q4 and full year results for FY2018 on April 5, 2018.
Investors would appreciate that preparation of annual account within three working days (April 2, 3 and 4,
2018) is a very quick performance for a company, which has the gross sales of about ₹1,600 cr including
more than thousand crores of tax liabilities, inventory distributed over distribution channel, 171 total
employees, and vendor assessments etc. It would have been a very efficient execution by the teams of
employees of the company to accurately ascertain the exact stock, payments due including any disputes
within three working days.
Moreover, it also indicates the fast pace at which the auditors of the company would have worked to
accurately assess all the claims made by the company within those three working days.
We hope that the efforts of the company to prepare the final accounts and the efforts of the auditors to check
them as quickly as within three working days would not have led to any errors. As the audit usually involves
making sample checks of bank accounts/fixed deposits/mutual funds by contacting the banks/AMCs,
contacting a few vendors to verify their claims as well as verifying a few inventory samples, we believe
that all these activities would have been properly undertaken within the three working days.
Margin of Safety in the market price of GM Breweries Ltd:
Currently (June 1, 2018), GM Breweries Ltd is available at a price to earnings (P/E) ratio of about 21, which
does not offer any margin of safety in the purchase price as described by Benjamin Graham in his book The
Intelligent Investor.
Conclusion:
Overall, GM Breweries Ltd seems to be a company, which has been growing at a moderate pace of 8-10%
over the last decade. The company faces competition in its key market segment of country liquor. As a
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result, it has not been able to pass on the increase in its raw material costs to its customers. Therefore, the
profit margin of the company has been fluctuating over the years.
The company sells its products on advance/over the counter payment basis and as a result, it receives almost
all of its sales revenue upfront. Such nature of its business helps the company to contain its working capital
requirements because the suppliers who provide the company a credit period end up funding the inventory
of the company.
The company has been able to use its assets efficiently and as a result, it has been able to grow using its
business profits. The company has paid off its debt. The company is utilizing only half of its manufacturing
capacity and therefore, may not need to do large capital expenditure for growthin existing markets.
The annual reports of the company do not provide information on future succession planning. Therefore,
investors may seek this information from the company directly.
Investors may also contact the company about the details of non-current investments, the property taken by
the company on rent from directors, steps taken by the company to keep the employees motivated in the
absence of bonus linked to business performance. Investors may also ascertain whether the company and
the auditors are able to appropriately conduct all the required procedures needed for flawless account
preparation and their subsequent audit before disclosing the audited financial results of the full financial
year to the shareholders within three working days from the end of financial year.
We believe that going ahead; investors should monitor the profit margins of the company, signs for
management succession planning and any deterioration in receivables days.
These are our views about GM Breweries Ltd. However, investors should do their own analysis before
P.S.

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5) Albert David Ltd
Albert David Ltd is a Kolkata based Indian pharmaceutical manufacturer producing acute therapy drugs
and human placenta extract based medicines under the brand “Placentrex”.
Let us analyse the performance of Albert David Ltd over the last 10 years.
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Financial Analysis of Albert David Ltd:
While analyzing the financials of Albert David Ltd, an investor would note that in the past (FY2009-18),
the company has been able to grow its sales at a moderate rate of 4-5% year on year. Sales of the company
increased from ₹181 cr. in FY2009 to ₹287 cr in FY2018. The growth in the sales of the company has not
been smooth. The company witnessed its sales decline in the past two years from ₹320 cr. in FY2016 to
₹287 cr. in FY2018.
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One of the reasons for the recent decline in the sale of Albert David Ltd has been the sale of brand Actibile
to Zydus Healthcare in FY2016. At the time of its sale, Actibile used to constitute about 5% of the sales.
Therefore, an investor would expect the sales of the company to decline by about 5% after the sale of
Actibile. However, an investor would notice that in the last 2 years, the sales of the company have declined
by about 9-10%. Therefore, investors would appreciate that over and above the sale of Actibile, there are
other factors, which have influenced the sales of the company.
On the similar lines, an investor would notice that during FY2009-15, the operating profit margin (OPM)
of Albert David Ltd was consistent within the range of 10-13%. However, in the recent years, the OPM has
declined sharply from 12% in FY2015 to 6% in FY2018. An investor would note that the company reported
the commencement in the decline in OPM in FY2016, the year in which it sold Actibile to Zydus. However,
the investor would also note that the company sold Actibile in the month of March 2016, which is the last
month of the financial year.
Therefore, even though the investor may get the initial impression that the decline in OPM may be the
absence of Actibile, which may be a high margin business, there seem to be other parameters, which have
affected the business of Albert David Ltd.
The company has intimated its shareholders in FY2018 (page 5) that the decline in its business performance
is primarily a result of demonetization and the introduction of goods & services tax (GST).
An investor would appreciate that over the last two year, FY2016-18, the two major changes of
demonetization (2016) and the introduction of GST have brought in a major shift in the manner of business
conduct. Therefore, it is normal for any business to cite them as a reason for declining business performance.
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However, investors should always look beyond these two factors, whenever, they analyse the decline in the
business performance of any company during the crucial period of these two years, FY2016-18. This is
because, many times, businesses may be able to hide poor business performance due to other weaknesses
under the pretext of the impact of demonetization and introduction of GST.
While looking at the decline in the OPM, an investor would notice that the sharp decline in the OPM in
FY2016 was before the period of demonetization. Therefore, investors would appreciate that some
additional factors are responsible for the decline in the profitability.
Investors would appreciate that in the June 2017 quarter, due to impending introduction of GST, most of
the dealers/retails of all the companies resorted to destocking of goods. This led to a decline in the business
performance of most of the companies. However, the business impact disclosed by Albert David Ltd was
very substantial. In June 2017 quarter, Albert David Ltd reported an operating loss with an OPM of negative
21%.
The impact of such events on Albert David Ltd has far more than anticipated. Credit rating agency, CRISIL,
has highlighted it credit rating rationale of the company for Sept 2017:
While analysing the publicly available information about Albert David Ltd, an investor would notice that
the company operates in highly competitive short therapy segments, where there is very high competition
from both organized as well as unorganized players. The company has disclosed the same to its shareholders
in its FY2018 annual report, page 61:
“The pharmaceutical industry in India, however, is an extremely highly fragmented market with severe
price competition from large number of small scale manufacturers leading to mis-matched, complex
competitive scenario.”
It seems that the competition faced by the company from unorganized players has affected its business very
severely recently as the unorganized players are fighting for the survival of their business. An investor may
appreciate the extent of the competition and its influence on the company when she reads that the company
has decided to close down one of its manufacturing facility, as it had become unviable. This facility used
to produce syringes and needles, which are essential medical items but face high competition from
unorganized players. From corporate announcement to Bombay Stock Exchange, dated Dec 27, 2017:
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The unit became financially unviable when the company could not recover the production cost of the
syringes & needles from their sales price. As per FY2018 annual report, page 119, the company had to
spend more than ₹9 cr. on the Mandideep plant to generate the sales of ₹3.5 cr. from it in FY2018.
CRISIL acknowledged this intense competitive scenario in its Sept 2017 credit rating rationale for Albert
David Ltd:
As a result, CRISIL changed its rating outlook for the debt of the company from “Positive” to “Stable” in
Sept 2017.
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At this point, investors should note that many times, downwards change in the outlook is the precursor to a
downgrade in the credit rating of any company. It might be one of the reasons that Albert David Ltd has
stopped cooperating with CRISIL in its review of credit rating in Sept 2018:
Therefore, investors should approach the company to seek clarifications about the reasons for such adverse
comment from the credit rating agency. Investors should keep a watch on any further rating communication
from CRISIL about the company. Investors should also monitor whether the company resorts to “credit
rating shopping” and changes its credit rating agency to some other company in order to avoid a rating
downgrade or to get a higher credit rating.
The net profit margin (NPM) of Albert David Ltd has been following the trend of OPM except in FY2016
when the NPM is higher than OPM because of significantly high other income from the sale of the brand
Actibile to Zydus.
The tax payout ratio of Albert David Ltd has been in the range of 34-35%, which is in line with the corporate
tax rate applicable to companies in India. In FY2016, the tax payout ratio of the company declined to 24%,
which may be due to the different tax treatment of sale proceeds of Actibile. An investor may contact the
company to get further clarification on the same.
Operating Efficiency Analysis of Albert David Ltd:
When an investor analyses the net fixed asset turnover (NFAT) of Albert David Ltd, then she notices that
the NFAT of the company has witnessed consistent improvement over the years from 2.71 in FY2009 to
6.81 in FY2016. The increase in NFAT indicates efficient utilization of existing manufacturing capacities
by the company and may indicate the role of operating leverage.
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An investor notices that the NFAT of the company has declined in the last two years to 3.39 in FY2018.
One of the reasons for the decline in NFAT is the decline in the sales revenue in the last two years. However,
another key reason is the increase in net fixed assets in FY2017. The increase in fixed assets in FY2017 is
due to revaluation of the land assets by the company when it changed its accounting from GAAP to IndAS
in FY2017.
As per the FY2018 annual report, page 136, the company has increased the value of its land assets by about
₹34 cr on adoption of IndAS.
An investor would appreciate that the increase in the denominator of fixed assets while calculating the
NFAT will decline when any company revalues its assets to a higher value.
range of 6-6.5 over the years indicating that the company has been able to manage its inventory position
well.
Over the years, Albert David Ltd has been able to keep its receivables days under control. An investor
would notice that the company has reported receivables days within the range of 38-45 days over the years.
It indicates that the company has been able to collect the money from its customers in time.
An investor would notice that over FY2009-18, Albert David Ltd Limited has reported a total cumulative
net profit after tax (cPAT) of ₹145 cr. whereas during the same period, it reported a cumulative cash flow
from operations (cCFO) of ₹260 cr indicating that it has converted its profits into cash.
An investor would note that in FY2016, Albert David Ltd has shown the proceeds of ₹53 cr. received from
the sale of the brand “Actibile” to Zydus Healthcare, in the cash flow from operations (CFO). FY2016
annual report, page 75:
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If an investor deems fit, then she may adjust the CFO calculations by removing the sale proceeds of ₹53 cr.
from CFO and put it under cash flow from investing (CFI). In such a situation, the cCFO over FY2009-18
will decline from ₹260 cr. to ₹207 cr. However, even in such a situation, the cCFO over FY2009-18 is more
than cPAT over the same period. Therefore, it seems that Albert David Ltd has been able to manage its
working capital efficiently during FY2009-18.
Margin of Safety in the Business of Albert David Ltd:
Free Cash Flow Analysis of Albert David Ltd:
While looking at the cash flow performance of Albert David Ltd, an investor notices that during FY2009-
18, the company had a cumulative cash flow from operations of ₹260 cr. However, during this period it did
a capital expenditure (capex) of ₹85 cr. (Please note that while calculating the capex we have made
adjustments for years FY2015 and FY2017. In FY2015, the company showed disposal of a lot of assets and
in FY2017, the company revalued its land assets. Both these event impact the calculation of capex. During
these years, we have used the inputs from the annual report in these years to adjust the data).
Albert David Ltd could meet the entire capex from its own sources. As a result, it had a free cash flow
(FCF) of ₹175 cr (= 260-85) over FY2009-18. In addition, the company had a non-operating/other income
of ₹85 cr. over the same period.
As a result, the company did not need to raise any debt for meeting its capital expenditure plans. It could
use the free cash available with it to pay dividends to shareholders and still left with surplus funds. Over
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FY2009-18, the company could reduce its debt from ₹58 cr in FY2009 to ₹28 cr. in FY2018. In addition,
it had cash & investments of about ₹94 cr. on March 31, 2018.
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 Albert David Ltd
On analysing Albert David Ltd, an investor comes across certain other aspects of the company:
While analysing the past annual reports of Albert David Ltd, an investor notices that Mr. A. K. Kothari, a
member of the promoter family, heads the company as Executive Chairman. Mr. Kothari is currently about
65 years of age. However, investors do not find any member of the next generation of the promoter family
on the board.
Over the years, the senior management of the company seems to consist of non-promoters. Mr. H. P. Kabra,
Executive Director, retired from the company on March 31, 2018, after working for the company for 44
years. He seems to have handed over the charge of leadership to Mr. T. S. Parmar. The company has recently
hired Mr. Parmar and appointed him as MD & CEO of the company.
Going ahead, in order to understand more about the succession planning, investors should monitor whether
any young member from the Kothari family joins the board. In addition, the investor may contact the
company to know if any of the younger members of Kothari family is already working in the company at a
junior or middle management position and whose name is not present in the annual report under key
management personnel (KMP).
2) Loans to promoter group companies:
While analysing the past annual reports, an investor notes that Albert David Ltd has given loans to the
group entities belonging to the Kothari group. As per FY2018 annual report of the company, page 149,
Albert David Ltd has given loans of about ₹16.65 cr. to the entities of Kothari group:
 ₹15.80 cr. to Kothari Capital & Securities Pvt. Ltd. And

 ₹0.85 cr. to Kothari Medical Centre.
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These are the loans, which Albert David Ltd gave the group entities and are unpaid at the end of the year.
Therefore, it is easy to find such loans in different sections of the annual report. However, many times,
companies give loans to promoter entities during the year and take back the loan before the end of the year.
Therefore, such loans, which are repaid within the year, are not reported at multiple places in the annual
report.
In a similar case, in FY2015, Albert David Ltd gave a loan of ₹3 cr. to a related party, which was repaid
during the year. However, the company did not mention the same in the section of the related party
transactions in the annual report.
An investor gets to know about this loan from the annexure to the report of the statutory auditor of the
company. FY2015 annual report, page 63:
FY2015 annual report, page 83: details of the above-mentioned loan are not present in the disclosures of
transactions with the related parties:
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3) Investments in the companies owned by the promoter group:
Investors would note that Albert David Ltd has invested about ₹19 cr. in multiple entities of the Kothari
group as an equity investment. As per FY2018 annual report, page 104, Albert David Ltd has made
following investments in the shares of Kothari group companies:
1. ₹16.75 cr. in the shares of Bharat Fritz Werner Limited

2. ₹2.15 cr. in the shares of Kothari Phytochemicals & Industries Limited
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Both the above-mentioned companies are a part of the related party companies of Albert David Ltd. FY2018
annual report, page 128, provides the list of related parties of the promoters/directors etc. of Albert David
Ltd:
We believe that investors should contact the company to get further clarification about the reasons for these
investments and the manner in which these investments benefit the shareholders of Albert David Ltd. This
is because, if there is no obvious benefit to the shareholders of Albert David Ltd from these investments,
then it might be equivalent to shifting the economic benefits from Albert David Ltd to these companies.
Credit rating agency CRISIL has highlighted these investments as a cause of concern in its rating rationales.
In 2015, CRISIL changed the outlook of the debt of the company from “Stable” to “Positive” after getting
confirmation from the management that it will not make further investments in the group companies:
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However, it seems that the management of Albert David Ltd has continued to make equity investments and
loans to different companies of the promoter group. In its communication of Sept 2018, CRISIL has
highlighted the exposure to group companies as one of the key rating sensitivities for Albert David Ltd:
4) Taking over risk of / supporting promoter group companies:
When an investor analyses the related party transactions done by the company in the previous years, an
investor notices that the company had provided a guarantee to a lender for loans of ₹35 cr. taken by
one/more of the promoter group entities in FY2014.
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Investors should note that when Albert David Ltd gives a corporate guarantee to a lender for a loan taken
by any other company, then the ultimate risk of the repayment of the loan lies with Albert David Ltd. In
case, the other company is not able to repay the loan, then lenders will hold Albert David Ltd accountable
for repayment of the loan and may initiate legal recovery proceedings against Albert David Ltd if it does
not repay the loan taken by the other company. Therefore, in the case of such corporate guarantees, the risk
is born by the guarantor while the real economic benefits of the loan proceeds are enjoyed by the entity
taking the loan.
As per later developments disclosed in the FY2018 annual report, the lenders have released the corporate
guarantee in FY2018. It might be a result of repayment of the loan by the related party or some other
company may have given the corporate guarantee to the lender in place of Albert David Ltd.
5) Donations to related parties:
While analysing the related party transaction disclosure of Albert David Ltd over past years, an investor
notices that every year, the company pays out a few crores to promoter group entities as donations.
e.g. FY2018 annual report, page 129:
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Over FY2012-18, Albert David Ltd has paid a sum of total ₹8.45 cr. to related parties in the form of
donations.
 FY2018: ₹2.00 cr.

 FY2017: ₹1.75 cr
 FY2016: ₹1.35 cr.
 FY2015: ₹1.50 cr.
 FY2014: ₹0.75 cr.
 FY2013: ₹1.00 cr.
 FY2012: ₹0.10 cr.
 Total over FY2012-2018 = ₹8.45 cr.
An investor would appreciate that if any company, which has taken debt from lenders and gives donations
to related parties, then it may be equivalent to the company taking loans and then giving it to related parties
in the form of donation. Investors may seek further details about these donations from the company to arrive
at their conclusions.
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6) High management remuneration and employee costs of Albert David Ltd:
When an investor analyses the employee costs of Albert David Ltd as a percentage of its sales, then she
notices that in FY2018, the company paid about 30% of its net sales as salaries to employees including
senior management. In FY2018, Albert David Ltd had an employee cost of ₹84.5 cr. for generating net
sales of ₹287.5 cr. (84.5/287.5 = 29.4%)
This level of employee cost seems very high when an investor compares the employee cost as a percentage
of net sales of Albert David Ltd with its peers. The investor notices that most of the peers have their
employee costs as less than half of the level of Albert David Ltd.
For the purpose of this peer comparison, we have chosen pharmaceutical companies having FY2018 net
sales similar to Albert David Ltd. The following data provides the FY2018 Net sales of all the peers:
1. Albert David Ltd: ₹287.5 cr.

2. Anuh Pharma Ltd: ₹238 cr.
3. Lincoln Pharmaceuticals Ltd: ₹361 cr.
4. Mangalam Drugs and Organics Ltd: ₹279 cr.
Looking at the above chart, an investor would notice that Albert David Ltd is spending a very high amount
of money on its employees when compared to its other similar-sized peers.
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When an investor analyses the remuneration paid by the company to its senior management (executive
chairman, executive director, and MD&CEO) in FY2018, then she notices that the company has paid a total
of ₹3.69 cr. (0.92 cr. + 1.27 cr. +1.50 cr. respectively) to the above mentioned senior management. This
amount of remuneration despite being within the statutory limits put by Company’s Act, 2013, however,
look very high when seen in the light of the net profit after tax (PAT) of ₹10 cr. reported by the company
in FY2018.
We believe that going ahead; investors should keep a close watch on the total employee costs of the
company including the remuneration paid to key management personnel.
7) Very large amount of assets given as security to lenders when compared to the
amount of loans:
In the FY2018 annual report, page 122, Albert David Ltd has disclosed that it has given assets worth ₹259
cr. to lenders as security.
An investor would notice that at March 31, 2018, Albert David Ltd has a total debt of about ₹28 cr., which
is very small when compared to the ₹259 cr. of the value of assets given as security to lenders.
Lenders usually ask for very high security from borrowers who have a very high risk of default. On the
contrary, an investor would notice that at March 31, 2018, Albert David Ltd has cash & investments of
about ₹94 cr., which indicates that lenders would not think that the company is going to default on its debt
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obligations very soon. In such a situation, it is not clear why the company has provided a security of almost
10 times the loan value to the lenders.
We believe that investors may contact the company to get further clarification on this aspect to rule out
whether the company has provided its assets as security to lenders for the loans taken by other companies.
8) Frequent non-recovery of security deposits given by the company:
In the FY2018 annual report of Albert David Ltd, an investor notices that the company has been consistently
losing the security deposits that it had paid to others for availing certain services etc. Over the last three
years, it has lost security deposits worth about ₹40 lac.
An investor may seek clarification from the company about the reasons it is not able to recover its security
deposit almost every year. Investors may seek the details of the counterparties that have confiscated/run
away with the deposits. What were the services for which the deposits were provided and what are the
actions that the company has taken to recover this money?
9) Less information provided by the company in communications like annual

reports:
While analysing the annual reports of Albert David Ltd, an investor finds that at many places, the
information provided by the company does not answer all the queries of the shareholders. An investor may
look at the following instances:
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i) Sale of the brand “Actibile” to Zydus Healthcare (FY2016)
Albert David Ltd sold the brand Actibile in FY2016 for ₹55 cr. to Zydus Healthcare in March 2016.
However, when an investor read the annual report for FY2016, then she notices that the director’s report,
as well as the management discussion & analysis sections, are completely silent on this development.
The only mention of this sales transaction in the FY2016 annual report is in the secretarial audit report
(page 26):
Any investor would expect that she would get the message about such important development in the
director’s report or the management discussion & analysis. Otherwise, an investor may be left guessing the
source of a large amount of “exceptional item” in the P&L. This is because nowhere else in the annual
report, apart from the secretarial audit report, it mentions the source/details of the exceptional item.
The investors should thank the secretarial auditor for including this development in his report, which was
reproduced in the annual report.
ii) Disposal of a large amount of assets in FY2018:
While analysing the annual report for FY2018, on page 103, an investor notices that Albert David Ltd has
disposed of assets worth ₹35 cr. during the year.
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Disposal of assets worth ₹35 cr. is a significant development for the company. However, despite reading
the annual report, an investor does not get a clear answer to many of the questions like:
 What are these assets, which are disposed of?

 Whether these are assets of the Mandideep plant, which has been closed down during the year.
 If these assets are of the Mandideep plant, then whether all the assets are now valued at zero or the
value of disposed assets represents the management’s estimate of the reduction of those assets from
their prior value? If it is a reduction in value, then by what percentage the value has eroded for the
plant and machinery of the Mandideep plant.
 What about the value of the physical infrastructure remaining at the plant: the land, the building,
and the machinery? What is its value?
Therefore, despite reading the annual report, an investor does not get an answer to such critical queries
related to the disclosure of disposal of assets worth ₹35 cr. in the financial statements. We believe that the
provided information might be sufficient to fulfill the legal requirements. However, it does not help an
investor in deriving meaningful conclusions.
10) Regulatory risk:
The pharmaceutical industry is a highly regulated industry and frequently the authorities keep on updating
the policies. As a result, many times, even the established products of different companies are put under
restrictions/banned. Therefore, investors in pharmaceutical companies should always be ready to face a
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situation when key products of their companies are restricted by the govt., which might result in significant
loss of business.
Albert David Ltd has faced such a situation in the past when in FY2011, govt. banned the use of human
placenta extract based medicines. (FY2011 annual report, page 10:
The company contested the govt’s decision in the court. The govt. lifted the ban on Placentrex partially in
FY2012. However, the govt’s decision to ban the medicine had created a fear in the minds of medical
practitioners while using Placentrex, which affected the sales and profits of the company. (FY2012 annual
report, page 11):
We believe that Investors should keep in mind always that in the case of pharmaceutical companies, any
time they may hear adverse developments from the regulatory side. It has happened with Albert David Ltd
in the past. It may happen again in the future.
Margin of Safety in the market price of Albert David Ltd:
Currently (Sept 24, 2018), Albert David Ltd is available at a price to earnings (PE) ratio of about
13 based on earning of past four quarters ending June 2018. The PE ratio of 13 does not offer
any margin of safety in the purchase price as described by Benjamin Graham in his book The
Intelligent Investor.
Conclusion:
Overall, Albert David Ltd seems like a company, which has been growing at a moderate pace of 4-5% year
on year until FY2016 with nearly stable profit margins. However, suddenly after 2016, the company has
witnessed its fortunes change for the worse. The company was hit by twin reforms of demonetization and
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introduction of GST. In addition, the company faced increasingly intense competition from the unorganized
sector. As a result, after FY2016, the company witnessed its sales and profit margins plummet. The impact
of competition is so severe that the company could not maintain the profitability of its syringe & needle
manufacturing unit. Therefore, ultimately, it had to shut this unit down.
Albert David Ltd has created a good niche in some of the pharmaceutical segments. It has created a few
good brands. The company could capitalize on the success of one of its brands, Actibile, when Zydus
Healthcare purchased it for ₹55 cr. in FY2016. As a result, the company now has a lot of cash surplus.
However, a few decision of the company for the use of cash, raise questions.
The company has been using its cash & resources for the benefit of promoter group entities. It has given
loans to such related parties of promoters. It has invested in equity shares of such entities. It has taken over
the risk of such promoter entities by giving guarantees for their loans and it has been giving donations to
promoter entities year after year. It is advisable that investors should convince themselves about these
transactions before making any final decision about the company.
Albert David Ltd has significantly high employee costs when compared to its peers. Surprisingly, the
company has given assets of about 10 times of the loan amount to its lenders as security. Investors may
seek clarifications from the company about the reasons for such a high value of security given to lenders as
well as the reasons for very high employee costs.
The amount of information disclosed by Albert David Ltd in its annual report leaves many questions
unanswered. As a result, investors may contact the company for getting further clarifications on multiple
unanswered aspects like frequent non-recovery of security deposits and disposal of fixed assets etc.
Going ahead, investors should keep a close watch on the transactions of the company with related
parties/promoter group entities, profit margins, usage of surplus cash, employee costs with senior
management remuneration as well as the regulatory announcements.
These are our views on Albert David Ltd. However, investors should do their own analysis before taking
P.S.

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Analysis Excel
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6) Stovec Industries Ltd
Stovec Industries Ltd is a leading producer of printing machines & consumables for textile printing,
graphics printing. The company is a part of SPGPrints group of Netherlands.
Let us analyse the performance of Stovec Industries Ltd over the last 10 years.
FY2013, Stovec Industries Ltd used to disclose only standalone financials. This is because; the company
did not have any subsidiary until then and in FY2014, it acquired 100% equity stake of Atul Sugar Screens
Pvt. Ltd. from Atul Electro Formers Limited. Therefore, since FY2014, the company has been preparing
both standalone as well as consolidated financials.
Stovec Industries Ltd, we have analysed standalone financials until FY2013 and consolidated financials
from FY2014 onwards.
Investors should also note that the company follows the reporting year from January to December of the
year unlike most of the other companies, which follow reporting year from April to March. As a result, the
latest available financial results of Stovec Industries Limited are available for FY2017 (January to
December 2017).
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Financial Analysis of Stovec Industries Ltd:
While analyzing the financials of Stovec Industries Ltd, an investor would note that in the past (FY2008-
17), the company has been able to grow its sales at a rate of 20-25% year on year. Sales of the company
increased from ₹47 cr. in FY2008 to ₹213 cr in FY2017.
While analysing the profitability of the company over last decade, an investor would notice that over
FY2008-17, the operating profit margin (OPM) of Stovec Industries Ltd has improved significantly from
7% in FY2008 to 20% in FY2017. However, simultaneously, an investor also notices that the OPM of the
company has displayed cyclical patterns where first the OPM improved from 7% in FY2008 to 17% in
FY2010. The OPM, then, declined sharply to 10% in FY2011 and later on, it increased to 22% in FY2015.
Thereafter, the OPM declined to 20% in FY2017. Therefore, an investor would appreciate that the
profitability of Stovec Industries Ltd is displaying long-term improvements with short cyclical patterns.
Investors would appreciate from the past company analysis articles that cyclical profit margins are a
characteristic of companies, which operate in businesses that are affected by changing commodity/raw
material prices. Such companies find it difficult to pass on the increases in raw material prices to their
customers and as a result, they have to take a hit on their profit margins to maintain the sales.
On the contrary, the long-term improving trend in the profit margins indicates the development of positive
aspects for the business of the company. It might be an improvement in the brand/business strength of the
company giving it pricing power on the customers. Another parameter may be the change in the product
mix of the sales of the company over the years, which may have led to higher sales of products with more
profitability leading to an increase in OPM. Moreover, long-term improvements in OPM may also be a
result of the long-term declining trend of key raw material prices for the companies.
In the case of Stovec Industries Ltd, an analysis of FY2017 annual report indicates that one of the
identifiable key raw material for the company is Nickel. As per the information provided by the company
in FY2017 annual report, page 67, Nickel constitutes about 30% of the total raw material cost of the
company:
An investor would note that at a share of 30% of the raw material cost, Nickel has the capacity of
significantly influencing the cost structure of Stovec Industries Ltd even though there are other raw
materials (70%), which would also have an impact. During any particular period, the effect of balance 70%
raw materials may be opposite to the effect of Nickel. Therefore, during any specific period, investors may
find that the movement of nickel prices may not fully explain the changes in the profit margin of the
company.
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The following chart provides the movement of Nickel prices over last 10 years:
(Source: tradingeconomics.com)
An investor would notice that the sharp decline in OPM of Stovec Industries Ltd during FY2011 coincides
with the sharp increase in the prices of Nickel in 2011 when the prices increased to almost 2.5-3 times of
their previous lows.
While reading the past annual reports for Stovec Industries Ltd, an investor would notice that the company
has repeatedly acknowledged its dependence on the price movements of Nickel.
In FY2011, the company disclosed that a sharp increase in Nickel prices affected its business performance
(page 8):
In FY2017 annual report, page 29-30, Stovec Industries Ltd has disclosed that it imports high-quality Nickel
but does not enter into any hedging/price control arrangements for its purchases. It exposes the company to
fluctuations of raw material prices.
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A look at the movement of the Nickel prices over the last 10 years indicates that the Nickel prices are in a
long-term downtrend where they have declined significantly since their peak levels in FY2011. Such a
significant decline in the input cost prices seems to be an important factor in the improvement of the OPM
of Stovec Industries Ltd during FY2011-17.
As discussed above, investors need to keep in mind that there are raw materials other than Nickel (70%),
which may affect the profit margin of Stovec Industries Ltd differently. Nevertheless, it is advised that
investors should keep a close watch on Nickel prices going ahead to monitor whether the OPM of the
company witnesses a decline with the increasing Nickel prices.
An investor would note that the net profit margin (NPM) of the company has followed the trend of its OPM.
This is primarily because the company does not have debt. The absence of debt avoids interest costs eating
into net profitability and the benefits of business operations are available to the equity shareholders.
The tax payout ratio of Stovec Industries Ltd has been about 30-34% over the last decade, which is in line
with the corporate tax structure prevalent in India.
Operating Efficiency Analysis of Stovec Industries Ltd:
When an investor analyses the net fixed asset turnover (NFAT) of Stovec Industries Ltd, then she notices
that the NFAT of the company has been consistently in the range of 6-7. An investor would also notice that
during the entire decade (FY2008-17), the company has been able to grow without doing any significant
capital expenditure. The only periods in which it did significant capital expenditure were FY2014 when it
acquired the sugar screen business along with the subsidiary Atul Sugar Screens Private Limited and in
FY2017 when it has invested about ₹14 cr. primarily in plant & machinery.
As a result, the NFAT of Stovec Industries Ltd witnessed a decline only in the periods like FY2011 when
the company, as well as its customers, faced challenging times of rising input cost and the NFAT declined.
In FY2014 and FY2017, the NFAT declined due to the capital expenditure, which takes some time to add
to sales revenue.
An investor would note that an NFAT of about 6-7 is higher than the normal trend for other manufacturing
businesses, which normally have NFAT within the range of 1-3. As a result, an investor would notice that
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the business of Stovec Industries Ltd is comparatively asset light and the company can grow its business
even with limited capital expenditure.
An investor would also appreciate that the low NFAT of Stovec Industries Ltd is also a result of the
arrangements of the company with its parent company under which it gets access to the product technology
from the parent and therefore, does not have to spend heavily on research & development (R&D). In return,
Stovec Industries Ltd pays for the technology by way of royalty payments. Therefore, effectively, an
investor may assume that Stovec Industries Ltd has outsourced the capital investment in R&D to its holding
company. The net expense of this cost of R&D (capital expenditure) to develop new technology, which is
essential for growth, is deducted from P&L as royalty payments instead of capitalizing it as capex in fixed
assets.
Therefore, to improve the idea of the investment required to generate sales growth for Stovec Industries
Ltd, an investor may factor in the royalty payments as an investment in fixed assets to understand the asset
utilization of the company.
range of 5.7-7 over the years indicating that the company has been able to manage its inventory position
well.
Over the years, Stovec Industries Ltd has been able to improve its receivables days. An investor would
notice that the company has been able to reduce its receivables days from 98 days in FY2009 to 49 days in
FY2017. It indicates that the company is able to fund its business operations efficiently from its operating
profits and not rely on working capital finance from banks etc.
While comparing the cumulative net profit after tax (cPAT) and cumulative cash flow from operations
(cCFO) of the company for FY2008-17, an investor would notice that the cCFO of Stovec Industries Ltd
has been less than cPAT during this period. Over FY2008-17, Stovec Industries Ltd Limited reported a
total cumulative net profit after tax (cPAT) of ₹128 cr. whereas during the same period, it reported a
cumulative cash flow from operations (cCFO) of ₹117 cr.
This finding of cCFO being less than cPAT goes counter-intuitive to the expectations of investors when
they notice that Stovec Industries Ltd has been able to manage its inventory and receivables position well
over the years. The investor is able to find the source of cCFO being less than cPAT when she notices that
over the years, Stovec Industries Ltd has generated a significant amount of non-operating income (other
income) of ₹39 cr. An investor would appreciate that the other income is excluded from PAT while
calculating CFO. This is because the other income is a result of the investments (fixed deposits etc.) and
are, therefore, considered as a cash inflow from investing.
Therefore, an investor would notice that Stovec Industries Ltd has cCFO lower than cPAT not because of
funds being stuck in working capital but because of the significant contribution of non-operating income
(other income) to its profits over the years.
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Margin of Safety in the Business of Stovec Industries Ltd:
target growth.
While analysing the SSGR of Stovec Industries Ltd, an investor would notice that the SSGR of the company
has consistently been above 30-40% over the years whereas the company has been growing at a rate of 20-
25% over the years. As a result, Stovec Industries Ltd has been able to increase its sales from ₹47 cr. in
FY2008 to ₹213 cr. in FY2017 without the need for external capital. The company has been able to maintain
its debt-free status over the years.
Free Cash Flow Analysis of Stovec Industries Ltd:
While looking at the cash flow performance of Stovec Industries Ltd, an investor notices that during
FY2009-2018, the company had a cumulative cash flow from operations of ₹117 cr. However, during this
period it did a capital expenditure (capex) of ₹56 cr. Stovec Industries Ltd could meet the entire capex from
its own sources. As a result, it had a free cash flow (FCF) of ₹61 cr (= 117-56) over FY2008-17. In addition,
the company had a non-operating/other income of ₹39 cr. over the same period.
use the free cash available with it to pay dividends to shareholders and still left with surplus funds. At Dec
31, 2017, the company had ₹43 cr. of cash & investments.
of any company.
Stock markets have also recognized the ability of Stovec Industries Ltd to produce high surplus cash from
its asset-light business. As a result, the company could generate an increase in market capitalization of ₹524
cr. over FY2008-17 when compared to about ₹90 cr. of earnings/profits retained by it. It amounts to a
creation of a wealth of ₹5.83 in terms of increase in market capitalization of the stock of the company for
every ₹1 of the earnings retained and not distributed to shareholders.
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Additional aspects of Stovec Industries Ltd.
On analysing Stovec Industries Ltd, an investor comes across certain other aspects of the company.
An investor would appreciate that Stovec Industries Ltd along with its holding company SPGPrints is
owned by various financial investors and not by any promoter family. As a result, whenever any of the key
managers leaves the company, then the company hires another professional to lead the company. As a
result, the typical issue of management succession, which is highly relevant for family-owned businesses,
is not a key issue for Stovec Industries Ltd.
In the past, Stovec Industries Ltd managed a change in leadership during FY2013, when its Managing
Director, Mr. Ashish Kaul resigned from the company. The company brought in Mr. Girish M Deshpande
as Whole Time Director to manage the operations of the company until the time it could find a suitable
person to lead the company. Later during FY2013, the company appointed Mr. Shailesh Wani as the
Managing Director of the company.
The following snapshot from the FY2014 annual report, page 61 covering names of key management
personnel in the related party transactions section captures the transition of management succession in the
company:
An investor would appreciate that when professional run companies, then it becomes easy for the
company/board of directors to consider a large pool of professionals (both outside as well as inside the
company) for leadership positions. In the case of family-run companies, it is usually a choice among the
few relatives/next generation of promoters. Therefore, a professionally run company provides some
advantages in management succession.
Simultaneously, investors should be aware of some of the pitfalls of professionally run companies. Many
times, professional in charge of the companies put their personal interest before shareholders’ interest and
as a result, they may take decisions, which are not in the favor of long-term interests of the
company/shareholders. Such decisions may be focused on influencing the share price if the professional
leaders have many employee stock options (ESOPs). Additionally, decisions may be taken to show short-
term good performance to earn higher bonuses/commissions based on quarterly/yearly performance.
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In addition, the professional may not provide sustained continuity in leadership, as they are open to shifting
jobs to competitors who may offer them higher remuneration/perks. As a result, all the experience/skills
gained by the professional leaders while working for one company may ultimately benefit the competitor
of the company. The probability of such transition of leaders from one company to its leaders is low in case
of family-run businesses where members of the family take up leadership positions.
Therefore, we believe that investors should assess the pros and cons of different leadership structures of
companies before taking a final investment decision about any company.
2) Acquisition and subsequent sale of Atul Sugar Screens Pvt. Ltd:
(i) Acquisition:
An investor would note that during FY2014, Stovec Industries Ltd acquired 100% stake in Atul Sugar
Screens Pvt. Ltd (ASSPL) from Atul Electro Formers Ltd. The company has not disclosed the exact amount
paid for this acquisition directly in its annual reports. However, from the detailed notes/schedules to the
financial statements, an investor can estimate that the company paid about ₹8 cr. for completing the
acquisition, which is reflected in the balance sheet in the following heads:
 Major heads: (₹7.81 cr)

 Trademark: ₹3.94 cr
 Technical know-how and non-compete fee: ₹3.87 cr.
 Minor heads: (₹0.02 cr)
 Investment in equity shares of ASSPL = ₹0.01 cr.
 Value of fixed assets of ASSPL added to the consolidated fixed assets of Stovec Industries
Ltd: ₹0.00 cr (actual value is ₹9,695/-)
 Increase in goodwill, which Stovec Industries Ltd paid to buy fixed assets of ASSPL over
and above their value in the balance sheet: ₹0.01 cr.
An investor may know these values from the following sections of the annual reports of Stovec Industries
Ltd and ASSPL:
 Value of trademark, technical know-how, non-compete fees and goodwill from the 2014 annual
report of Stovec Industries Ltd, page 52:
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 Value of investment in the equity shares from the 2014 annual report of Stovec Industries Ltd, page
53:
 Value of fixed assets of ASSPL from the 2014 annual report of Atul Sugar Screens Pvt. Ltd
(ASSPL), page 7: (Annual reports of ASSPL from FY2014 to FY2017 are available at the website
of Stovec Industries Ltd):
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An analysis of the summary balance sheet of ASSPL at March 31, 2014, indicates that when Stovec
Industries Ltd acquired it in May 2014, the ASSPL did not have any significant assets. Its net worth was
only about ₹3.50 lac. It did not have any meaningful fixed assets. All its current assets (trade receivables,
inventory, cash & bank balance of ₹42 lac) were to be set off against the trade payables of ₹53 lac.
Therefore, an investor would appreciate that ASSPL did not bring any fixed assets/plants etc. to Stovec
Industries Ltd. Almost the entire amount of about ₹8 cr. paid by Stovec Industries Ltd to the seller (Atul
Electro Formers Ltd) was a consideration for the trademark, technical know-how, and non-compete fee. As
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a result, the investor would appreciate that Stovec Industries Ltd paid the entire acquisition cost of ₹8 cr.
for the non-quantifiable intangible benefits.
(ii) Sale:
In FY2018, Stovec Industries Ltd sold the entire sugar screens business to one of its group company, Veco
B.V.
The sale transaction of sugar screen business constituted two components:
 Sale of entire equity stake with all the assets of Atul Sugar Screens Pvt. Ltd (ASSPL) for ₹10.4 cr.
 Sale of assets of Stovec Industries Ltd related to the sugar screen business along with the associated
trademarks for ₹9.96 cr.
An investor may find the above considerations in the following disclosures done by Stovec Industries Ltd
to Bombay Stock Exchange (BSE):
March 14, 2018:
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April 5, 2018:
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Therefore, an investor would note that by this two-step transaction, Stovec Industries Ltd sold its entire
business of sugar screens with assets & trademark to its group company Veco B.V. for about ₹20 cr.
If an investor assesses both the parts of transactions, then she notices that at December 31, 2017, Atul Sugar
Screens Pvt. Ltd (ASSPL) has a net worth of about ₹6.3 cr., which is almost entirely available as cash &
bank balance (₹6.8 cr) with the company.
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Similarly, the disclosure made by the company to BSE on April 5, 2018, indicates that the sugar screens
business owned by Stovec Industries Ltd (outside of ASSPL) had a net worth of ₹19.96 cr.
Therefore, if an investor looks at the sale transaction in its entirety, then she notices that while selling the
sugar screens business along with all the trademarks to the group company, Veco B.V., for a consideration
of ₹20 cr., Stovec Industries Ltd has given away a total net worth of more than ₹26 cr. (6.3 + 19.96). The
net worth of ₹26 cr. given away by the company includes cash & bank balance of at least ₹6.8 cr. held by
ASSPL.
Therefore, an investor would appreciate that in this sale transaction, the shareholders of Stovec Industries
Ltd did not receive even the full consideration for the net worth given away by them. It is anybody’s guess
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what valuation has been assigned to the trademarks and intangible benefits, which were purchased by
Stovec Industries Ltd in about ₹8 cr. when it bought Atul Sugar Screens Pvt. Ltd (ASSPL).
The company has not disclosed the independent valuation report, which has been used to arrive at these
considerations for the sale of sugar screens business to Veco B.V., which is a related party/group company
under the holding company. Therefore, we believe that investors may seek clarifications from the company
about the finalization of the sale price for sugar screen business and a copy of the independent valuation so
that they may assess this transaction properly.
This is because if after detailed analysis of the valuation approach/methodology, an investor finds that the
assets including trademark etc. have been undervalued in this sale transaction, then it may indicate shifting
of economic benefit from the minority shareholders of Stovec Industries Ltd to the shareholders of Veco
B.V. and the holding company.
3) Contract manufacturing of sugar screens for Veco B.V.
As per the disclosures made by Stovec Industries Ltd with the results of June 30, 2018 quarter, even though
the company has sold its assets of sugar screens, it is still manufacturing the sugar screens in those
assets/plants.
June 2018 quarterly results, page 4:
An investor would appreciate that in this arrangement, the company (Stovec Industries Ltd) has sold the
assets of the manufacturing plant but is still using it to manufacture the goods. In such situation, in addition
to the manufacturing costs like raw material, labour costs etc., the company (Stovec Industries Ltd) will
have to additionally pay for the rent to use the plant for manufacturing goods. Whereas the entity who
bought the manufacturing plant (Veco B.V.) is assured of a usually fixed rental income from Stovec
Industries Ltd for giving the plant on lease to it.
Please note that the company has not disclosed the terms of the contract manufacturing agreement entered
by Stovec Industries Limited with Veco B.V. / Atul Sugar Screens Pvt. Ltd (now a subsidiary of Veco
B.V.).
Investors may seek further clarification from the company about its arrangement with Veco. B.V. and a
copy of the contract manufacturing agreement. This is because it might turn out to be a case where all the
business risk of manufacturing and selling the sugar screens is still retained by Stovec Industries Ltd
whereas Veco B.V. has taken away an assured benefit in terms of fixed rental income on the purchased
plant.
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Moreover, if after seeking clarifications from the company and further analysis, as per the discussion above,
investors find that the plant/assets of sugar screens business are transferred to Veco B.V. on such terms,
which are more favourable to them, then it will be a double whammy for the shareholders of Stovec
Industries Ltd. First, they had to part with the assets on a cheap valuation and second, they are now paying
a rent to use these same assets.
Additionally, if the shareholders of Stovec Industries Ltd felt that the sale of sugar-screen business assets
was a good development, as it seemed like an unrelated business to its printing and graphics business, then
even now, they might bear the entire risk of the business of producing and selling sugar screens. In addition,
another party (Veco B.V.) may be taking out a risk-free return (as rental income on the manufacturing plant)
out of the profits earned by shareholders of Stovec Industries Ltd by taking the risk of running the sugar
screens business. Therefore, the shareholders of Stovec Industries Ltd might be in a worse off situation than
earlier.
In light of the same, it is advised that investors should seek further clarification from the company about
the terms of the sale of sugar screen assets and the contract manufacturing agreement entered by Stovec
Industries Ltd with Veco B.V. and do a further assessment before making a final opinion about the company
and its management.
4) Management remuneration:
While analysing the past annual reports of Stovec Industries Ltd, an investor notices that the company has
been continuously paying a remuneration to its managing directors, which is in excess of 5% of net profit
after tax (PAT).
We find that despite case-to-case variation in different companies, the remuneration of key management
personnel of most of the companies stays within 2-4% of PAT. Please note that this benchmark is not in
relation to the statutory limit on managerial remuneration under the Company’s Act, 2013 under various
sections like 197 & 198. This is our personal assessment benchmark.
Therefore, we believe that investors should keep a watch on the trend of the managerial remuneration going
ahead.
5) Investments in a public listed company, Jaysynth Dyestuff (India) Limited:
While analysing the annual reports of Stovec Industries Ltd, an investor notices that since FY2016, it has
started invested in the equity shares of another listed company, Jaysynth Dyestuff (India) Limited, which
is into the business of dyes and pigments.
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Stovec Industries Ltd has invested about ₹1.36 cr. into the shares of Jaysynth Dyestuff (India) Limited and
own about 2% stake in the company on June 30, 2018.
Shareholding details of Jaysynth Dyestuff (India) Limited at June 30, 2018, from BSE:
In light of the stake of Stovec Industries Ltd being significant at about 2% in Jaysynth Dyestuff (India)
Limited, we believe that investor may seek clarifications from the company about its rationale and future
plans related to this investment.
6) Property given on lease to a third party:
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An analysis of the annual reports of Stovec Industries Ltd reflects that the company owns some property,
which it has given on a non-cancellable lease for 7 years to a third party. The company received a lease rent
of ₹1.16 cr for the property in FY2017 and FY2016.
It seems that the company has given the land and building on lease to an unrelated third party as the related
party transactions in the annual reports do not contain details of lease income. In addition, the lease rental
income is present in the consolidated financials as well, indicating that the property is not leased to the
subsidiary Atul Sugar Screens Pvt. Ltd (ASSPL).
Annual lease rental payments of ₹1.16 cr. may indicate a value of the property to be about ₹14.5 cr.
considering 8% capitalization rate (14.5 = 1.16/0.08).
Moreover, while analysing the past annual reports, an investor notices that the lease rent has been at the
same level of ₹1.16 cr. without any increase since FY2012.
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It seems that Stovec Industries Ltd has invested about ₹14-15 cr. to prepare a building, which it has
lent/leased out to a third party under a contract, which is non-cancellable and does not have any escalation
of lease rental for at least 5 years (FY2012-2017). We believe that investors may seek further details from
the company about this property, the location, the investment done to purchase the land & construct the
building, the name of the counterparty and the reasons for non-escalation of rentals for past 5-6 years.
7) Significant increase in the expenses charged by the holding company to Stovec

Industries Ltd
While analysing the related party transactions of Stovec Industries Ltd, an investor notices that in FY2017,
the company has paid for expenses of about ₹4.16 cr. for its holding company, SPGPrints B.V. In FY2017,
these expenses have increased significantly from ₹0.55 cr. in FY2016.
An investor would also note that the nature of these expenses is uncertain as they are shown separately from
the purchase of raw material, fixed assets, services etc.
Therefore, we believe that investors may seek further clarification from the company about the nature of
these expenses, the benefits derived by the shareholders of Stovec Industries Ltd by paying for these
expenses incurred by SPGPrints B.V. and the reason for the sudden multifold increase in these expenses in
FY2017.
Margin of Safety in the market price of Stovec Industries Ltd:
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Currently (Sept 20, 2018), Stovec Industries Ltd is available at a price to earnings (PE) ratio of about 19.57
based on consolidated FY2018 earnings. The PE ratio of 19.57 does not offer any margin of safety in the
Conclusion:
Overall, Stovec Industries Ltd seems like a company, which has grown its business at a decent pace of 20-
25% year on year in the last decade (FY2008-17). The company has been able to show significant
improvement in its profit margins. It has kept its working capital utilization at an efficient level. In addition,
it has been able to grow by investing limited money in capital expenditure. As a result, Stovec Industries
Ltd has shown a profitable and debt-free business growth.
The company has generated a lot of free cash flow, which it has used for paying dividends to the
shareholders and for creating investments. However, it is advised that investors should seek further
clarifications from the company about some of its investments like a building, which it has leased out to a
third party at rentals, which are constant since FY2012. Investors may also seek clarifications about the
investment done by the company in shares of Jaysynth Dyestuff (India) Limited in which it now owns a
significant stake (1.99%).
Stovec Industries Ltd purchased a company in 2014 to focus on sugar screens business but in 2018, the
company has sold the sugar-screen assets to a group company. On the face of it seemed like a decision
where the company is exiting a non-core business segment. However, different aspects of this sale
transaction, which investors learn though separate disclosures leave many aspects that need further
clarification from the company. We believe that investors should seek further details about the valuation of
the assets sold by the company as well as the contract manufacturing agreement entered by it with the
purchaser of sugar-screen assets. Investors may wish to get this clarification to avoid being in a situation
where they are paying risk-free profits to another entity out of the profits earned by them by taking risk of
sugar-screen business and that too on assets, which they only sold to the buyer on cheaper valuations.
Stovec Industries Ltd is run by professional managers where the key leadership has changed upon the
resignation of the prior managing director. An investor may be aware of the risks faced by companies,
which are run completely by professionals. There have been many instances in the corporate world where
professional managers gave more priority to their personal interests over the interests of shareholders.
Moreover, it seems that the key management of the company is taking a remuneration, which is higher than
the usual benchmark of the industry.
Investors may seek clarifications from the company about the significant increase in the payment made by
the company to the holding company SPGPrints B.V. in FY2017.
We believe that going ahead investors should monitor the movement in the prices of Nickel and the resultant
impact on the profitability of the company. Additionally, investors may monitor the management
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remuneration, investments that are done by the company from its cash reserves, payments done by the
company to Veco B.V. for using the sugar-screen producing asses, changes in the lease rental income and
other related party transactions with group companies.
These are our views on Stovec Industries Ltd. However, investors should do their own analysis before
P.S.

Videos
Analysis Excel
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7) Bodal Chemicals Ltd
Bodal Chemicals Ltd is an Indian manufacturer and exporter of dyestuff, dye intermediates and basic
chemicals.
Let us analyse the performance of Bodal Chemicals Ltd over the last 10 years.
FY2010, Bodal Chemicals Ltd used to disclose only standalone financials. This is because; the company
did not have any subsidiary until then and in FY2011, it formed it subsidiary Bodal Agrotech Limited.
Since the FY2011, the company has been preparing both standalone as well as consolidated financials.
Bodal Chemicals Ltd, we have analysed standalone financials until FY2010 and consolidated financials
from FY2011 onwards.
Financial Analysis of Bodal Chemicals Ltd:

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While analyzing the financials of Bodal Chemicals Ltd, an investor would note that in the past (FY2008-
18), the company has been able to grow its sales at a moderate rate of 10-15% year on year. Sales of the
company increased from ₹413 cr. in FY2008 to ₹1,142 cr in FY2018. However, an investor would also
notice that this growth journey has not been smooth. During the last 10 years, Bodal Chemicals Ltd has to
witness some tough periods during which it witnessed its sales to decline as well like during FY2009,
FY2013 and FY2016.
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Similarly, the company has witnessed a lot of fluctuating performance in its profitability as well. Up to
FY2013, the company has seen its operating profit margin (OPM) fluctuate widely. OPM declined from
7% in FY2008 to operating losses in FY2009. OPM then increased to 11% in FY2011 only to decline again
to 1% and 4% in FY2012 and FY2013 respectively. Since the FY2014, the OPM has improved significantly.
Recently, OPM seems to have stabilized at 17-19%.
An investor would appreciate that fluctuating operating profitability is the first sign of any company
working in a cyclical industry. Such companies usually find it very difficult to pass on the increases in the
raw material prices to their end customers. As a result, the companies have low profits/losses when the raw
material prices increase. On the contrary, when raw material prices decline, then such companies are not
able to earn high profits. This is because of the intense competition within such cyclical industries. Many
competitors are willing to supply products at lower profit margins in order to gain customers. Therefore,
whenever raw material prices decline, then the companies are not able to earn high profits for a prolonged
period.
Bodal Chemicals Limited is facing these challenges in its business. A reading of the annual reports for the
years in which it faced operating losses/reduced profitability will highlight the inability of the company to
pass on the increase in its costs to its customers.
In FY2009, the company disclosed to its investors that it had to reduce final product prices to its customers
despite the high cost of its raw material. This was because the Chinese competitors were supplying dyestuff
at a very low to cost in India and the rest of the world. As a result, the final product prices declined to result
in losses for the company.
The impact of competition from China was so huge that in some cases, the final product prices declined by
even 50%.
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An assessment of the annual reports of Bodal Chemicals Ltd during the next difficult phase of FY2012 and
FY2013 again brings similar insights. The FY2012 annual report indicates that the key reason for losses is
the fluctuations in its raw material prices and the inability of the company to pass on this increase in raw
material costs to its customers.
Moreover, the credit rating agency CARE has also highlighted this aspect in their credit rating report for
the company for April 2018, page 2:
Bodal Chemicals Ltd witnessed a decline in its revenue and profits in FY2018. The management has
mentioned that this decline was due to an increase in the cost of raw material, which it seems that the
company could not pass on to the customers.
While reading the conference call transcript of Dec 2012, an investor comes to know that in the chemicals
industry, many times, the market price of products falls below the cost of production.
Dec 2018 conference call, page 11:
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An investor would appreciate that Bodal Chemicals Ltd is operating in a cyclical industry with intense
competition both from national and international manufacturers. Such competition explains the fluctuating
operating profitability until FY2013. However, upon analysing the OPM of the recent years, an investor
notes that the OPM of the company has significantly improved and stabilized from FY2014 onwards.
In FY2014, Bodal Chemicals Ltd reported an OPM of 12%. After the FY2014, the OPM of the company
has consistently been in the range of 17-19%. This is a remarkable change in the business performance of
any company, which has been facing strong challenges to maintain its profitability in the past.
An analysis of the annual report of FY2014 indicates that the improvement in the profitability of Bodal
Chemicals Ltd is due to reduced supply of dyestuff in India because of declining manufacturing in China.
The dyestuff production in China has reduced due to strict enforcement of environmental protection
regulations, reduction in export incentives and electricity subsidies.
The reduced supply of the dyestuff from China has reduced the competition in the industry and as a result,
Bodal Chemicals Ltd is able to get higher prices for its products in the market. This has resulted in the
improvement of the OPM for the company.
An investor would notice that from FY2015 onwards, the OPM of the company has stabilized to 17-19%.
The stable OPM indicates that now the company is able to pass on the changes in the raw material prices
to its customers. The OPM of any company shows a stable pattern over long periods of multiple years when
the company increases its product prices when raw material prices increase and when it had to decrease its
product prices when raw material prices decrease.
Usually, such kind of changes in the final product prices, which are linked to changes in the raw material
prices are a result of long-term contracts entered by companies with their customers. In long-term contracts,
the prices of final products are usually linked to prices of raw materials by a formula. As a result, the final
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products keep changing according to raw material price changes and the company is able to maintain a
stable profit margin.
In this light, when an investor analyses the publicly available information about Bodal Chemicals Ltd, then
she comes to know that the company does not have any long-term contract with its customers.
The company has disclosed this fact in its prospectus for the Qualified Institutional Placement (QIP) in
October 2017, page 44:
On further analysis, the investor gets to know that almost all the contracts that Bodal Chemicals Ltd has
with its customers are only for 1-2 months duration. The executive director of the company, Mr. Ankit Patel
has disclosed during the conference call with analysts in May 2018 (page 5 &6) that the company does not
have any long-term contracts with customers. Mr. Patel explained in an answer to a query that Bodal
Chemicals Ltd has only 1-2 months long contracts with the customers.
Conference Call, May 2018, page 5 & 6:
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Looking at the above analysis, an investor would appreciate that in recent years, Bodal Chemicals Ltd has
been able to maintain a stability in its OPM because it renegotiates the price with its customers whenever
they place new orders with it after every 1-2 months upon expiry of old orders.
An investor would also appreciate that in the absence of long-term contracts, there is no obligation for the
customers to keep coming back to Bodal Chemicals Ltd for their orders. An investor would remember from
the above discussion that the dyestuff industry is highly fragmented (many manufacturers) and highly
competitive. The company had to face this hard truth in FY2009, FY2012 and FY2013 when it had reported
losses.
Therefore, investors would observe that the newfound ability of the company to maintain stable OPM by
quoting higher prices to its customers in order to pass on the increase in the cost of raw material in the
recent year, might be only a result of the current phase of reduced manufacturing in China. If due to any
change in circumstances, the manufacturing of dye intermediaries and dyestuff revives in China or any
other country, then the ability of Bodal Chemicals Ltd may not remain the same. As a result, in case, the
competition from international manufacturers (China etc.) revives, then the customers of Bodal Chemicals
Ltd will again have a large choice of suppliers. In such situations, Bodal Chemicals Ltd may again face
tough times like those that it did in FY2009, FY2012 and FY2013.
Moreover, while reading the credit rating report of Bodal Chemicals Ltd prepared by India Ratings in April
2018 (page 2); an investor gets to know that despite the current shutdown of dye units, China still has over-
supply in the country.
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In the conference call with investors in May 2018 (page 11), the company communicated that the bare
minimum EBITDA (earnings before interest, taxes, depreciation, and amortization) margin of the company
is 15%, which should increase in future to 18%.
Investors would appreciate that in the absence of long-term contracts, a company producing commodity
products can maintain stable profit margins only until the competition from other suppliers is limited. The
moment other suppliers increase their production, the ability of any company to charge the customers its
desired prices will vanish. Investors would observe that Bodal Chemicals Ltd faced this situation in
FY2009, FY2012 and FY2013 when the OPM declined sharply and it reported net losses.
Therefore, investors would note that the stable/improving profitability margins predicted by the
management of Bodal Chemicals Ltd would sustain only in the situation when the outgoing entrepreneurs
& the governments in China and other countries ignore the loss of business and the people’s livelihood
completely and do nothing to sustain the manufacturing in their countries.
Investors would note that the responses of governments in situations of the loss of livelihood and the
business are highly unpredictable. As a result, it becomes essential that investors should keep a close watch
on the developments in China’s policies regarding dyestuff industry and their manufacturing levels in order
to believe that sustainability of profit margins of dyestuff producers in India including Bodal Chemicals
Ltd. Any change in the policy from China can prove the current assumptions of stable profit margins of dye
industry players wrong.
Being commodity products, the prices of dye intermediaries and dyestuff are highly volatile. The
management of Bodal Chemicals Ltd in its May 2018 conference call (page 4) told the analysts that the
prices of key products like H-Acid declined more than 50% in Q4-FY2018:
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An investor would note that such wide fluctuations in the prices of the products in the dye intermediary and
dyestuff industry when seen along with the lack of long-term formula-based pricing contracts with
customers put the existing players in dyestuff industry in a very precarious position. Investors would
appreciate that as and when the supply resumes from competitors within India, China or any other country,
the pricing ability and the current stable profit margins enjoyed by the existing companies may quickly go
away.
To conclude from the above discussion on the operating profit margin of Bodal Chemicals Ltd, the key
parameters that influence its pricing power and its performance over the years, we believe that Bodal
Chemicals Ltd operates in a highly competitive brutal industry. This intense competition in this industry of
commodity type chemicals does not allow the manufacturers to have stability in their business model.
Cyclical phases of oversupply from producers within the country as well as from outside countries like
China lead to severe declines in the profitability of the manufacturers. Bodal Chemicals Ltd suffered these
consequences in the past. The current phase of stable & consistent operating profit margins of the company
has arisen from the fact of reduced competition from manufacturers in China due to changes in government
policies. As and when the policies of the government in China/other countries change, the dyestuff industry
in India may return to old days of intense competition with players undercutting margins and resultant
losses.
Therefore, we believe that while analysing the improvement in the operating profit margins of Bodal
Chemicals Limited, investors should always keep in mind the continuous threat from overseas suppliers
from countries like China. The current pricing power of dyestuff players in India has resulted from external
factors (actions of Chinese govt.) and the pricing power may go away if the Chinese govt. amends its
policies. Investors should safeguard themselves from blindly falling into the “This time it is different”
phenomenon.
The net profit margin (NPM) of Bodal Chemicals Ltd has followed the trend of its OPM. The NPM was
fluctuating until FY2013 and after FY2014, like OPM, its NPM has also improved and is currently stable
at 9-10%. During FY2009, FY2012 and FY2013, when the company witnessed a decline in its OPM, it
reported net losses, as the operating profit was not sufficient to meet other expenses.
Over the years, Bodal Chemicals Ltd has a tax payout ratio of 33-35%, which is in line with the standard
corporate tax rate prevalent in India.
Operating Efficiency Analysis of Bodal Chemicals Ltd:
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When an investor analyses the net fixed asset turnover (NFAT), then she notices that over the years, Bodal
Chemicals Ltd has shown significant improvement in its NFAT. Net fixed asset turnover used to be 3.90 in
FY2009, which declined to 1.94 in FY2013. However, since then, the NFAT increased significantly to 5.97
in FY2017 and in FY2018, the company had an NFAT of 3.50.
An investor would note that the basic formula for NFAT is:
Sales/Net Fixed Assets
(Please note that we use average of net fixed assets at the start and the end of the year in our calculations).
Therefore, increasing revenue of the company over the years due sale to higher volumes of dye
intermediate/dyestuff as well as higher prices of these final products have led to improvement in the NFAT.
However, while analyzing the past annual reports of Bodal Chemicals Ltd, an investor would notice one
change in the accounting policy by the company in FY2014, which has led to significant reduction in value
of fixed assets. This change in accounting has also contributed to the sharp improvement in NFAT esp.
from 1.94 in FY2013 to 4.43 in FY2014.
While analysing the past annual reports, an investor would notice that until FY2013, the company used to
follow the straight-line method of calculation of depreciation on its fixed assets.
However, in FY2014, the company changed its depreciation calculation method from straight-line (SLM)
to written down value (WDV) method:
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Because of the change in the method of calculation of depreciation, in FY2014, apart from the routine
depreciation of ₹25 cr., Bodal Chemicals Ltd recognized additional depreciation of about ₹74 cr.
The recognition of such large amount of depreciation in FY2014 led to sharp decline in the value of net
fixed assets by more than 35% in a single year from ₹264 cr. in FY2013 to ₹167 cr. in FY2014.
The significant reduction in the value of net fixed assets of the company because of the change in the
method of calculation of depreciation has also contributed to the sudden improvement in NFAT from the
low level of 1.94 in FY2013 to 4.43 in FY2014. Therefore, we believe that while interpreting the
improvement in the efficiency of asset utilization by the company over the years, an investor should keep
in mind the impact of the change in method of calculation of depreciation as well.
An investor would note that during FY2018, the NFAT of the company has declined sharply from 5.97 in
FY2017 to 3.47 in FY2018. Many factors seems to have contributed to this decline like the reduction in the
revenue from ₹1,233 cr in FY2017 to ₹1,142 cr. in FY2018 and additional capital expenditure (capex) of
₹237 cr. done in FY2018 to increase manufacturing capacity, which is yet to contribute to sales. However,
another factor, which investors need to keep in mind in this regard, is the change in method of calculation
of depreciation by Bodal Chemicals Ltd once again in FY2018.
As per the FY2018 annual report, page 164, the company has once again changed its method of calculation
of depreciation. This time the company has changed it back from the written down value (WDV) method
to straight-line method (SLM).
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An investor would appreciate that after the two changes in the method of calculation of depreciation, first
in FY2014 from SLM to WDV and then in FY2018 from WDV to SLM, the impact of the changes done in
FY2014 get nullified in FY2018. Therefore, looking at the long-term trend of NFAT before FY2014 and
the NFAT in FY2014, an investor would notice that the efficiency of usage of assets has indeed improved
from the NFAT level of 1.94 in FY2013 to 3.47 in FY2018.
However, an investor should note that while analysing financial and operating performances, she should
always look for any changes in accounting practices, which might have contributed to the
improving/deteriorating parameters.
The inventory turnover ratio (ITR) of the Bodal Chemicals Ltd. has been varying year on year. Over the
years, ITR has been fluctuating from 7.2 to 11.2. However, over the years, the ITR has remained constant
from 9.4 in FY2009 to 9.4 in FY2018. Therefore, it seems that the company has been able to maintain its
inventory utilization efficiency at a stable level.
An investor would notice that over the years, the receivables days of Bodal Chemicals Ltd have been within
the range of 60 to 90 days. On further analysis, the investor would note that during the tough years in which
it made losses like FY2009, FY2012 and FY2013 it had comparatively high receivables days (82-84 days).
This indicates that whenever the dyes industry goes through the down-cycle, not only the price and demand
for final products fall but the customers also delay making payments in time. This presents a double
whammy to the companies.
Many times, it is very difficult for companies to handle such situation of reducing sales and stuck
receivables. No wonder that Bodal Chemicals Ltd could not repay its loans to banks in FY2013 and it had
to enter into corporate debt restructuring in FY2013.
These observations should point out to the investors the nature of the industry in which Bodal Chemicals
Ltd operates and the situations that manufacturers in the dyes industries might face.
Overall, it seems that Bodal Chemicals Ltd has managed its working capital efficiently. As a result, over
the years, it has been able to convert its net profits (PAT) into cash flow from operations (CFO). Over
FY2008-18, Bodal Chemicals Ltd reported a total cumulative net profit after tax (cPAT) of ₹443 cr. whereas
during the same period, it reported a cumulative cash flow from operations (cCFO) of ₹624 cr.
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Margin of Safety in the Business of Bodal Chemicals Ltd:
target growth.
While analysing the SSGR of Bodal Chemicals Ltd, an investor would notice that until FY2014, the
company had an SSGR, which was deeply negative. The SSGR was in the range of -5% to -15%, which
indicated that the business strength of the company did not allow it any growth from its internal resources.
However, during the same time, the company kept on doing a lot of capital expenditure (capex). Over
FY2009-2013, the company did a capex of about ₹229 cr. As a result, the net fixed assets of the company
increased from ₹97 cr. in FY2008 to ₹265 cr. in FY2013.
An investor would appreciate that in the absence of inherent business strength supporting the capex, the
company had to rely on external financing to meet the capex requirements. As a result, the company
witnessed its debt level increase from ₹140 cr. in FY2008 to about ₹350 cr. in FY2013. In addition, the
company also raised equity by way of rights issue along with detachable warrants in FY2009 and then again
by way of warrants in FY2012.
Investors would note that continued reliance on external funding in absence of inherent business strength
& cash flows to meet the capex requirements has the potential to put the company at high risk. Under such
circumstances, every person who provides money to the company will want attractive returns. A look at the
interest rates charged by the lenders on the loans given to Bodal Chemicals Ltd will indicate the risk
perceived by the financial institutions in lending to Bodal Chemicals Ltd during this phase.
The FY2012 annual report, page 44, indicates that the lenders charged it an interest rate of 14.50-15.00%
for the loans, which is a high-interest rate to be by any corporate with a stable business model.
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No wonder that when the company faced tough times of business losses and simultaneously the delay in
payments from customers in FY2012 & FY2013, it could not repay its lenders. As a result, it had no option
left but to seek the restructuring of its loans.
Upon restructuring, the rate of interest increased further. The FY2014 annual report, page 45, indicates that
the interest rate on the loans increased to 15.00-16.00%.
An investor would appreciate that the decisions of the management to focus on high capex, which was not
supported by the business cash flows but by the external sources of funds like debt and equity infusion led
the company on a downward path, which resulted in the company facing near bankruptcy in FY2012 when
it opted for debt restructuring.
When an investor looks at these troubled times faced by Bodal Chemicals Ltd during FY2012-FY2013,
then she realizes that in FY2014, the decision of the Chinese govt. to tighten the environment regulations,
reduce the export and electricity subsidies came as a savior for the Bodal Chemicals Ltd.
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As per our discussion above, because of the closure of manufacturing factories in China, the supply in the
dyes industry declined and companies like Bodal Chemicals Ltd could sell their products at good profit
margins. The policy change by the Chinese govt. reversed the fortunes for Bodal Chemicals Ltd. In
subsequent years, it could sell a higher volume of its products at high prices and thereby it could generate
a good amount of cash. As a result, it could repay its lenders and get out of the corporate debt restructuring
(CDR) in FY2015.
An investor can imagine what would have been the situation if the Chinese govt. had not reduced its support
for the dye industry in its country.
As discussed above, post FY2015, the business of Bodal Chemicals Ltd has been doing well. It has been
able to post good sales growth, sustained high-profit margins. As a result, its SSGR has increased to 20-
30%. Therefore, the company has been able to repay its lenders, come out of restructuring, and reduce its
debt from about ₹372 cr. in FY2014 to ₹181 cr. in FY2018.
Free Cash Flow (FCF) Analysis of Bodal Chemicals Ltd:
While looking at the cash flow performance of the company, an investor notices that during FY2009-2012,
the company had a cumulative cash flow from operations of ₹97 cr. However, during this period it did a
capex of ₹228 cr. The company had to meet a large amount of negative free cash flow from debt. As a
result, it got burdened with unsustainable levels of debt. Eventually, the company ended up with debt
restructuring.
After the policy changes in China in FY2014, the company could generate cumulative cash flow from
operations of ₹491 cr. in FY2014-2017. The company did a capex of ₹149 cr. during this period. As a result,
the company generated a lot of free cash flow during this period and it could repay its lenders and come out
of debt restructuring.
(Please note that if we consider the reduction in fixed assets due to change in depreciation method in
FY2014, the calculation shows a negative capital expenditure of ₹63 cr. However, we have replaced this
negative capital expenditure with the ₹18 cr, which is the amount of cash used in capex as per the cash
flow statement of FY2014)
It looks like the company was on a downward path due to aggressive debt-funded capital investment
decision taken by the management. However, the policy changes in China pulled the company out of the
tough situation. It remains to be seen how long the policy restriction in China limits the supply from its
manufacturers. This is because if China goes back to the old way of manufacturing dyes, then the dyes
industry across the world may revert to its old times of fierce competition with oversupply where players
undercut profit margins and it becomes difficult for the companies to make profits like during FY2009,
FY2012 and FY2013.
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In FY2018, the company has done a capex of ₹237 cr whereas it had a CFO of ₹7 cr. The company funded
this capex from the incremental debt of ₹30 cr. (total debt increased from ₹151 cr in FY2017 to ₹181 cr in
FY2018) and from the equity of ₹225 cr raised by QIP during the year.
of any company.
Additional aspects of Bodal Chemicals Ltd
On analysing Bodal Chemicals Ltd, an investor comes across certain other aspects of the company:
When an investor analyses the annual reports of Bodal Chemicals Ltd, then she notices the founder
promoter Mr. Suresh Patel (age 62 years) has brought in his sons Bhavin (age 37 years) and Ankit (age 35
years) as executive directors in the company.
Presence of the next generation of the promoter family in active management roles in the company when
the founder promoter is still active is a sign of good management succession. Such a situation provides
sufficient time for the next generation to learn the management skills to run the business under the guidance
of founder promoter. It provides for continuity in the leadership of the company.
2) Inefficient capital allocation decisions:
The discussion above in the article highlighted that promoters of the company decided to go for capex
during FY2009-12, which was large when compared to the business strength of the company. As a result,
the company had to rely on debt to meet the capex requirements. When tough times arrived in FY2012-
FY2013, it could not repay its lenders and as a result, it faced near bankruptcy and had to go for debt
restructuring. This indicates that the capital allocation decisions from the management could have been
better.
3) Multiple attempts at diversification:
Moreover, an investor would also recollect the discussion that the dyes industry is fiercely competitive
where tough times may make it difficult for companies to survive. While analysing the history of the
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company by reading past annual reports, an investor would notice that the promoters have taken multiple
attempts to diversify into other businesses. However, until now most of their diversification attempts have
not seen good results.
While analysing the past investment decisions of the company, an investor comes across multiple instances
where the promoters/management decided to implement a business strategy but it had to reverse the
decision after failing to implement the strategy. Let us see a few such decisions:
i) Agriculture based businesses/ Agro-products:
In FY2010, the company disclosed its plans to set up a wholly owned subsidiary company as Bodal
Agrotech Ltd. (BAL) to focus on technology-based agriculture businesses. The management disclosed its
plans to start a fertilizer plant of Single Super Phosphate (SSP) as the first project of BAL.
The FY2010 annual report, page 5 & 6:
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The management projected that BAL will be able to generate revenue of ₹240 cr. once the SSP fertilizer
plant is functional.
In FY2011, the management informed the shareholders that the SSP plant is still under process; however,
BAL has started the business of trading in vegetables, fruits, and food grains.
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In FY2013, the company intimated the shareholders that after looking at the losses incurred by it in the
agro-products business, the management has decided to stop all the business activities of BAL including
the trading/retailing of vegetables, fruits etc. as well as the SSP plant.
The management cited that closing the operations of BAL would allow it to focus on the main company i.e.
Bodal Chemicals Ltd. Investors would appreciate that venturing into trading and retailing of vegetables &
fruits may be a case of moving out of the area of expertise.
ii) Tissue culture, contract research, microbial bio-fertilizers, genetic research:
Bodal Chemicals Ltd entered into the business of culture plants, microbial bio-fertilizers, genetic
improvement of crops and contract research in FY2011 by acquiring a 51% stake in Sun Agrigenetics Pvt.
Ltd (SAPL) through its subsidiary Bodal Agrotech Ltd. (BAL)
The FY2011 annual report, page 17-18:
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In FY2013, the company said that it plans to conduct research & development in SAPL and launch new
products.
However, an investor would notice that within the next two years, Bodal Chemicals Ltd sold off its stake
in SAPL. It sold a part of the stake in FY2014 and some part in FY2015.
Investors would note that Bodal Chemicals Ltd entered the business of culture plants, microbial bio-
fertilizers, genetic improvement of crops and contract research in FY2011 and exited it in FY2015.
However, the business could not do any meaningful contribution to Bodal Chemicals Ltd.
iii) LABSA (a chemical used in detergents):
In FY2015, Bodal Chemicals Ltd decided to make investments in Bodal Agrotech Ltd to manufacture
LABSA, which is a chemical used in the detergent industry. The company said that it would be able to
generate a revenue of ₹100 cr from LABSA.
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In FY2016, the company communicated its shareholders that it has started commercial production of
LABSA and that the product has received a very encouraging response from the market.
However, in May 2018 conference call, the company intimates its shareholders that it is exiting the LABSA
business (page 7):
Investors would note that over last a few years, Bodal Chemicals Ltd initiated multiple new businesses as
a part of its wholly owned subsidiary, Bodal Agrotech Ltd (BAL). After initiating and then closing these
businesses, finally, the company merged BAL in itself.
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When an investor analyses the financial position of BAL disclosed in the FY2017 annual report of Bodal
Chemicals Ltd, then, she would notice that BAL has accumulated negative reserves & surplus in its balance
sheet. The negative reserves are usually due to the losses accumulated by the companies over the years.
Therefore, it might seem that Bodal Chemicals Ltd formed a subsidiary, BAL, to start new businesses.
However, after experimenting with multiple businesses for over 5 years, the company accumulated losses
and then merged it into the main company.
(iv) Trichloro Isocynuric Acid (TCCA) by investment in Trion Chemicals Pvt. Ltd. (TCPL)
In FY2015 annual report, Bodal Chemicals Ltd intimated its shareholders that diversification is a key part
of its business strategy and as a result, it plans to invest ₹15 cr in Trion Chemicals Pvt. Ltd. (TCPL). In
FY2017 Bodal Chemicals Ltd acquired 42% stake of TCPL, which it increased further to 59% in May 2018.
As per FY2015 management communications, TCPL was to start commercial production in July 2016 and
generate potential revenues of ₹240 cr. However, as per the management comments in the August 2018
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conference call (hh:mm:ss = 12:00:00 to 14:00:00), the company has not yet started production in the TCPL
plant even after a delay of more than two years from the initial expected date of July 2016. (Please note that
the transcript of the August 2018 conference call is not yet available publicly).
As per FY2018 annual report, page 54, TCPL is facing many issues related to price increases in its raw
materials.
An investor would appreciate that the new business segment entered by Bodal Chemicals Ltd by acquiring
TCPL, also faces the similar intense competition like its core business. As a result, the company is finding
it difficult to charge higher prices to its customers and has not been able to start production of TCCA despite
significant delays from original plans.
Therefore, it remains to be seen whether the company can successfully execute its plans to generate
significant revenue from TCPL.
Moreover, the company disclosed in its QIP document, Oct. 2017 that in TCPL, it is completely dependent
on others for generating any benefits from TCPL:
As per the Dec 2017 conference call, the other promoters of TCPL, three individuals, had brought the
project to Bodal Chemicals Ltd. As a result, Bodal decided to invest in TCPL and acquired about a 42%
stake. However, in the light of continued delays in the production of TCCA by TCPL and the sale of stake
by other promoters (17%) to Bodal in May 2018, an investor may need to explore the possibility of whether
the prospects of TCCA remain good. This is because the other promoters may be selling out if they are not
seeing bright prospects of TCCA/TCPL.
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Therefore, an investor would notice that over last a few years, Bodal Chemicals Ltd has attempted to
diversify its business stream by entering various kinds of businesses. However, it is yet to achieve any
significant success from these ventures. We believe that investors should keep this past record in mind
when they appraise future ventures of the company.
4) Some of the promoters competing with Bodal Chemicals Ltd in the same
business:
The company disclosed in its QIP document, Oct 2017, that one of the promoters of Bodal Chemicals Ltd,
Mr. Ramesh P. Patel- HUF, operates in the same line of business as Bodal Chemicals Ltd.
Promoters’ shareholding pattern, June 2018, from BSE website:
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In such situations where promoters run competing businesses in their personal capacity, an investor should
be cautious and do a deeper analysis to understand whether promoters of the public listed company are
favoring their personal business interests over the public shareholders.
5) Inter-corporate loans given by the company:
As per FY2018 annual report, page 156, Bodal Chemicals Ltd has provided loans of about ₹16.8 cr to some
corporate bodies, where the terms and the details of the parties to whom these loans have been given, are
not disclosed.
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Investors may seek clarifications from the company about the terms of these inter-corporate loans given by
the company like the name of the counter-parties, rate of interest, whether these loans are secured by any
collateral etc.
Analysis of the loans becomes important when an investor notices that during FY2018, the Bodal Chemicals
Ltd did a capital expenditure of ₹237 cr. whereas it had a cash flow from operations of only ₹7 cr. An
investor can appreciate that the company had to raise debt and dilute its equity (QIP in Oct 2017) to meet
its capital needs. In such circumstances, any loan given by the company to other corporate bodies (e.g.
₹16.8 cr. in FY2018) is essentially given out of the debt raised or equity diluted (QIP funds) by Bodal
Chemicals Ltd.
6) Reduction in the promoters’ shareholding in the company:
Investors would notice that the shareholding of the promoters in the company is on the continuous decline
during the past a few years. As per BSE website, the shareholding of the promoters has declined from
74.09% at March 31, 2011, to 55.69% at June 30, 2018.
In the Dec 2017 conference call, the company mentioned that recent selling of shares disclosed to stock
exchanges, as promoter stake sale is actually the sale of shares by certain people who are not part of the
actual promoter group. As per the management, the recent share sale is by some professionals. These
professionals got the equity stake long back when the company was a partnership firm.
The management intimates that the core promoter family has instead increased its stake in the company in
recent years, which has however declined after the recent QIP.
However, investors should make her own opinion regarding the shareholding changes in light of the
following aspects:
 Long-term shareholders, who are classified as promoters and have been with the company for
decades, are leaving the company.
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 The promoters have preferred equity dilution (QIP) as a source of funding. This is despite the
communication from the company that it has access to low-cost debt.
May 2018 conference call, page 15:
When an investor analyses the history of changes in the equity capital, then she finds that the company has
been consistently raising money by issuing additional equity over the years:
 FY2008-FY2009: Bodal Chemicals Ltd came up with a rights issue where it issued two additional
detachable warrants to shareholders.
 FY2011: the company issued warrants in May 2010 to counterparties, which included the promoter
group.
 FY2018: raised equity capital by qualified institutional placement (QIP).
Moreover, the company has claimed that it might dilute the equity further if it feels appropriate.
India Ratings credit rating report, April 2018, page 2:
We believe that an investor should keep these details in front of her while she makes any final opinion
about the promoters’ approach to their shareholding in the company.
7) The sharp increase in trade receivables:
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While analysing the FY2018 annual report, an investor notices that during the year, the trade receivables
of the company have witnessed a significant increase from ₹230 cr in FY2017 to ₹347 cr. in FY2018.
An investor may also notice that over the last two years, the receivables have increased by about 110%
from ₹165 cr in FY2016 to ₹347 cr in FY2018. This is significant in comparison to the sales, which have
increased by about 25% from ₹908 cr in FY2016 to ₹1,142 cr in FY2018.
An investor may seek clarifications from the company about this sharp increase in the receivables. An
investor should closely monitor the position of the receivables of the company.
8) Frequent lending transactions with promoters:
While analysing the related party transaction section of the FY2018 annual report, an investor notices that
the company has been entering into frequent lending transactions with its promoters/directors. It seems that
the company frequently takes loans from the promoters/directors and repays them during the year.
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Investors would note that the loans to and from related parties is the area from where most of the corporate
issues arise in life.
An investor may also wish to read the disclosure by the company in its QIP document, where it cautions
the investors that in future, the related party transactions may be detrimental to the company and thereby to
the shareholders. The company cautions the shareholders that it cannot assure the shareholders that such
transactions will not have an adverse impact.
QIP document, Oct 2017, page 50:
Therefore, investors should monitor the section of related party transactions closely for red flags.
Margin of Safety in the market price of Bodal Chemicals Ltd:

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Currently (August 26, 2018), Bodal Chemicals Ltd is available at a price to earnings (PE) ratio of about
11.9 based on consolidated FY2018 earnings. The PE ratio of 11.9 offers a small margin of safety in the
Conclusion:
Overall, Bodal Chemicals Ltd is a company that has seen two phases in the last decade. In the first phase
from FY2008 to FY2013, the company did aggressive debt-funded capital expenditure, faced the brutality
of cyclical businesses, reported losses, almost faced bankruptcy and entered debt restructuring. The next
phase (FY2014-FY2018) started with the policy changes in China that led to a reduction in competition in
the dye products industry. As a result, the fortunes of the company revived and it could charge higher prices
to its customers. It started making large profits and repaid most of its debt.
While analysing the good performance of the company in the recent years, an investor should always keep
in mind that Bodal Chemicals Ltd operates in a very competitive industry. As a result, the manufacturers
are not able to gain long-term contracts with customers, are not able to pass on the increase in raw material
costs to buyers and many times have to sell the products below the cost of production. In the recent years,
the industry dynamics have changed a bit due to policy changes by China. However, an investor should
always keep it in mind that in the case in future due to any reasons, China increased its production either
by relaxing the environmental protection norms or the manufacturers come up with alternative solutions,
then the industry might go back to its old hyper-competitive days. Therefore, within a short period, investors
may see the pricing power of current players go away.
The management of Bodal Chemicals Ltd recognizes the challenges of operating in such a commodity
business and therefore, over time has taken many initiatives to diversify in different businesses. However,
most of these initiatives like agro-products, retailing of fruits & vegetables, tissue culture, LABSA, and
TCCA have not yielded any fruitful results until date. The company made losses on most of these initiatives.
It remains to be seen whether the company is able to add any value to shareholders by way of its
diversification attempts in future.
The company has done aggressive debt-funded capital expenditures in the past, which were more than what
its business cash flows (CFO) could support and as a result, it had to go under restructuring. The company
has been frequent in raising money by diluting equity capital in the past. In FY2018, the company has done
significant capital expenditure while it has very low cash flow from operations (CFO). The company met
its funding requirements by taking debt and diluting equity by qualified institutional placement (QIP). The
company has claimed (as per India Ratings report, April 2018) that if needed it may go for further equity
dilution. We believe that investors should keep these aspects in mind along with stake sale by long-standing
investors (termed as professionals by the company) while making their opinion about the confidence of
promoters in the company.
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There are certain other aspects related to promoters, which an investor should keep in mind like competing
business run by promoters in their personal capacity and frequent lending transactions of the company with
the promoters, which investors should explore further. The investors should seek clarification from the
company about the inter-corporate deposits funded from the cash raised by the company from debt and/or
equity.
The promoters seem to have a strategy of management succession planning in place. As a result, two sons
of the founding promoter have joined the company as executive directors and seem to play an active role
in the management of the company.
We believe that going ahead; most importantly, the investors should monitor the policy decisions of the
Chinese govt. in relation to dye products industry. Investors should monitor the profit margins, level of
trade receivables, debt levels along with further equity dilution and related party transactions.
These are our views on Bodal Chemicals Ltd. However, investors should do their own analysis before
P.S.

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Analysis Excel
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8) Nesco Ltd
Nesco Ltd is owner of the largest exhibition and convention center and multiple IT office buildings in
Mumbai.
Let us analyse the performance of Nesco Ltd over the last 10 years.
FY2014, Nesco Ltd used to disclose only standalone financials. This is because; the company did not have
any subsidiary until then and in FY2015, it formed it subsidiary Nesco Hospitality Private Ltd. Since the
FY2015, the company has been preparing both standalone as well as consolidated financials.
Nesco Ltd, we have analysed standalone financials until FY2014 and consolidated financials from FY2015
onwards.
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Financial Analysis of Nesco Ltd:
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While analyzing the financials of Nesco Ltd, an investor would note that in the past (FY2009-18), the
company has been able to grow its sales at a rate of 16-18% year on year. Sales of the company increased
from ₹85 cr. in FY2009 to ₹321 cr in FY2018.
An investor would notice that throughout the last decade, the operating profit margin (OPM) of Nesco Ltd
has been in the range of 64%-72% except in FY2009 when the OPM was 47%. Such sustained high profit
margin of the company indicate that it enjoys good pricing power over its customers. Nesco Ltd enjoys its
superior position in terms of business negotiations from the location of its IT Park and the exhibition cum
convention center at the key location adjoining Western Expressway in Goregaon, Mumbai. The absence
of any competing exhibition center in Mumbai adds to the business strengths of the company.
In FY2009, the company reported lower profits because of the global slowdown and Mumbai terrorist
attacks in 2008. The company highlighted its challenges in its FY2009 annual report, page 4:
The company witnessed cancellation of exhibitions in FY2009. However, the business recovered soon
thereafter and the company could report growth in sales with improved operating profit margins in future.
The company enjoys high profit margins on account of the nature of its business of a landlord where the
company rents out its assets and has to spend only a nominal amount on the running its business operations.
Investors may note that under most common leasing contracts, the occupants/lessees pay the expenses for
maintaining the building separately in addition to their monthly lease rentals. Therefore, the financial
burden of the property owner reduces further, which results in the high profit margins.
The net profit margin (NPM) of Nesco Ltd has been with about 55% over the years and has been following
the trend of OPM.
When an investor analyses the tax payout ratio of Nesco Ltd, then she notices that the company has been
paying taxes in line with the standard corporate tax rate in India except in FY2018. In FY2018, Nesco Ltd
had a tax payout ratio of 25%, which is less than the standard corporate tax rate.
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When an investor analyses the details of computation of tax provided by the company in its FY2018 annual
report, page 140, then she notices that the primary reason for the lower tax rate is the implementation of
new accounting standards (IndAS):
An investor would note that as per IndAS, the company had to show the unrealized gains in the value of
investments like mutual funds etc. under non-operating income (other income). The inclusion of unrealized
gains on investments has increased the profit before tax of the company for FY2018 in the profit & loss
statement. However, the company will have to pay taxes to the income tax department only when it sells
the investments and realizes these gains.
Moreover, in such situations, the tax liability of the company will depend on multiple factors like the period
of holding of the investments, which may be short-term capital gains tax or long-term capital gains tax.
Even in the computation of the long-term capital gains tax, the amount of tax may differ depending upon
the date when the company bought the investments and the date when the company sells these investments.
This is because one of the key influencing factor of the final tax liability: the value of inflation index may
differ significantly over the periods. The applicable tax on long-term holdings in the debt mutual funds of
domestic companies is 20% with indexation + applicable cess & surcharge.
Another important factor leading to lower tax payout is the IT park rental income considered under “Income
from House Property” as per income tax act. Under income from house property, the owner gets a benefit
of 30% standard deduction on the net rental income. As a result, if a property owner earns ₹100 as rental
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income, then she can take benefit of 30% standard deduction and pay tax only on remaining ₹70 of the
rental income. At a tax rate of 30%, the tax payable by the owner will be ₹21 (70 * 30%) + cess &
surcharges. An investor would notice that in such cases, the overall tax payout of the property owner would
be lower than the standard corporate tax rate.
Investors would appreciate that this new addition to the annual reports of the company under IndAS,
reconciling the income tax is a good feature, which clarifies many queries of investors.
Operating Efficiency Analysis of Nesco Ltd:
When an investor analyses the net fixed asset turnover (NFAT) of Nesco Ltd, then she notices that the
NFAT of the company initially declined from 3.65 in FY2010 to 1.01 in FY2014. Later on, the NFAT
improved to 1.77 in FY2017. However, once again the NFAT declined to 1.54 in FY2018.
Investors may relate the decline in NFAT with the investments done by the company in IT buildings 3 and
4 respectively. The NFAT declined in FY2014 when the company invested in IT building no. 3. It took
some time for the company to find lessees for building 3. Therefore, the NFAT remained low for 2-3 years
and thereafter, as the leasing of building 3 increased, the NFAT started increasing. In FY2018, the company
has done significant investments in the construction of building no. 4, which is yet to be ready. Therefore,
the NFAT has declined in FY2018. If Nesco Ltd is able to complete the building and find lessees soon, then
investors may witness an increase in NFAT.
The primary business of Nesco Ltd is renting out its space of IT buildings and exhibition center. Most of
the clients of these businesses pay their rental due in advance. As a result, Nesco Ltd does not need to give
high credit period to customers. The business segment of capital goods (Indabrator) would need to give a
credit period to its customers. However, the contribution of Indabrator to the overall sales of the company
is small. Therefore, investors would notice that the company has a very low amount of receivables when
compared to its sales resulting in low receivables days of about 15 days.
Investors would notice that over the years, the receivables days for the company have witnessed a
continuous decline from 42 days in FY2009 to 15 days in FY2018. This significant improvement seems to
be due to the increasing contribution of rental income from IT parks in the overall sales of the company.
The contribution of rental income in the total sales has increased significantly after completion of building
3. Similarly, if the company is able to complete and lease out building 4 soon, then investors may expect
the contribution of rental income from IT parks in the total sales to increase further.
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 the cCFO of the company has been
less than cPAT during this period. Over FY2009-18, Nesco Ltd Limited reported a total cumulative net
profit after tax (cPAT) of ₹991 cr. whereas during the same period, it reported a cumulative cash flow from
operations (cCFO) of ₹905 cr.
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However, the investor would notice that over the years, other non-operating income has contributed
significantly to the net profits. Over FY2009-18, Nesco Ltd reported a total non-operating (other) income
of ₹249 cr. Investors would appreciate that while calculating cash flow from operations, we remove the
impact of other income because the other income is primarily from non-operating activities like investments
in mutual funds.
Therefore, the removal of a large component contributing to net profits (non-operating income), while
calculating CFO has led to the cCFO over FY2009-18 becoming less than cPAT. Investors would appreciate
that the lower amount of cCFO when compared to cPAT is not a result of money being stuck in working
capital.
An investor would appreciate that the significant part of Nesco Ltd’s revenue comes from rental/leasing
activities of its IT buildings and the exhibition/convention center. As a result, it does not need to keep a
large amount of inventory like manufacturing companies. The divisions of the company like the capital
goods division (Indabrator) and the food kitchen division (Nesco Hospitality Pvt. Ltd) need to keep
inventory. However, the contribution of these divisions in the overall asset base of the company is small.
Therefore, an investor would notice that at any point in time, Nesco Ltd carries only a small amount of
inventory in comparison to its total sales. As a result, the company has been able to demonstrate very high
inventory turnover ratios (ITR) of 25 or more over the years.
Margin of Safety in the Business of Nesco Ltd:
target growth.
While analysing the SSGR of Nesco Ltd, an investor would notice that the SSGR of the company has
consistently been above 50% over the years. The primary reason for such high SSGR is the significantly
high profit margins enjoyed by the company on its rental income from IT parks and exhibition center.
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Because of the high SSGR, the company could grow its sales at about 16% per annum from ₹85 cr. in
FY2009 to ₹321 cr. in FY2018 without the need for external capital. The company could repay its debt of
₹17 cr. in FY2010 and become debt free.
Free Cash Flow Analysis of Nesco Ltd:
While looking at the cash flow performance of Nesco Ltd, an investor notices that during FY2009-2018,
the company had a cumulative cash flow from operations of ₹905 cr. However, during this period it did a
capital expenditure (capex) of ₹608 cr. Nesco Ltd could meet the entire capex from its own sources. As a
result, it had a free cash flow (FCF) of ₹297 cr (= 905 – 608) over FY2009-18. In addition, the company
had a non-operating/other income of ₹249 cr. over the same period.
use the free cash available with it to repay its debt, pay dividends to shareholders and still left with surplus
funds. At March 31, 2018, the company had ₹509 cr. of cash & investments.
of any company.
Stock markets have also recognized the ability of Nesco Ltd to produce high surplus cash from its low cost
and high profitability business. As a result, the company could generate an increase in market capitalization
of ₹3,100 cr. over FY2009-18 when compared to about ₹900 cr. of earnings/profits retained by it. It amounts
to a creation of a wealth of ₹3.40 in terms of increase in market capitalization of the stock of the company
for every ₹1 of the earnings retained and not distributed to shareholders.
Additional aspects of Nesco Ltd:
On analysing Nesco Ltd Limited, an investor comes across certain other aspects of the company:
When an investor analyses the annual reports of Nesco Ltd, then she notices that Mr Jethabhai V. Patel
founded the company in 1939. Later on his son, Mr. Sumant J. Patel took over the management of the
company. In 2003, Krishna S. Patel, son of Mr. Sumant J. Patel, joined the company and he is currently the
Managing Director of the company.
Presence of the next generation of the promoter family in active management roles in the company when
the earlier generation of the promoters is still active is a sign of good management succession. Such a
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situation provides sufficient time for the next generation to learn the management skills to run the business
under the guidance of senior members of the family. It provides for continuity in the leadership of the
company.
2) Promoter’s shareholding:
The Shareholding of the promoters in the company has been consistently on increase over last 10 years.
However, there was a brief period previously when the shareholding of the promoters declined significantly
from 60.49% in December 2001 to 52.22% in June 2004. Nevertheless, increasing promoters’ shareholding
thereon until the present is a good sign.
Increase in promoters’ stake in the business along with the presence of next generation of promoters in
management, indicates the faith/confidence of the promoters in the company and its business.
3) Capital allocation decisions:
While analysing the business performance of Nesco Ltd over FY2009-18, an investor would notice that the
company has taken good capital allocation decisions by investing in new IT buildings and improvements
of the exhibition/convention halls. The company has been able to generate good returns from the
investments done in IT parks and exhibition center.
However, when an investor comes across the investments done by the company in its capital goods division
“Indabrator”, then she finds that the decisions of the company to put additional capital in Indabrator are not
equally efficient.
An analysis of the past annual reports of Nesco Ltd indicates that during FY2009-18, the capital goods
division, Indabrator, has reported losses in three out of ten years. While analysing the segmental
performance section of the past annual reports, an investor would notice that overall, Indabrator reported a
cumulative profit before tax (PBT) of ₹14.37 cr. in FY2009-18. Assuming 33% tax rate including cess &
surcharge, Indabrator could have reported the cumulative net profit after tax (PAT) of about ₹9.63 cr. (=
14.37 – 33% tax on 14.37). Moreover, the segmental performance sections of past annual reports and the
director’s report section indicate that over FY2009-18, Nesco Ltd did an incremental capital expenditure of
₹9.13 cr. in Indabrator.
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Therefore, an investor would notice that almost all of the profits generated by Indabrator are in turn,
consumed by this division itself as additional capital investments. An investor would note that if Indabrator
generated a lower amount of cash flow from operations than its profit after tax over FY2009-18, then it
would have proved a net burden on the other divisions of IT parks and exhibition center.
Upon analysis of past business performance of Nesco Ltd, an investor would notice that the capital goods
division has been consistently in troubled times.
FY2008 annual report, page 8: the company discloses that the raw material prices of steel are going up but
the final product prices are not increasing due to the intense competition:
FY2009 annual report, page 4: Nesco intimated its shareholders that the capital goods division is not doing
well because many corporates have deferred their capital expenditure plans.
Upon further analysis, an investor would notice year after year until FY2015, the company kept on
informing the shareholders that the capital goods segment is not doing well:

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An investor would notice that in FY2011 annual report has acknowledged that the capital goods sector is
the first one to get impacted in any slowdown and the last one to recover.
However, despite these sustained challenges and resultant poor performance of the capital goods division,
Nesco Ltd kept on increasing its investment in Indabrator over the years:
FY2009 annual report, page 4: the company completed construction of unit at Vishnoli:
FY2012 annual report, page 5: the company is constructing a new research and development center at
Indabrator:
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FY2014 annual report, page 9: Nesco is investing in upgrading the abrasive plant:
FY2016 annual report, page 6: Nesco Ltd is upgrading the machine building division at Vishnoli:
An investor would notice that the communications from the management in the annual reports from FY2016
onwards have become positive. The management intimates that the division has seen revival and has won
some additional orders. However, looking at the segmental performance of Nesco, the capital goods
division (Indabrator) is hardly making any money. In FY2018, Indabrator earned a profit before tax (PBT)
of ₹0.18 cr. In FY2018, the revenue earned by capital goods division was ₹26.38 cr indicating a PBT margin
of 0.68%.
Moreover, an investor would notice that at March 31, 2018, Nesco Ltd has employed a capital of ₹28 cr. in
the capital goods division, which has produced a profit before tax of ₹0.18 cr. in FY2018. It turns out to be
a return of 0.64% on the capital employed (= 0.18 / 28).
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A return of 0.64% before tax on any investment is very low. Investors would note that an investment in
bank fixed deposits or government securities or debt mutual funds can easily provide a return of 6.50%-
7.50% before tax.
Therefore, an investor would appreciate that the decision of the management of Nesco Ltd to put additional
money in Indabrator despite low returns and recognition of persistent challenges leave a scope for
improvement in the allocation of capital.
4) Audit and compliance issues:
While analysing the audit report section of the FY2018 annual report, an investor notices that Nesco Ltd
has not paid an undisputed income tax demand of AY2008 (FY2007).
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This development comes as a surprise to the investor due to the following reasons:
 Income tax demand is outstanding for a long period despite being undisputed.
 The amount of income tax demand is very small when compared to cash balance available with the
company.
However, when an investor analyses the annual reports of previous years, then the investor notices that
auditors have regularly highlighted issues related to compliance with statutory regulations and payments
by the company.
i) Delays in depositing service tax and unclaimed dividends to the Govt. accounts:
FY2008 annual report, page 44: Nesco Ltd is not regular in depositing statutory dues:
The company did not deposit the unclaimed dividend in the Investors Education and Protection Fund (IEPF)
even in the years FY2009, FY2010 and FY2011. In many of these years, it continued to have delays in the
depositing service tax as well.
The delays in depositing the service tax continued in FY2012 and the company did not deposit the
unclaimed dividend to the IEPF.
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The company finally deposited the unclaimed dividend to IEPF in FY2013. However, it continued to delay
the deposit of service tax to the Govt. account.
An investor would appreciate that the delays in the timely deposit of statutory dues by a company, which
claims to be cash rich do not put the company in a good light. Despite repeated highlights by the auditors,
the company kept on delaying the payments of service tax and unclaimed dividends.
ii) Inadequate internal audit system:
An analysis of the past annual reports of Nesco Ltd indicates that for a significant period, the company did
not have a good internal audit system. The auditor of the company continued to highlight this shortcoming
continuously in the audit reports from FY2008 (the earliest audit report available on the company website)
to FY2012.
The audit report during FY2008, FY2009, FY2010, FY2011 and FY2012 consistently indicates that the
internal audit system of the company needs strengthening.
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Finally, after multiple years of warnings, the company improved its internal audit system in FY2013 and
the auditor removed its observation.
An investor would note that probability of issues like frauds, misappropriation of funds etc. is high when
the audit systems are insufficient. An investor can only pray that no such negative incident would have
happened in the company when its audit system was not sufficient.
iii) Maintaining records of inventory and fixed assets:
While analysing the past annual reports, an investor notices that Nesco Ltd did not update its inventory
records/books at least for a couple of years. As a result, the auditor could not provide her opinion whether
there is any discrepancy in the actual amount of inventory available with the company when compared to
the amount of inventory claimed by the company in its records.
An investor would appreciate that non-updation of inventory records might lead to frauds where the
inventory claimed by the company in its records may not exist in its plants/warehouses. It is good that the
company started updating its inventory records later on and as per FY2018 annual report; the company has
maintained proper records for the inventory.
Similarly, the company did not do physical verification of its fixed assets at least for four years: FY2008,
FY2009, FY2010 and FY2011. This is because, during all these years, the auditor of Nesco Ltd has pointed
out that the company has not carried out the physical verification of its fixed assets as it is in the process of
updating its records.

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It seems that the company took at least 4 years (FY2008-2011) to update the fixed assets records. This is
because it was in FY2012 that the auditor mentioned that the company has updated its records partially.
An investor would appreciate that it does not look good on part of any company if it does not maintain
proper records of its assets like inventory or fixed assets. When an investor looks at the fact of non-
maintenance of records along with the aspect of a weak internal audit system, then she can only pray that
the reported results of the company during those periods would have reflected the true picture of the
business position of the company.
As per the audit report of Nesco Ltd for FY2018, the company has been maintaining proper records of fixed
assets as well as inventory.
5) Delays associated with real estate projects:
An investor would notice that most of the real estate projects witness delays in construction and sales. Most
of the times, the developers end up promising very aggressive schedules for construction and sales/leasing
only to witness delays later on.
Nesco Ltd informed its shareholders in FY2011 that the construction of IT building 3 is complete and
internal finishing work is going on. The company indicated that it would be able to lease part of the building
3 in FY2012 and fully lease it in FY2013.
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However, an investor would notice that at the end of FY2013, the leasing was yet to commence.
Finally, the company could lease building 3 fully in FY2016 instead of earlier indicated date of FY2013:
An investor should appreciate that real estate projects require a coordination of many parties including
multiple govt. departments. Delays in real estate projects are a norm instead of the exception. Therefore,
investors should always keep this aspect in mind before envisaging the future aspect of any real estate
company including Nesco Ltd.
Moreover, due to delays in project completion, many times, the original business situations undergo
significant changes. As a result, companies cancel the previously declared plans and launch new plans from
scratch.
In FY2009, Nesco Ltd noticed revival in the demand post global slowdown. As a result, it announced plans
to increase the area of the exhibition and convention center from the existing 450,000 sqft to 1,000,000 sqft.
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However, the company could not increase the area of its convention center to 1,000,000 sq ft even by
present date. As per the FY2018 annual report, the area of exhibition and convention center is 635,000 sq
ft (59,000 sq. meters).
Therefore, investors should be cautious before taking the proposed expansion plans and the timelines of
completion of real estate projects at face value. Investors should always use their own understanding before
factoring in future plans of real estate developers in their cash flow projections.
6) Risks to the business from expected sources:
The key business strength of Nesco Ltd is that it is the only large exhibition and convention center available
in Mumbai. An investor would expect that in such a situation, other competitors would come up with
competing convention centers to benefit from the lucrative high profit margin business of hosting
exhibitions.
The same is happening in Mumbai where Reliance group is coming up with its convention center in Bandra
Kurla Complex in Mumbai. This convention center is currently under construction and has witnessed the
delays in completion, which are a norm for real estate projects.
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However, as and when this competing convention center is complete, then it will present a serious threat to
the business of Nesco Ltd. It might have an impact on Nesco Ltd both in terms of occupancy level of its
exhibition and convention halls as well as its profit margins as Nesco Ltd might have to charge lower prices
to retain its customers.
An investor can easily anticipate the extent of damage Reliance group can inflict on existing players when
it enters any new business segment by looking at the example of the telecom sector. Entry of Reliance group
in the telecom sector has forced many existing players out of business and has made many existing strong
players to report losses due to a price war.
Therefore, any investor should keep the threat of competitors while assessing the future business potential
of Nesco Ltd.
The company has acknowledged the threat of competition in its FY2013 annual report, page 8:
7) Risk to the business from unexpected sources:

Businesses always operate in uncertain environments. In many cases, the threat to the business arises from
unexpected sources. Moreover, Nesco Ltd has faced such issues multiple times in the recent past.
In Dec 2017, Mumbai police directed Nesco Ltd to limit its bookings only up to 50% of capacity on
weekdays in order to avoid traffic congestion at Western Expressway. (Source: Times of India)
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Similarly, in August 2018, an office of the municipal corporation (BMC) directed Nesco Ltd not to hold
any exhibition until the construction work of the Andheri-Dahisar Metro line is complete. (Source: Times
of India)
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Later on, as per media reports, BMC withdrew the said order prohibiting exhibitions by Nesco Ltd.
An investor would appreciate that due to the significant problem of traffic management present in Mumbai,
many times, Nesco had to face such challenges in its business. Such kind of challenges/risks may arise in
future as well and God forbid, any such similar adverse order in future, if the order prevails, then it may
hurt the business of Nesco Ltd significantly ensuing long legal battles.
Additionally, the concentration of almost all business activities of Nesco Ltd in a single geographical
location increases the impact of such risks.
8) Resignation of Chief Executive Officer of Nesco Ltd:
Nesco Ltd intimated its stakeholders on August 1, 2018, by an announcement to stock exchanges that its
CEO, Mr. Dibakar Chatterjee has resigned. The company stated that the tenure of the CEO would end on
after 2 days i.e. on August 3, 2018.
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It seems like an abrupt resignation, as the notice period of 2 days looks very short for an effective handover
of the responsibilities of CEO from one person to another.
Investors may seek clarifications from the company about the sudden exit of the CEO. In most of the cases,
companies come out with the explanation that the employee has resigned to look for better opportunities
outside the company. However, we believe that investors should do their own analysis before making their
final opinion.
9) Errors in the annual reports:
In the FY2018 annual report, in the section representing the segmental results, the company has not
provided a correct description of the parameters that it has listed down in the segmental profits.
The subheading of the section describes it as “Segment profit after tax and finance cost” whereas the label
of the total at the end describes it as “Total Operating profit before tax”. As a result, an investor is confused
whether the date provided in the annual report in this section is “before tax” or “after tax”.
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The company seems to have repeated the same mistake in previous annual reports as well.
Margin of Safety in the market price of Nesco Ltd:

Currently (Sept 3, 2018), Nesco Ltd is available at a price to earnings (PE) ratio of about 19.50 based on
consolidated FY2018 earnings. The PE ratio of 19.50 does not offer any margin of safety in the purchase
price as described by Benjamin Graham in his book The Intelligent Investor.
Conclusion:
Overall, Nesco Ltd seems like a company, which is currently witnessing a very stable business model with
high profitability. It has the only big exhibition and convention center in Mumbai and as a result, it is able
to get repeat business from its customers at very attractive prices.
The other key business segment of IT park (office space) benefits from the key location of its premises at
one of the main roads in Mumbai, the Western Expressway. The location of its office building has made it
an attractive proposition for corporate tenants. The payment of maintenance expenses of the buildings by
the tenants over and above rental charges makes it a highly profitable business for the property owner.
Moreover, contractual increases in rental charges provide for growth in the sales revenue/rental income.
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These factors make the business of Nesco Ltd a stable source of income where the company is reaping the
benefits of buying a strategic asset (a large land parcel adjoining one of the key roads in Mumbai) at very
attractive prices in distant past.
However, there are certain aspects of the business, which should make investors cautious before they
become complacent. One factor is the risk of competitors coming up with better convention centers at
premium locations like the convention center built by Reliance group at BKC, Mumbai. It is currently under
construction. This convention center poses significant competition to Nesco as and when it becomes
functional.
The other factor is the risk from unexpected sources like Govt. departments, regulatory authorities etc.,
which may issue orders hampering the business of Nesco Ltd. The company has faced such orders in the
past and such instances may repeat in future. Any such instance carries the potential of hampering the
business of Nesco Ltd in a significant manner.
Another factor, which investors should keep in mind, is the omnipresent delays in the construction and
leasing of real estate projects. In the past, Nesco has witnessed such delays due to which a few plans did
not commence like the expansion of exhibition center to 1,000,000 sq ft and other plans were delayed like
leasing of IT building 3 by almost three years. Therefore, an investor should always be cautious before
taking the plans and projections of real estate developers on face value. They should always use their own
views about such projections instead of relying completely on the plans provided by the real estate
developers. There have been many instances where nearly complete buildings could not get completion
certificates from the govt. authorities for years due to pending compliance with many of the regulations.
The promoters of Nesco Ltd seem to have good faith/confidence in the business of the company. As a result,
the promoters have been increasing their stake in the company in the last decade. Additionally, the younger
generation of the promoters has joined the company and is playing an active role in the management.
The major segments of the business of Nesco Ltd i.e. exhibition center and the IT Park are doing very good.
As a result, the company has been able to accumulate a lot of cash and investments. However, another
business division of the company, Indabrator, which manufactures capital goods, is not adding great value
to the shareholders. Indabrator has a history of reporting losses and it faces challenging business
environment most of the times. However, still, Nesco Ltd has been putting additional money in Indabrator,
which provides a very low return on the employed capital. An investor may believe that the capital
allocation decisions of the management to put additional money in Indabrator leaves scope for
improvement. This is because an investment in bank fixed deposit, mutual funds, govt. securities etc.
provides a higher return than an investment in Indabrator.
Investors notice that Nesco Ltd has a history of weak audit controls, delayed payments of statutory dues,
poor records maintenance of fixed assets and inventory. Such kind of operating environment is the potential
ground for frauds where the financial numbers reported on the books may not match with the actual material
present on the company plants and warehouses. As per the audit report in the FY2018 annual report, Nesco
Ltd seems to have resolved these issues in present times. This is because the auditor has not highlighted
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these issues in the recent annual report. However, an investor should pray that there should not be any old
fraud buried deep in the books, which may come across in future due to the lax audit and compliance culture
prevalent in the company in previous years.
Going ahead, we suggest that investors should monitor the timeliness of completion and leasing of IT
building 4, which is currently under construction. Investors should monitor the development of the proposed
plans of the company where it plans to restructure almost the entire existing layout of the exhibition center
and existing IT buildings. Investors should monitor the amount of additional investments and business
performance of Indabrator.
Investors should keep a close watch on the developments related to the completion and commencement of
operations of the convention center by Reliance group and plans of any other upcoming convention center
in Mumbai. This is because new convention centers have the potential of affecting the business of Nesco
Ltd significantly.
These are our views on Nesco 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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9) Cupid Ltd
Cupid Ltd is a leading Indian manufacturer and exporter of male & female condoms and lubricant jelly.
Let us first try to analyse the past financial performance of Cupid Ltd.
Financial Analysis:
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If an investor looks at the financial performance of Cupid Ltd over the years, then she would be able to
notice that the past financials of the company present two marked different phases in performance.
The first period is leading up to FY2010 where the company has witnessed declining sales, operating losses
and sustained debt. During this phase, the company’s sales declined from ₹24 cr in FY2008 to ₹9 cr in
FY2010. The company’s profits witnessed a continuous decline and it reported operating losses in FY2009
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and FY2010. The company’s debt levels were sustained at levels of ₹6-8 cr. It becomes obvious to the
investors that the business position of operating losses with continued pressure of finance costs would have
led to a serious rethink in terms of business strategy in the company, which seems to have led to the onset
of the second phase of business performance from FY2011.
This second period of business performance is from FY2011 to current times, which is characterized by
increasing sales, improving profit margins, declining debt and rising cash reserves. During this period, the
company witnessed the sales increasing from ₹9 cr in FY2010 to ₹83 cr in FY2017. The operating profits
increased from losses in FY2010 to ₹32 cr in FY2017. The operating profit margin (OPM) increased from
losses to 39% in FY2017. The company used the funds generated from improved business performance to
repay its debt and it became a debt-free company in FY2017.
In light of such marked change in the business performance of the company with FY2010 as the watershed
period, it becomes essential that an investor understands the underlying reasons for the same.
When an investor analyses the journey/milestones of the company over the years in the investors’
presentation released by the company in February 2018 (page 8), then she finds the key steps taken by the
company leading to the improvement in the business performance:
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Looking at the above “Cupid Journey”, an investor would notice that until FY2010, the company dealt
mainly in male condoms and supplied primarily to Govt. of India (GoI) whereas, fromFY2010 onwards,
the company started focusing on female condoms and started supplying to foreign governments.
While analysing various shareholder communication of the company, an investor gets to know that the male
condom is a lower margin product when compared to female condoms and the years when the company
could sell higher numbers of female condoms, then its operating margins have shown significant
improvement. E.g. in FY2016, when the operating profit margin (OPM) of the company increased to 41%:
Moreover, an investor also notes that the Govt of India (GoI) orders are low margin tenders when compared
to export orders. This is evident from the company’s communications that the margins on GoI orders are in
the range of 10%, which is significantly less than the ongoing operating margins of the company of 30-
40%:
Therefore, an investor realizes that until FY2010, the focus areas of the company: male condoms and GoI
orders were not remunerative enough and as a result, the company had to bear operating losses in years
FY2009 and FY2010. However, the change strategy of the company to start manufacturing female condoms
and focus on export markets/foreign govt. tenders bearing high profit margins has led to the revival of the
company and as a result, the company is currently standing at a much stronger financial position when
compared to FY2010.
Going ahead, the company plans to apply for Govt. of India tenders, which contain lower profit margins
(February 2018 conference call, page 4):
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As a result, the company may report lower profit margins going ahead.
Until now, the key focus area of the company was tenders by govt. department and similar agencies/donors
(B2B); however, recently, the company has tried to increase its focus on direct sales to consumers (B2C).
It seems that the company has realized that the direct sales to the customer (B2C) is turning out to be a
tough business, where there is a lot of competition and in turn currently, the company is not able to get
higher profit margins on direct sales to customers (B2C):
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An investor would notice that the company has realized that an entry in the B2C segment of direct sales to
the customer is turning out to be harder than what it had originally envisaged due to competition. As a
result, the company acknowledges that it will have to spend higher amounts on advertising and brand
building that its earlier assessment. An investor would notice that because of higher spends to generate sales
in direct sales to the customer (B2C); the profit margins in this segment are currently lower at 15% when
compared to the overall OPM of the company.
Therefore, an investor would appreciate that if going ahead the contribution of Govt. of India orders and
direct sales to customers increase in the overall sales of the company, then the profit margins of the company
may witness a decline.
The tax payout of the company over the years has been primarily in line with the standard corporate tax
rate in the country. However, going ahead, as per the company, it may witness lower tax payout ratio due
to changes in the tax laws stipulating 25% tax rate for companies with turnover lower than ₹250 cr.
Therefore, an investor should keep monitoring the profit margins of the company going ahead.
Operating Efficiency Analysis of Cupid Ltd:
While analysing the net fixed asset turnover (NFAT) of the company over the year, an investor would notice
that the NFAT has improved from 0.43 in FY2010 to 5.25 in FY2017. An improvement in the NFAT
indicates that the company is able to operate more efficiently and is able to generate a higher amount of
sales from its assets.
When an investor reads the previous annual reports of the company, then she realizes that the manufacturing
capacity of Cupid Ltd had been much higher than the orders that it used to get. As a result, the company
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had low capacity utilization levels in the past, leading to low NFAT. In FY2015, the capacity utilization
was about 52%, which improved to 64% in FY2016.
The availability of unutilized manufacturing capacity ensured that the company could meet increasing
orders from the existing capacity without incurring a huge amount of additional capital expenditure
(Capex). As a result, the company could witness a significant improvement in its NFAT over the years.
However, the has now reached maximum capacity utilization for segments like male condoms and as a
result, it is doing capex to create more manufacturing capacities.
The company has already provided a roadmap of the future expansion plans on its agenda to the
shareholders:
The required additional investment in the fixed assets to generate higher sales from here on indicates that
the NFAT of the company might not improve as it has done in the past. An investor should keep a close
watch on the progress of the mentioned capex plans of the company.
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Looking at the inventory turnover ratio (ITR), an investor would notice that Cupid Ltd has been able to
improve its inventory utilization efficiency over the years. The ITR has improved from 4.2 in FY2010 to
21.1 in FY2017. Such kind of improvement in the efficiency of the inventory utilization is an appreciable
performance by the company.
An investor would notice that the receivables days of the company have been fluctuating over the years.
The receivables days deteriorated to 103 days in FY2010 and then improved to 26 days in FY2013 only to
increase to 59 days in FY2017.
Primary customers of the company are Govt agencies/departments and state/multilateral donor agencies.
An investor would appreciate that collection of receivables from Govt. departments many times witnesses
delays and therefore the time for the release of payments cannot be predicted with certainty. As a result, the
receivables days of most of the manufacturers, which supply to Govt. departments see such kind of
fluctuations. Nevertheless, it is advised that investors should keep a close watch on the receivables days of
the company and put special focus on the receivables outstanding for a period of more than 6 months from
the day became due, which are disclosed by the companies in their notes to financial statements as seen
below:
While comparing the cumulative net profits (cPAT) with the cumulative cash flow from operations (cCFO)
over last 10 years (FY2008-17), an investor would notice that Cupid Ltd has been able to convert its profits
into cash. The company reported a cPAT of ₹43 cr during FY2008-17 and it could generate cCFO of ₹45
cr over the same period. Therefore, an investor would appreciate that the company has been able to manage
its working capital requirements efficiently.
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Margin of Safety in the Business of Cupid Ltd:
target growth.
An investor would notice that over the years, Cupid Ltd has witnessed an SSGR increasing from -17% in
FY2011 to 59% in FY2017. An investor would realize that the key parameters leading to the significant
improvement in the SSGR are the result of the change in the business strategy of the company post FY2010
as discussed above.
The updated focus of the company to manufacture of female condoms and the focus on the export markets
has led to better profit margins, a higher amount of orders leading to higher capacity utilization and in turn
higher NFAT, all of which are inputs in the SSGR calculation. As a result, the company has witnessed its
SSGR improve significantly since FY2011.
As on date, the given business characteristics of NPM of about 25%, NFAT of about 5x and retained
earnings of about 75-80% (considering dividend payout of 20-25%) seems sufficient to support a decent
sales growth rate from the cash generated by the operations without putting any pressure on the capital
structure of the company.
17, the company generated a total cash flow from operations (CFO) of ₹45 cr and it did a capex of ₹12 cr
over the years to grow its sales from ₹24 cr in FY2008 to ₹83 cr in FY2017. As a result, the company could
report an FCF of ₹33 cr (45-12) over FY2008-17.
The company seems to have used the FCF to service interest & repay all of its existing debt over the years
and pay dividends. The surplus cash remaining after the above usage is available with the company as cash
& investments of ₹19 cr at March 31, 2017.
of any company.
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Additional aspects and annual report analysis of Cupid Ltd:
On analysing Cupid Ltd, an investor comes across certain other aspects of the company, which are essential
for making any final opinion about the company:
1) Management Succession and the probability of existing promoters selling off their stake
in the company:
Cupid Ltd is run by its promoter Chairman and Managing Director (CMD) Mr. Om Prakash Garg who is
about 75 years of age currently:
As per the annual report, wife of Mr. Garg, Ms. Veena Garg is associated with the company and fulfilling
the criteria for a mandatory woman director on the board of the company. Mr. Garg is assisted in the
business by Mr. Durgesh Garg, who is his brother’s son and Mr. Pawan Bansal, who is his sister’s son.
As per the annual reports of the company, none of the children of Mr. Om Prakash Garg, if any, is a part of
the management of the company.
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It seems that in light of the increasing age of Mr. Om Prakash Garg and absence of any of his children to
take forward the central leadership of the company, Cupid Ltd is looking for hiring an external CEO. The
company has been in a search of the CEO but has not been able to find a suitable candidate until now.
It seems that because of non-visibility of members of Mr. Om Prakash Garg’s family leading the company
in future, the promoters are ok to sell off the company as well. Some of the comments of Mr. Garg in the
February 2018 conference call allude to this conclusion:
February 2018 conference call, page 17-18:
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The indication of the promoters’ willingness to let go of their business ownership gets strengthened when
an investor notices that in FY2017, the promoters reduced their stake in the company by 3.59% from
48.46% at March 31, 2016, to 44.87% at March 31, 2017.
In light of the same, it is advised that any investor should keep a close watch on the steps taken by the
company for succession planning/ensuring smooth leadership transition for future.
2) Volatile business orders due to nature of tenders and customers:
The primary business of Cupid Ltd is to supply to govt. /donor agencies based on the tenders floated by
them. The tenders from these organizations depend a lot on the budget allocations and therefore, many
times, the orders might not follow in continuity. This might lead to the periods where Cupid Ltd does not
have orders to keep its facilities running and leading to lower sales revenue.
As per the February 2018 conference call, the company faced a similar situation in Q3-FY2018 when the
Govt. of South Africa cut down on its purchase of female condoms due to its budgetary controls and delay
in the purchase order from Govt. of India. These factors led to the sales of Cupid Ltd decline to ₹21 cr in
Q3-FY2018 as compared to ₹28 cr in Q3-FY2017.
February 2018 conference call, page 3-4:
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The company accepts that it needs to keep working on getting new orders on a consistent basis to maintain
the sales revenue as the company usually has the revenue visibility of only a few next quarters
from existing orders:
Therefore, in light of the nature of the business orders serviced by the company, an investor should be
prepared to witness large fluctuations in the sale performance of the company over the periods.
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3) The company was listed on the stock exchange (BSE) even before it could establish its
business model:
If an investor analyses the journey of Cupid Ltd over the years, then she would notice that the company got
its shares listed on BSE in 1995, very shortly after its incorporation in 1993. Moreover, the company has
disclosed that it started commercial production of male condoms in 1998 well after it went public in 1995.
February 2018 investors’ presentation, page 8:
The fact of getting a company listed soon after incorporation without starting commercial production of the
key products indicates that the promoter/entrepreneur wanted to offload the risk of the business as soon as
possible on the minority public investors.
Investors would remember that the period of the mid 1990s was the time when many companies were listed
on Indian stock exchanges in light of relaxed statutory guidelines. Many investors remember this period as
the time when promoters considered public money as riskless free capital (without payment of any interest),
which is not to be returned ever. This led to a spurt of IPOs in those times.
It is advised that investors should be aware of the timing of stock exchange listing of the company when
they analyse the company.
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4) Issuance of preferential convertible warrants to the promoters:
The company issued 2,650,000 warrants to the promoters in FY2011 (1,150,000) and FY2012 (1,500,000)
at ₹10/-. As per the terms of the warrants allotment, 25% of the money was to be paid by the promoters at
the allotment and the balance 75% of the money was to be paid at the time of conversion of the warrants
within 18 months from the allotment.
Many times, the argument provided in the favour of preferential convertible warrant allotment to the
promoters is that the company is in dire need of funds and other outside parties like banks etc. are not
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willing to lend to the company. As a result, it is communicated to the minority/public shareholders that the
promoters are helping the company by subscribing to the warrants as they are infusing the much-needed
funds into the company at the time of liquidity crunch.
However, we believe that the inherent transaction structure of the warrants where the promoters upfront
pay only 25% of the money (at the time when the company is supposedly in dire need of funds) and the
balance 75% of the money is kept in abeyance at a future time creates an issue.
The company will receive the balance 75% of the money only when the promoters decide to exercise the
warrants to convert them into equity shares at a later period. Common logic says that anyone holding
warrants would not exercise them to get shares at a price, which is higher than the price at which he/she
can get shares from the market.
The entire gimmick of paying 25% at the time of allotment of warrants and then keeping the option to pay
75% at the time of exercise, which the promoters would decide based on whether at the date of exercise,
the promoters are making money or not, seems like a facade to us.
If the promoters pay 25% now and let the warrants expire due to the market price being consistently lower
than the exercise price in future, then it effectively means that the promoters did not have the true intention
of infusing 100% of the money. Or that the company did not need 100% of the money. It might be that the
company needed only 25% of the money, which promoters put in by way of warrants allotment and the
right to get shares in future at a discount is the payoff that promoters would enjoy as a consideration for
giving 25% to the company. The company might not need the balance 75% at all.
Nevertheless, we believe that if the promoters wish to infuse funds into the company, then the company
should straight away issue additional shares to them at prevailing market price and get 100% of the funds
upfront rather than letting the promoters speculate at the company’s share price by holding back 75% of
the funds as happens in case of warrants.
5) Investments in supposedly real estate companies and then writing them off:
While analysing the non-current investments section of the annual reports, an investor would notice that
Cupid Ltd had made investments of ₹0.24 cr in Arihantsidh Properties Pvt. Ltd. (APPL) in previous years.
As of March 31, 2017, the company has completely written off its investment in APPL, which is akin to
100% loss of the money invested in the company.
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The company had written-off its investments in two other real estate entities in FY2013: Ramniyati Realities
Private Ltd and Sanmati Realities Pvt. Ltd.
It is advised that investors may seek clarifications about the nature of these investments in these seemingly
real estate entities and the factors leading to their diminution of value. Moreover, it is advised to find out
whether these entities are companies owned by persons known to promoters, who are not legally required
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to be classified as related parties in the annual report. This is because, if these companies are owned by
known persons, then the act of first investing in these entities and then writing off these investments might
tantamount to taking the money out of the company (Cupid Ltd).
Margin of Safety in the market price of Cupid Ltd:
Currently (April 16, 2018), Cupid Ltd is available at a price to earnings (P/E) ratio of about 17 based on
trailing 12 months earnings, which does not offer any margin of safety in the purchase price as described
by Benjamin Graham in his book The Intelligent Investor.
Conclusion:
Overall, Cupid Ltd seems to be a company, which was facing tough times until FY2010 when it was facing
operating losses and sustained high debt levels. However, the company updated its strategy from FY2010
onwards by launching high margin female condoms apart from the low margin male condoms and focus on
export markets instead of low margin Govt. of India contracts. As a result, the company witnessed a revival
of its fortunes where it could grow its sales and profits multifold including a significant increase in profit
margins and the company paid off all the debt to turn into a debt-free company.
The company has been able to utilize its existing spare manufacturing capacity efficiently while keeping its
inventory levels in check. As a result, the company has been able to grow its sales despite doing Ltd
additional investments in its fixed assets (plant & machinery and working capital). The company has
generated a significant amount of free cash flow (FCF), which it has used to pay-off debt, pay dividends
and has kept the remaining as cash & investments with itself to fund future growth opportunities.
The company seems to be facing a management success crisis as the current promoter CMD is getting old
and none of the children is currently in the leadership positions of the company. The promoter is currently
being assisted by his nephews in running the company. However, the company is looking out for a CEO,
which it has not been able to hire yet.
As alluded to in the conference call in February 2018, the promoters seem to be willing to cash out of the
company in case outside parties make any suitable buyout offer. The promoters diluted their stake in the
company by 3.60% in the previous financial year.
The company’s business is dependent on the tenders from Govt. and donor agencies and therefore, is highly
dependent on the budgetary constraints on these entities. As a result, the sales revenue of the company is
prone to significant fluctuations. The company has been attempting to grow direct sales business to
customers (B2C); however, it has been faced with challenges of competition and significantly higher
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spending needs to create a brand. As a result, the B2C business is yet to contribute significantly to the
profits.
There are certain aspects, which an investor gets to know upon analysing the company. The company got
its shares listed on stock exchanges shortly after its incorporation without the commercial launch of its key
product, male condoms. The company invested in a few seemingly real estate companies, where it, later
on, wrote off the investment. The company had issued preferential convertible warrants to its promoters,
which we believe is not the best of the methods to raise funds in the times of liquidity crunch.
We believe that investors should be aware of these aspects and if feel appropriate, then they may seek
further clarification about them from the company to make an opinion about the company.
Going ahead, investors should monitor the company for operating profit margin, debt levels, receivables
days, promoters’ shareholding, management succession planning etc.
These are our views about Cupid 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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10) Mahanagar Gas Ltd

Mahanagar Gas Ltd is the distributor of natural gas in the Mumbai and Thane region supplying piped natural
gas (PNG) to homes and compressed natural gas (CNG) to automobiles.
Let us analyse the performance of Mahanagar Gas Ltd over the last 10 years.
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Financial Analysis of Mahanagar Gas Ltd:
While analyzing the financials of Mahanagar Gas Ltd, an investor would note that in the past (FY2009-18),
the company has been able to grow its sales at a moderate rate of 10-15% year on year. Sales of the company
increased from ₹639 cr. in FY2009 to ₹2,233 cr in FY2018. The growth in the sales of the company has
not been smooth. The company witnessed its sales increase steadily from FY2009 up to FY2015. However,
sales of Mahanagar Gas Ltd witnessed a decline during FY2016 and FY2017 when the sales of the company
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reduced from ₹2,095 cr. in FY2015 to ₹2,034 cr. in FY2017. In FY2018, the sales of the company have
increased to ₹2,233 cr.
An investor would appreciate that the price of the gas to the end consumer is linked to the crude oil prices.
Mahanagar Gas Ltd gets its supply of natural gas from two sources:
1. Domestic gas allocation under administered pricing mechanism (APM), which is allocated for
piped natural gas (PNG) supply to homes and compressed natural gas (CNG) for vehicles and
2. Purchase from the market for supply to industrial and commercial units.
PNG and CNG are the dominant sales categories for Mahanagar Gas Ltd, as they constitute about 85% of
total sales. Industrial and commercial sales constitute the rest. The following chart from the investor
presentation of Mahanagar Gas Ltd with Q1-FY2019 results (Page 13) shows the sales revenue from each
segment:
Mahanagar Gas Ltd get the natural gas for supplying to residential customers (PNG) and vehicles (CNG)
under APM whereas it has to source the natural gas for supply to commercial and industrial units from the
market.
The price of gas from these two sources of natural gas differ from each other with APM gas being cheaper
than market/spot purchase. However, the trend of the change in the price of natural gas from both these
sources is similar. Petroleum and Natural Gas Regulatory Board (PNGRB) decides the price of APM gas
based on a formula containing the inputs influenced by crude oil prices.
An investor would notice that the sales revenue of Mahanagar Gas Ltd declined in FY2016 and FY2017,
which coincides with the period of the sharp correction in crude oil prices. During this period, the crude oil
prices declined from about $110 per barrel to $30 per barrel. The below chart of the price changes of
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NYMEX crude over the last 10 years shows the sharp decline in crude oil prices in recent past (Source:
macrotrends.net)
When an investor analyses the change in the price of domestic natural gas under the APM decided by
PNGRB since FY2015, then she notices that the price of gas under APM has mirrored the change in the
crude oil. The below chart shows the changes in the APM decided by PNGRB over the years:
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An investor would notice that during FY2016 and FY2017, the price of domestic natural gas under APM
declined as the crude oil prices were falling. The price of natural gas under APM declined more than 50%
from the level of $5.05/MMBTU for H2-FY2015 to $2.50/MMBTU for H2-FY2017.
As a result, Mahanagar Gas Ltd had to pass on the benefits of the lower natural gas prices to its customers.
This, in turn, resulted in the decline in the sales revenue for Mahanagar Gas Ltd despite a consistent increase
in the overall volume of the natural gas sold by it. It illustrates that the positive impact of the sale of higher
volumes of natural was by Mahanagar Gas Ltd was not sufficient to overcome the negative impact from
the decline in the sales price of natural gas. The following chart from the investor presentation of Mahanagar
Gas Ltd with Q1-FY2019 results (Page 21) shows that over the years, it has grown its sales volumes of
CNG and PNG at a CAGR of about 5%.
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The above analysis indicates that the prices charged by Mahanagar Gas Ltd to its customers are dependent
on the price of its raw material (natural gas), which in turn is dependent on crude oil prices.
This aspect of the linkage of the sales price of the natural gas sold by Mahanagar Gas Ltd with the cost of
natural gas is highlighted by ICRA in its credit rating report for May 2015:
Therefore, investors should expect that as the crude oil prices increase in the future, then Mahanagar Gas
Ltd would be able to show higher sales revenue. On the similar lines, if the crude oil prices decline in future,
the sales revenue for Mahanagar Gas Ltd may fall in future.
Now let us analyse the profitability parameters of Mahanagar Gas Ltd. Whenever, investors come across
companies, which have their final product prices fully benchmarked to the price of raw material, then
investors would notice that such companies usually follow two types of pricing formulas with the
customers:
1. Scenario 1: In the first scenario, the company adds a fixed percentage of profit margin over the raw
material cost and then quotes the final price to the customer. In most such cases, the profit margins
stay constant irrespective of the changes in the raw material costs. E.g. if the profit margin in the
formula is 20% and the raw material cost is ₹100, then the customer will be asked to pay ₹120. If
the raw material price falls to ₹50, then the customer will be asked to pay ₹60. In both the cases,
the profit margin will stay constant at 20%. When we interpret it in an inverse manner, then we
notice that the cost of raw material as a percentage of sales stays constant i.e. 100/120 = 50/60 =
83.3%
2. Scenario 2: In the second scenario, the company adds a fixed amount (₹/$) of profit amount on the
raw material and asks the customer to pay the final price. In such cases, the profit margin of the
company increases when the raw material costs decline and vice versa. E.g. if the fixed profit
amount to be added is ₹20 and the cost of raw material is ₹100, then the final product price will be
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₹120 and the profit margin will be 20%. On the contrary, if the raw material price decline to ₹50,
then the final product price will be ₹70 and the profit margin will be 40%.
 In Scenario 2, the cost of raw material as a percentage of sales will keep changing i.e.
100/120 = 83.3%, 50/70 = 71.4%.
 An investor would appreciate that in scenario 2, as sales increase due to increase in raw
material prices (which are passed on to customers resulting in higher sales), the raw
material costs as a percentage of the sales increase. E.g. in the above example, the raw
material costs are 83.3% of sales when the sales are ₹120.
 On the contrary, when the sales decline due to a decrease in raw material costs (when the
benefit of lower costs is passed on to the customers), the raw material costs as a percentage
of sales witness a decline. E.g. in the above example, the raw material costs are 71.4%
when the sales are ₹70.
Looking at the two most common scenarios of full/complete benchmarking of final product prices with the
raw material costs, an investor would appreciate that the raw material costs as a percentage of sales of such
companies will show any of the two patterns:
1. Either the company will have stable raw material costs as a percentage of sales (scenario 1) or
2. The raw material costs as a percentage of sales will increase when the sales increase due or raw
material costs as a percentage of sales will decrease when the sales decline (scenario 2).
Out of these two scenarios of benchmarking, we believe that the scenario 2 in which the company adds a
fixed amount (₹/$) of profit on the raw material cost, is highly beneficial to the companies. This is because,
in the case of scenario 2, the company is assured of a fixed amount of profit, which it needs to meet other
expenses like employee costs, administration expenses etc. In case of scenario 2, the shareholders can be
assured that irrespective of the level of raw material costs, the company will earn at least a fixed sum of
profit per unit of product, which it will use for meeting all other operating costs and in turn pay a dividend
as well. Therefore, in the case of scenario 2, when the company adds a fixed amount of profit amount on
the raw material costs, the shareholders can stay relaxed irrespective of the changing costs of raw materials.
In the example cited above, the company earns a profit of ₹20 whether the raw material cost is ₹50 or ₹100.
On the contrary, in case of scenario 1 where a company adds a fixed percentage profit (in contrast to the
addition of a fixed amount (₹/$) of profit in case of scenario 2), the company is continuously exposed to
the risk of changing raw material prices. This is because in scenario 1, as the raw material prices decline,
the amount of profit earned by the company also declines. In the example cited above (stable 20% profit
margin), when the raw material cost was ₹100, then the company earned ₹20 as profit (20%). Whereas
when the raw material cost declined to ₹50, then the amount of profit declined to ₹10 (20% profit).
Therefore, in the case of scenario 1, whenever the raw material costs decline, then the amount of profits
available with the company to meet other operating expenses like employee, administration costs etc.
declines. As a result, the company faces challenges to meet its costs when the raw material costs decline.
A live example of a company facing the consequences of benchmarking under scenario 1 is the case of Nile
Ltd, which is a key supplier to Amara Raja Batteries Ltd. It seems that Nile Ltd has a contract with
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Amara Raja Batteries Ltd, which provides a fixed percentage of profit over the raw material costs. As a
result, Nile Ltd has witnessed its profit margins decline to low levels when the cost of the key raw material
(Lead) declined. Nile Ltd reported operating losses in FY2009 when the Lead prices witnessed a sharp
decline.
For further details and learning about such cases suffering under scenario 1 benchmarking, an investor may
read the analysis of Nile Ltd on our website here:
To find out the nature of the benchmarking followed by Mahanagar Gas Ltd (out of scenario 1 and scenario
2), an investor needs to see the changes in the raw material costs as a percentage of sales over the years as
the sales revenue of the company changed.
If an investor notices that the raw material costs as a percentage of sales of a company are stable over the
years, then it may indicate that it is following scenario 1 benchmarking of passing on the costs to its
customers (i.e. a fixed percentage of profit over the raw material costs). However, if the raw material costs
as a percentage of sales increase when sales increase and raw material costs as a percentage of sales decline
when the raw material costs decrease, then it would indicate that the company is following scenario 2
benchmarking (a fixed ₹/$ of profit amount over raw material costs).
The following chart shows the raw material costs as a percentage of sales for Mahanagar Gas Ltd over the
years.
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On the analysis of the above chart, an investor would notice that since FY2011, the raw material costs as a
percentage of sales for Mahanagar Gas Ltd have increased step in step with the increasing sales. Since
FY2016, when the sales of the company declined due to declining crude oil and natural gas prices, then the
raw material costs have declined as well. Such kind of pattern of changing raw material costs as a percentage
of sales with changing sales revenue (due to passing on of increase/decrease of raw material costs) is a
feature of Scenario 2 benchmarking (a fixed ₹/$ amount of profit per unit of sales). As discussed above,
scenario 2 benchmarking is beneficial for the companies as the company can stay assured of a fixed amount
of profit irrespective of the changing raw material costs.
Moreover, while looking at the above chart of changing raw material costs as a percentage of sales for
Mahanagar Gas Ltd, an investor would notice that during FY2011-15, the increase in raw material costs as
a percentage of sales is well aligned to the increasing sales. Whereas during FY2016 and FY2017, when
the natural gas prices declined and as a result, the sales declined, the raw material costs as a percentage of
sales of Mahanagar Gas Ltd have witnessed a much sharper decline than the comparative decline in sales.
This indicates that the company has not passed on the full benefit of the declining raw material costs to its
customers.
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Mahanagar Gas Ltd seems to have reduced the prices to the customers only partly when compared to the
benefit it got from the PNGRB in terms of lower APM gas prices. It also gets established when an investor
analyses the credit rating report of Mahanagar Gas Ltd by ICRA for May 2017:
The increasing natural gas costs along with scenario 2 (fixed ₹/$) benchmarking illustrate the declining
profitability of Mahanagar Gas Ltd over FY2011-2015 when crude oil prices and natural gas prices were
high. The declining natural gas costs as a percentage of sales along with partial retention of benefits when
crude oil and natural gas prices were declining in the recent past explain the recent sharp increase in profit
margins of Mahanagar Gas Ltd from 23% in FY2016 to 34% in FY2018.
An investor may also refer to the gross margin per standard cubic meter (SCM) of natural gas sold by
Mahanagar Gas Ltd as disclosed by the company in its investor presentation of August 2018, page 25:
The above table indicates that the profit margin of Mahanagar Gas Ltd per unit of sale of natural gas has
increased continuously since FY2014 irrespective of changes in the crude oil prices or natural gas prices
under APM. Such data clearly indicates that Mahanagar Gas Ltd is following scenario 2 benchmarking and
is even able to retain the benefits of declining raw material prices.
Operating Efficiency Analysis of Mahanagar Gas Ltd:
When an investor analyses the net fixed asset turnover (NFAT) of Mahanagar Gas Ltd, then she notices
that the NFAT of the company has consistently been in the range of 1.50 to 2.00 over the years (FY2009-
18). During the initial years (FY2011-15), the NFAT increased from 1.45 to 2.04. It seems due to
completion of major capital expenditure in the Mumbai and Thane region where it has been getting
incremental customers from the key pipeline infrastructure, which it has created.
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From FY2016 onwards, Mahanagar Gas Ltd has increased capital expenditure. One of the key areas
requiring a lot of capital expenditure currently is the Raigad region where the company has to create the
entire pipeline and CNG station network. Because of the heavy capital expenditure, which will lead to
results/revenue in the future, the NFAT of Mahanagar Gas Ltd has declined in recent years from 2.04 in
FY2015 to 1.57 in FY2018.
An investor would note that over the years, the inventory turnover ratios (ITR) of Mahanagar Gas Ltd have
been very high in the range of 90 to 100 and on occasions exceeding the levels of 120 as well. Such high
levels of inventory turnover indicate that Mahanagar Gas Ltd does not need to maintain high inventory
when compared to its sales. This is true as the product of the company, natural gas, is simultaneously fed
into the pipelines and consumed. It does not need to store a large amount of gas for supplying to customers
many months down the line.
Over the years, Mahanagar Gas Ltd has been able to keep its receivables days very low in the range of 15-
20 days. This is because most of the sales of the company (73%) are to automobiles fitted with CNG, where
the vehicle owners pay the money whenever they fill the gas. The next major segment of sales (12%) is
residential customers (PNG), which pay the bills within 15-20 days after the bill is generated. Therefore,
Mahanagar Gas Ltd has a very low level of receivables.
Looking at the performance of Mahanagar Gas Ltd on both the aspects of inventory and receivables, an
investor would notice that the company is doing well at both these fronts. The company does not need to
maintain a large inventory and it collects its receivables very soon. Therefore, the operations of Mahanagar
Gas Ltd need only low levels of working capital.
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An investor would notice that over FY2009-18, Mahanagar Gas Ltd Limited has reported a total cumulative
net profit after tax (cPAT) of ₹2,921 cr. whereas during the same period, it reported a cumulative cash flow
from operations (cCFO) of ₹3,988 cr indicating that it has converted its profits into cash.
Margin of Safety in the Business of Mahanagar Gas Ltd:
Free Cash Flow Analysis of Mahanagar Gas Ltd:
While looking at the cash flow performance of Mahanagar Gas Ltd, an investor notices that during FY2009-
18, the company had a cumulative cash flow from operations of ₹3,988 cr. However, during this period it
did a capital expenditure (capex) of ₹1,919 cr. Mahanagar Gas Ltd could meet the entire capex from its
own sources. As a result, it had a free cash flow (FCF) of ₹2,069 cr (= 3,988 – 1,919) over FY2009-18. In
addition, the company had a non-operating/other income of ₹326 cr. over the same period.
use the free cash available with it to pay dividends to shareholders and still left with surplus funds. At
March 31, 2018, the company has a negligible debt of ₹1 cr. and cash & investments of about ₹780 cr.
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 Mahanagar Gas Ltd
On analysing Mahanagar Gas Ltd, an investor comes across certain other aspects of the company:
1) Government ownership of Mahanagar Gas Ltd:
On September 30, 2018, the largest shareholders of Mahanagar Gas Ltd are Govt. entities:
 32.5% is owned by GAIL (India) Ltd, which is a public sector unit (PSU) and
 10% is owned by Govt. of Maharashtra
The erstwhile large shareholder, British Gas, which originally used to own 49.5% shareholding, currently
own only 10% of the stake in the company. Minority shareholders own rest of the shareholding of the
company.
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An investor would note that accordingly to the current shareholding pattern of Mahanagar Gas Ltd, it has
almost become a public sector unit (PSU).
We believe that while investing in Mahanagar Gas Ltd, investors should be aware of the key aspect of
investing in any PSU:
 Govt. starts PSUs for the specific purpose of public good.

 PSUs have the primary aim of meeting the purpose and agenda of Govt.
 Profit making for the largest shareholder (Govt.) or minority shareholders is not the primary aim
of PSUs.
 As a result, many times, investors would notice that PSUs do not prioritize maximization of
shareholders’ wealth as their key goal. Instead, PSUs take their decisions to fulfill the vision of the
largest shareholder (Govt.).
In the recent past, there have been many instances have PSUs have played their part in the vision of public
good as per Govt. agenda. In many such cases, minority shareholders have felt that the PSUs could have
generated greater profits for them. An investor may notice the following cases as some examples:
 Oct. 2018: Central Govt. asks oil marketing companies (OMCs) to bear subsidy burden of ₹1 per
liter of automobile fuels and as a result, the stocks of OMCs: BPCL, HPCL, IOC decline
significantly. (Source: Business Today: Petrol, diesel impact: Oil companies’ stocks lose Rs 1.25
lakh crore in last two trading sessions).
 May 2018: OMCs did not change the fuel prices for about 19 days as elections in the state of
Karnataka were taking place. Previously, under fuel price deregulation, OMCs used to update the
fuel prices daily in line with changing crude oil prices. (Source: India Today: Was fuel price freeze
during Karnataka’s poll season a result of political influence?).
 Oct 2012: Coal India Limited (90% owned by Govt. of India), which has a near monopoly for
supplying coal in India, reversed the fuel price hike announced in Dec 2011. The Children’s
Investment (TCI) Fund, which owned 1% stake in Coal India, sued the company and the Govt. of
India in the court stating that the company lost about ₹8,700 cr. due to the price increase reversal.
(Source: India Times: The Children’s Investment Fund sues government, Coal India directors over
loss).
 However, finally, The Children’s Investment (TCI) Fund sold its entire stake in Coal India
Limited (Source: First Post: Why The Children Investment Fund’s exit from Coal India
matters).
Therefore, investors of Mahanagar Gas Ltd just like investors of any PSU should keep it in mind that many
times, the decisions of the company might not be aligned to generate maximum profits for the shareholders.
The largest shareholder (Govt.) may influence the decisions of the company in line with what it thinks is in
the best interests of the public at large.
Further advised reading: Why Management Assessment is the Most Critical Factor in Stock
Investing?
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2) Significant decline in the stake of the founding promoter, British Gas:
Mahanagar Gas Ltd was started as a joint venture (JV) between GAIL (India) Ltd and British Gas. While
reading the draft red herring prospectus (DRHP), an investor comes to know that as a part of the permission
for setting up this JV, the Foreign Investment Promotion Board (FIPB) had stipulated a few conditions.
One of the condition was that the promoters (Gail and British Gas) would have to dilute their shareholding
so that Govt. of Maharashtra owns 10% and the public owns 20% of the stake in Mahanagar Gas Ltd.
DRHP, Mahanagar Gas Ltd, page 23:
By reading the above conditions, an investor would appreciate that the regulations directed for the
promoters of Mahanagar Gas Ltd to reduce their stake in the company in the future. However, it remains to
be seen whether the recent significant reduction of stake by one of the founding promoters of the company,
British Gas, is a result of any regulatory guidelines or it is a commercial decision. Investors may seek
clarifications from the company about the reasons for the significant sale of stake by British Gas in the
company.
3) Project delays due to requirement of multiple approvals:
Mahanagar Gas Ltd operates in an industry in which the execution of any project requires multiple
approvals. The following comment by the management of the company in its August 2018 conference call
(page 18) indicates the significant number of approvals needed for its projects:
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As accepted by the management of the company, obtaining so many approvals is not an easy task. Many
times, projects are delayed due to lack of approvals, which may be beyond the control of the company.
However, such delays, even if they are beyond the control of the company, may involve financial penalties
by PNGRB if the project work is not completed in time.
Mahanagar Gas Ltd is facing a similar situation in case of its project work in Raigad district where it is
laying down the natural gas pipeline and distribution infrastructure. The company is not able to meet its
project deadlines due to delays in approvals from statutory bodies, which are beyond the control of
Mahanagar Gas Ltd.
Credit rating report, ICRA, May 2017, page 3:
Because of these delays, Mahanagar Gas Ltd has submitted a remedial action plan to PNGRB.
Investors should keep a track of the developments related to Raigad project and the actions taken by
PNGRB if any. An investor should be aware that many times in the past, the delays in approvals from
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statutory authorities have been so long that the multiple projects have become unviable due to resultant cost
escalations.
4) Intention of acquiring stakes in other city gas distribution (CGD) companies:
As per FY2015 annual report, page 3, Mahanagar Gas Ltd is looking forward to acquiring stakes in other
CNG distribution companies.
Investors should keep a close watch on any development on this front. It is essential to know that the price
paid by Mahanagar Gas Ltd for any such acquisition is reasonable.
5) End of exclusive selling/marketing rights in Mumbai and Thane regions:
The exclusive selling/marketing rights of Mahanagar Gas Ltd in the Mumbai and Thane region have ended.
Therefore, currently, other competing entities may use the infrastructure of Mahanagar Gas Ltd to supply
natural gas to different customers in Mumbai and Thane region. These competitors need to pay Mahanagar
Gas Ltd charges for using its pipeline infrastructure for supplying gas to their customers.
The marketing exclusivity of Mahanagar Gas Ltd ended in Mumbai region in 2012 and in Thane region in
2014. However, until now, no other competitor has used its pipeline network to supply gas to customers in
Mumbai and Thane region.
As per Mahanagar Gas Ltd, the cost of natural gas to any competitor in Mumbai and Thane region will be
higher than the cost of natural gas to Mahanagar Gas Ltd. This is because, in addition to the procurement
cost of natural gas, the competitor will also have to pay the network charges to Mahanagar Gas Ltd for
using the pipelines (network tariff).
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An investor should keep in mind that the above assumption holds true if the cost of procurement of natural
gas is same for Mahanagar Gas Ltd and the competitors proposing to use its pipelines to supply natural gas
to customers in these regions. In case, any competitor is able to lower the cost of procurement of natural
gas than Mahanagar Gas Ltd like in case of any entity directly owning the natural gas production fields,
then the cost barrier might break. This, in turn, may lead to significant competition for Mahanagar Gas Ltd
as in such cases; Mahanagar Gas Ltd cannot increase the network tariff indiscriminately to kill the
competition. In case of any such predatory moves by Mahanagar Gas Ltd, the Competition Commission of
India (CCI) and PNGRB may intervene to control the network tariffs to ensure the presence of fair
competition.
Moreover, while analysing the rating methodology document (Dec 2016) used by credit rating agency
ICRA for rating of city gas distribution (CGD) companies (Source: ICRA), an investor comes to know that
many bidders have put in very aggressive bids to win the CGD blocks. Rating Methodology for City Gas
Distribution Companies, Dec 2016, ICRA, page 4:
As per the above document, many times, the aggressive bidders have quoted nil network tariff, which means
that once the marketing/selling exclusivity period is over, then the third-party natural gas suppliers can use
their pipeline networks at very low costs to supply gas to customers in their region.
Investors may seek clarifications from Mahanagar Gas Ltd about the exact amount of network tariff/costs
third-party suppliers may need to pay to it for using its pipeline infrastructure. This data will help investors
in making an informed assessment of the competition that may arise for Mahanagar Gas Ltd from third-
party natural gas suppliers.
Please note that an investor may use rating methodology documents of credit rating agencies to learn the
analysis of companies in industries, which are new to her.
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6) Contingent liability: Monetary demand from GAIL (India) Ltd:
While analysing the contingent liabilities section of the FY2018 annual report (page 161) of Mahanagar
Gas Ltd, an investor gets to know about a demand of ₹137 crore by GAIL (India) Ltd for additional
transportation tariff since November 2008 until March 2018. Investors also get to know that the additional
tariff demand under dispute is increasing every year.
As per Mahanagar Gas Ltd, it has contested this demand and has filed an appeal in the appellate tribunal.
Investors should note that Mahanagar Gas Ltd might have needed to go to an appellate tribunal when the
original authority had given a decision against the company. Therefore, investors should keep a close watch
on the developments related to this dispute. This is because an outflow of ₹137 cr. is significant at a time
when the company is looking at a large capital expenditure to develop Raigad region and has bid for three
new blocks in the latest round of bidding by PNGRB.
7) Pending IPO expenses after about 2 years:
Mahanagar Gas Ltd came up with its initial public offer (IPO) in June 2016. However, an investor notices
that even on March 31, 2018, the company has certain IPO expenses of about ₹13 cr. payable to its related
parties (probably to GAIL (India) Ltd.).
An investor also notices that Mahanagar Gas Ltd has earmarked about ₹12 cr. in the current account for
these expenses.
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An investor may seek clarifications from the company about the nature of these expenses to related parties
about IPO, which are still unpaid. What are these expenses? Whether there is any dispute about these
expenses. In addition, the reasons that the money of ₹12 cr. is held in the current account, which does not
earn any interest, instead of holding it in fixed deposits.
As per page 66 of the FY2018 annual report, Mahanagar Gas Ltd has spent only ₹3 cr. out of about ₹10 cr.,
which it needed to spend on CSR. Investors may monitor whether the company spends the deficit amount
of about ₹7 cr. on the CSR activities in future years.
Margin of Safety in the market price of Mahanagar Gas Ltd:
Currently (October 16, 2018), Mahanagar Gas Ltd is available at a price to earnings (PE) ratio of about 17
based on earning of past four quarters ending June 2018. The PE ratio of 17 does not offer any margin of
safety in the purchase price as described by Benjamin Graham in his book The Intelligent Investor.
Conclusion:
Overall, Mahanagar Gas Ltd seems like a company, which has a stable business model having a monopoly
of natural gas distribution in Mumbai and Thane region. The company has set up most of the pipeline
infrastructure in these regions and is currently adding incremental customers within these regions with
established gas distribution infrastructure.
Mahanagar Gas Ltd has the ability to pass on increases in the cost of its raw material (natural gas) to its
customers. Moreover, it has been able to retain part of the benefits with itself when the natural gas prices
have declined. As a result, the company has witnessed its profit margins increase in recent years when the
prices of crude oil and natural gas have declined.
The business of Mahanagar Gas Ltd is capital intensive, as it has to spend a lot of money in capital
expenditure on laying the gas pipeline network before it can start earning money by supplying gas to
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customers. The capital-intensive business along with the requirement of a lot of regulatory approval creates
many barriers to entry in this field. However, as part of aggressive bidding by different entities for allotment
of city gas distribution (CGD) blocks even at almost nil network tariff, the companies may see competition
from third-party gas suppliers who may use the pipeline network of the CGD allottee companies at low
cost.
Mahanagar Gas Ltd enjoys very low working capital requirements in its business as almost three fourth of
its business is done on cash payment basis at the CNG pumps where vehicle owners pay whenever they fill
gas. As a result, the company has been able to generate free cash flow without money being stuck in working
capital with increasing business.
Currently, Mahanagar Gas Ltd is developing a pipeline network in Raigad district and has applied for three
more CGD blocks in the latest round of bidding by PNGRB. These ventures entail significant capital
expenditure going ahead. Investors need to monitor the capital spent on these new projects as well as the
timely development of these regions. This is especially important as the development of pipeline networks
need many regulatory approvals, which may take a long time to come, which is beyond the control of the
company and as a result, the company may suffer cost escalations as well as regulatory penalties for delay
in meeting project deadlines.
Until now, Mahanagar Gas Ltd has been able to generate good profitability with significant free cash flow
for its shareholders. However, as the largest shareholders of the company are govt.-controlled entities,
therefore, investors should keep a track of different decisions of the company. It may happen that in future
the company may take decisions, which are influenced by the vision of the largest shareholder, which may
not align with the aim of generating maximum profits for shareholders.
Investors may seek clarification from Mahanagar Gas Ltd about certain aspects like reasons for the
significant sale of stake by one of its promoters, British Gas, the amount of network tariff quoted by the
company in its bid for third-party gas suppliers, the reasons for IPO expenses still payable to related parties
etc.
Going ahead, investors should keep a close watch on the development of gas distribution network in Raigad
district, passage of complete cost of an increase in natural gas prices when APM gas prices increase in
future, valuation of acquisition of a stake in any other CGD player. Investors should also monitor the
amount of capital expenditure to be done on the new blocks and its sources if it wins in the latest round of
bidding for CGD blocks.
These are our views on Mahanagar Gas Ltd. However, investors should do their own analysis before taking
P.S.

Videos
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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
280 | P a g e

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
281 | P a g e

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.
282 | P a g e

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
284 | P a g e

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Copyright © Dr Vijay Malik. All Rights Reserved.

Company Analyses (Vol. 4)

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.

1) KNR Constructions Ltd

Company website: Click Here

Financial data on Screener: Click Here

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Therefore, in light of the above observations related to:

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 Analysis: Globus Spirits Ltd

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 Analysis: Castex Technologies Ltd / Amtek India Ltd

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Operating Efficiency Analysis of KNR Constructions Ltd:

Copyright © Dr Vijay Malik. All Rights Reserved.

February 2018 investor’s presentation, page 14:

Margin of Safety in the Business of KNR Constructions Ltd:

Self-Sustainable Growth Rate (SSGR):

Copyright © Dr Vijay Malik. All Rights Reserved.

Free Cash Flow Analysis:

Additional aspects of KNR Constructions Ltd:

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4) A large amount of loans provided by promoters to the company:

The FY2017 annual report, page 199:

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1. raise questions on the strength of the credit rating or

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5) Demonetization: dealing in non-permitted receipts and payments in currency notes:

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6) Investments in closed-ended mutual funds and equity mutual funds:

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7) Subsidiary/JV financial results not audited by their auditors:

The FY2017 annual report, page 138:

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8) Apparently, surplus funds lying with subsidiaries:

The FY2017 annual report, page 209:

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